Benefit Cost Analysis Questions and Answers

Answer: C

Correct answer: is not necessarily the best choice

A ratio is dimensionless and takes no account of scale, so a small scheme with a ratio of 2.0 may deliver far less net benefit than a large one at 1.3. The question is whether each additional increment of spending earns its keep, which requires incremental analysis rather than a ranking of ratios.

Answer: D

Correct answer: added benefits to added costs between alternatives

\[ \frac{\Delta B}{\Delta C} = \frac{B_2 - B_1}{C_2 - C_1}. \] The question asked of every step up is whether the extra money buys at least its own value in extra benefit. Answering it increment by increment is what makes the method scale-aware where a comparison of overall ratios is not.

Answer: A

Correct answer: increasing cost

The analysis works upward from the cheapest alternative, asking of each further increment whether it is justified. That sequence only makes sense in order of increasing cost, with do-nothing as the opening baseline where the project is genuinely optional.

Answer: B

Correct answer: the cheaper alternative is preferred

The extra spending fails to return its own value, so it should not be made and the cheaper alternative remains the defender. Note that the dearer alternative may still have a perfectly acceptable overall ratio - it is the increment between them that fails, and that is the quantity the decision turns on.

Answer: C

Correct answer: the project is genuinely optional

Do-nothing is a real alternative only when doing nothing is permissible. Where a bridge must be replaced or a standard must be met, the choice is among ways of doing it, and the baseline is the cheapest acceptable option rather than inaction.

Answer: D

Correct answer: gives more weight to benefits accruing to future generations

A low discount rate leaves distant benefits with much of their value, favouring long-lived projects such as flood defences and climate measures; a high rate discounts them almost to nothing. Since the choice therefore decides which projects can pass, it is an ethical question about intergenerational weight and not merely a technical parameter.

Answer: A

Correct answer: has no observable market price

Travel time, clean air, an averted injury and a preserved habitat are all real but unpriced, so a value must be imputed from what people reveal or state they would pay. Shadow prices are the weakest link in most studies and are the first thing a sensitivity analysis should be run on.

Answer: B

Correct answer: what beneficiaries would give up to obtain it

Willingness to pay measures the value to the people who receive the benefit, which is what the analysis is trying to capture. What the agency spends measures cost rather than value, and a project can perfectly well cost more than the benefit is worth - which is the finding the study exists to produce.

Answer: C

Correct answer: as a benefit and again as a cost saving

The classic case is counting both the time road users save and the resulting rise in land values, when the second is largely the capitalisation of the first. Counting both inflates the numerator without any additional real effect, and it is one of the commonest ways an appraisal is made to pass.

Answer: D

The comparison is against what would have happened anyway, which is not the same as the situation before construction, since conditions would have changed regardless. Using the before-and-after difference credits the project with changes it did not cause.