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Economics
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2) Refer to Figure 1-1. For the government, the opportunity cost of one search and rescue helicopter is A) 0 kilometres of highway repair. B) 50 kilometres of highway repair. C) 100 kilometres of highway repair. D) 150 kilometres of highway repair. E) 200 kilometres of highway repair.

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Related questions

1. A farmer can grow wheat or corn. If the price of wheat increases, the farmer expects a better return from growing wheat. All else equal, the corn supply curve

a. shifts to the right.

b. shifts to the left.

c. stays where it is. This is a movement along the corn supply curve.

d. becomes a backward-bending curve.

2 The opportunity cost of a new public highway is the

a. other goods and services that must be sacrificed to construct the new highway.

b. money cost of hiring contractors and construction workers for the new highway.

c. cost of constructing the new highway in a future year.

d. increase traffic from the use of the new highway.

3. All else equal, which of the following will cause the demand curve for a good to shift to the left (decrease)?

a. an increase in the price of the good.

b. an expectation of a future price decline.

c. a decrease in the price of the good.

d. an increase in the supply of a good.

Suppose that a major city's main thoroughfare, which is also an interstate highway, will be completely closed to traffic for two years from January 2012 to December 2013 for reconstruction, at a cost of $535 million. If the construction company were to keep the highway open for traffic during construction, the highway reconstruction project would take much longer and be more expensive. Suppose that construction would take four years if the highway were kept open, at a total cost of $800 million. The state department of transportation had to make its decision in 2011, one year before the start of construction (so that the first payment was one year away). The department of transportation had the following choices:

(i) Close the highway during construction, at an annual cost of $280 million per year for two years.

(ii) Keep the highway open during construction, at an annual cost of $200 million per year for four years.

a. Suppose the interest rate is 8%. Calculate the present value of the costs incurred under each plan. Which reconstruction plan is less expensive?

b. Now suppose the interest rate is 16%. Calculate the present value of the costs incurred under each plan. Which reconstruction plan is now less expensive?

The government is considering paving a highway with a newly developed "wear-proof" material. Paving the highway the traditional way would cost $1 billion today, but the annual projected maintenance is $400 million in each of the next 10 years. Paving the highway using the newly developed wear-proof material would cost $4 billion today, but using the new wear-proof material means there are no maintenance costs for the next 10 years. Only consider the current cost and maintenance costs for the next 10 years when evaluating this project.

(a) Use the concept of present value to determine which method is best if the government can borrow at an interest rate of 4%.

(b) Is it worth it if the interest rate is 0%?

(c) Is it worth it if the interest rate is 8%?

(d) A politician says to you, " don't care what the interest rate is. The new wear-proof material is clearly a good investment: it more than pays for itself in only 8 years, and all the rest is money in the bank." What's wrong with this argument, and why does the interest rate matter?

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