Question 1:

Define the concept of opportunity cost in your own words. Given an example from your own life of the opportunity cost of a decision (do NOT use classroom examples). Explain why opportunity costs rather than "out of pocket" costs are the appropriate cost measure for social benefit cost analysis.

Question 2:

A foreign company plans to clear several dozen acres of ecologically valuable mangrove swamp in Vietnam for the creation of a shrimp aquaculture facility. This decision will create economic profits of $5000/year to the company (which hires substantial numbers of local villagers) after one year of construction but will cost $10,000 (paid upfront) to build. In addition, the loss of the mangrove habitat will reduce spawning and nursery habitat for valuable fish species - thus reducing the catch of fish by artisanal fishermen from 1000 tons to 750 tons per year (which has a market value, after costs, of $10/ton). Assume that these losses are experienced from the very first (construction) year onward and are permanent.

a. Assume that the discount rate is 5% (r=.05) and the evaluation horizon is 10 years from the present. Please neatly fill the blanks in the table below.

b. What is the net present value of this proposed project? If efficiency was the only objective for making the decision and we have fully accounted for all costs and benefits would you recommend the project go ahead or not?

c. Would the demonstration of a $.50 per family average willingness to pay for the preservation of the mangrove habitat on the part of middle to upper-class families in developed countries change your perception of the efficiency of this project?