Question

Suppose a cost-benefit study is conducted to measure the impact of prenatal vitamin usage to improve birth outcomes and long-term health of children. The costs are incurred during pregnancy, while the benefits extend over a long timeframe. Suppose further, that the researchers conclude that prenatal vitamins are cost-effective using a 2% discount rate. However, most cost-benefit studies use a discount rate of 3-5%. Explain whether the use of a lower than typical discount rate makes these results more convincing or less convincing.

Answer 1

Answer:

Using lower than typical discount rate will make the results more convincing.

B/C Ratio=Present value of benefits availed during long period of time/Present value or Discounted value of Cost incurred during pregnancy

With low discount rates, Present value of benefits to be availed in long duration will be higher and numerator of the B/C ratio will be higher because of which B/C ratio will be higher.

If high discount rates are used then, Present value of benefits to be availed in long duration will be lower and numerator of the B/C ratio will also be lower because of which B/C ratio will be lower.

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