[answered] 1) The Town of Tucson iis determining whether or not to add

1. The Town of Tucson is determining whether or not to add bike lanes to several roads around town. To do so, many of the roads would have to be widened, which always results in certain levels of uncertainty in determining the costs of the project. One of the big uncertainties is in the cost of obtaining a right of way to the private land abutting the roads. Assume that there is a 75% chance that the Town will face a large number of lawsuits challenging their taking of the lands. Using the following numbers, evaluate the expected cost of doing the project.
1) The Town of Tucson iis determining whether or not to add bike lanes to several roads around

town. To do so, many of the roads would have to be widened, which always results in certain

levels of uncertainty in determining the costs of the project. One of the big uncertainties is in

the cost of obtaining a right of way to the private land abutting the roads. Assume that there

is a 75% chance that the Town will face a large number of lawsuits challenging their taking of

the lands. Using the following numbers, evaluate the expected cost of doing the project.

Construction Costs: \$15 million

Right of Way Costs Option A (no lawsuits): \$4 million

Right of Way Costs Option B (lots of lawsuits): \$12 million 2) Several residents of the town would prefer to use the money currently set aside for the bike

lane project above to construct a new soccer complex for the local recreational youth league.

That project is estimated to cost \$18 million. Assume that the soccer complex will serve

approximately 10,000 people per year, while roughly 15,000 people will use the bike lanes.

Which project should we do? How did you reach your conclusion? 3) If I wanted to calculate the actual monetary benefits of the soccer people and bike people

respectively, what would be a good way to do it? 4) Pretend that the U.S. government decides to do something proactive about climate change. It

decides that it will invest \$100 billion today because it believes it will result in \$200 billion of

benefits in 50 years, and additional \$500 billion in 100 years. Using a discount rate of 0.04, is

the project a Kaldor-Hicks improving one? (hint: you need to calculate net present value of the

benefits. See formula on slide 6 of the ?Making Decisions? lecture). What if we use a discount

rate of 0.02? Show your work! 5) Who gets to decide what the discount rate is?

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