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    The social discount rate

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    I need assistance with the following questions:

    2. Suppose a welfare recipient is given a cash grant that increases his monthly income. That grant will never be taken away no matter how much the recipient earns. The grant will result in a (n):
    a. substitution effect favorable to work.
    b. substitution effect unfavorable to work.
    c. income effect favorable to work.
    d. income effect unfavorable to work.

    6. The social rate discount used in cost-benefit analysis measures the:
    a. benefits of a project.
    b. cost of a project.
    c. rate of return on the project.
    d. opportunity cost of displaced private saving or investment.

    8. A cost-benefit analysis of an irrigation project shows that the ratio of the discounted present value of benefits to costs is less than one. This implies that:
    a. the net benefit of the project is positive.
    b. the net benefit of the project is negative.
    c. efficiency can be attained by undertaking the project.
    d. the project will redistribute income to the poor.

    9. An income guarantee of $10,000 per year for all families is established with a phase-out rate of benefits of 50 cents per dollar of earnings. Then it follows that:
    a. only families with earnings of less than $10,000 per year will receive transfers.
    b. all families with earnings of less than $20,000 per year will receive transfers.
    c. all families with income of less than $30,000 per year will receive transfers.
    d. all families will receive transfers.

    Note: The text being used is, Public Finance, A Contemporary Application of Theory to Policy, 9th Edition, David N. Hyman, 2008

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    Solution Preview

    Hello Student,

    Before you answer question 2, the first thing you may want to do is understand what is the substitution effect and the income effect. Note the following excerpt:

    "The substitution effect is the change in consumption patterns due to a change in the relative prices of goods. For example, if private universities increase their tuition by 10% and public universities increase their tuition by only 2%, then it is very likely that we would see a shift in attendance from private to public universities (at least amongst students accepted to both). The same can be said across brands, goods, and even categories of goods.
    The income effect is the change in consumption patterns due to the change in purchasing power. This can occur from income increases, price changes, or even currency fluctuations. Since income is not a good in and of itself, price decreases increase one's purchasing power. For ...

    Solution Summary

    The benefit-cost ratio is one of the various concepts depicted in this posting.