Cost-Benefit Analysis (CBA) is a systematic approach to estimating the strengths and weaknesses of alternatives; it is used to determine options which provide the best approach to achieving benefits while preserving savings. Simply put, it weighs the total expected costs versus the total expected benefits of one or more actions in order to choose the best or most profitable option. In microeconomics, CBA is frequently used to evaluate different business decisions or policy options.
This quiz will help you practice applying the principles of CBA in various scenarios, reinforcing your understanding of this crucial economic concept. Good luck!
Match the following terms with their definitions:
| Term | Definition |
|---|---|
| 1. Opportunity Cost | A. The additional cost of producing one more unit of a good or service. |
| 2. Marginal Cost | B. A benefit that is not included in the cost-benefit analysis. |
| 3. Sunk Cost | C. The value of the next best alternative forgone as the result of making a decision. |
| 4. External Benefit | D. A cost that has already been incurred and cannot be recovered. |
| 5. Discount Rate | E. The rate used to convert future costs and benefits to present values. |
Complete the following paragraph using the words provided: Net Benefit, Benefits, Costs, Decision, Analysis
Cost-benefit _______ helps in making a rational _______. It involves comparing all the _______ and _______ associated with a project or choice. The goal is to maximize the _______, which is calculated by subtracting total costs from total benefits.
Imagine your local government is considering building a new public park. What are some of the potential costs and benefits that should be included in a cost-benefit analysis? Explain how you would quantify some of these costs and benefits to determine if building the park is a worthwhile investment.
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