NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY (NUST)

SCHOOL OF ELECTRICAL ENGINEERING AND COMPUTER SCIENCE (SEECS)

SEMESTER 6
ECO-130: Engineering Economics
ASSIGNMENT # 1
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Dated: 20th Febuary’2019.

Q-1 Suppose you are assigned the task of determining the route of a new highway through an
older section of town. The highway will require that many older homes must be either
relocated or torn down. Two possible criteria that might be used in deciding exactly where
to locate the highway are:
a. Ensure that there are benefits to those who gain from the decision and
that no one is harmed by the decision.
b. Ensure that the benefits to those who gain from the decision are greater
than the losses of those who are harmed by the decision.

Which criterion will you select to use in determining the route of the highway? Explain Why?

Answer: Choice (B)

Explanation:
The central task of rational decision making is choosing from among the alternatives available.
When the question comes to choosing a particular alternative, logically, we choose the ‘best’
alternative. The criterion for judgment of the best alternative is decided using a number of
factors. One possible criteria that could be applied here is to ensure that the benefits to those
who gain from the decision are greater than the losses of those who are harmed by the decision,
which is the same as option B. This is the Kaldor criterion.
Although, surely planners would like to use criterion (a), that causes no harm to that certain part
of the population, as relocated people often feel harmed, no matter how much compensation
they are provided, but this option is still unworkable, so criterion (b) is used instead, as the most
favorable option.
It ensures long-term benefits to the millions of people in the country and for generations to come,
in terms of improved transportation and commute.
In this kind of highway project, benefits typically focus on better serving future demand for travel
measured in vehicles per day, lower accident rates and time lost due to congestion. Also, a side
benefit of this could be urban renewal of rural areas, which introduces other benefits.

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Q-2 Explain how (if at all) each of the following events affects the location of a country’s
production possibilities curve:
Draw Graphs with brief explanation.

a. The quality of education increases.

Keeping in mind the four factors of production: Land, Labor, and Capital and
Entrepreneurship spirit, the curve moves outward. Thus, more resources, more
production. This is because if the quality of education increases, skilled labor,
entrepreneurship and technical and work skills in individuals would get better,
hence the productivity rises and this would shift the curve outward, assuming
better education translates into better work skills.

b. The number of unemployed workers increases.

The number of unemployed workers should not affect location of curve, as it
doesn’t directly affect the factors of production in a negative manner.

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c. A devastating earthquake destroys numerous production facilities.
An earthquake would definitely shift the curve inward with the destruction of
capital and the land. Production of goods would get affected in a negative manner
due to destruction of production units and the country’s production decreases
than the usual. Destruction of factories decreases your capacity to produce using
the other inputs.

d. A new technique improves the efficiency of extracting copper from ore.

As improved techniques and technology are PPC shifters, they can also contribute
to the factors of production. These new techniques should shift the curve outward
as production capacity increases with existing resources.