consumer surplus is (.5)($3 $1.50)(450) $337.50 per hour. At a
rate of $1.00, 600 cars will park each hour, generating revenue of $600
per hour. Consumer surplus is (.5)($3 $1)(600) $600 per hour.
The $1 rate generates the greater total benefit, $1,200 per hour. The
annual benefit is (2,600)($1,200) $3,120,000. Thus, the net benefit
of the garage (in present-value terms) is (11.9)(3,120,000 620,000)
20,000,000 $9,750,000.
b. The private developer would use the $1.50/hour rate because it offers
the greater revenue. The annual profit is (2,600)($675) 620,000
$1,135,000. The net present value of the garage is (11.9)(1,135,000)
20,000,000 $6,493,000. The garage is not profitable.- a. The total benefits (B) for the programs (per $1 million spent) are
Program 1. B (1.0)($4.8 million) $0 $4.8 million.
Program 2. B (.2)($4.8 million) $3.2 million $4.16 million.
Program 3. B (.5)($4.8 million) $1.5 million $3.9 million.
Program 4. B (.75)($4.8 million) $.2 million $3.8 million.
Thus, program 1 should be funded up to its limit ($14 million), then
program 2 (up to $12 million), and next the remaining $6 million on
program 3.
b. With $7.2 million as the value per life, the program benefits are now
Program 1. B = (1.0)($7.2 million) + $0 = $7.2 million.
Program 2. B = (.2)($7.2 million) + $3.2 million = $4.64 million.
Program 3. B = (.5)($7.2 million) + $1.5 million = $5.1 million.
Program 4. B = (.75)($7.2 million ) + $. 2 million = $5.6 million.
Again, program 1 should be funded up to its limit ($14 million), then
program 4 (up to $16 million), and the remaining $2 million on
program 3. With a greater value for each life, the programs saving the
most lives are fully funded.
Chapter 12
- a. The expected values at points E, D, C, B, and A in the decision tree
are $15.5, $50, $30, $19.2, and $19.2, respectively.
b. The manager is confused. Point D is a point of decision: The manager
simply should select the top branch (50 is greater than 37). Thus, the
value at point D is $50. Putting probabilities on the branches makes
no sense. - a. The expected value of continuing with its current software strategy is
(.2)(2) (.5)(.5) (.3)(1) $.35 million. The expected value of
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