Mid-Term Exam Flashback

Question 1

In applying microeconomic principles to counter-terrorism strategies, what ethical consideration should a defense economist keep in mind?

Answer 1

Balancing security measures with potential economic and social costs.

Question 2

What does “collective action” mean?

Answer 2

Coordinated efforts by multiple actors to address shared security challenges.

Question 3

NATO membership is a …

Answer 3

common resource (non-rival and excludable).

Question 4

Ethically, a defense economist should …

Answer 4

provide accurate and unbiased information, even if it contradicts policy.

Question 5

For collective action theories on military alliances, a defense economist should prioritize …

Answer 5

analyzing equitable burden-sharing among members.

Question 6

Exploitation hypothesis?

Answer 6

Larger members carry a disproportionately large burden compared to smaller members.

Question 7

True or False: Since defence is a public good, there are no negative externalities to defence expenditures.

Answer 7

False

Question 8

True or False: It is simple to measure the social impact of defence expenditures using the Military Cost Benefit Analysis methodology.

Answer 8

False

Question 9

True or False: All measures of the impact of defence operations are quantifiable.

Answer 9

False

Question 10

True or False: Elements of security can be seen as private goods.

Answer 10

True

Question 11

Military Cost Benefit Analysis

Answer 11

1. Identify key decision-makers (and other stakeholders) to clarify goals, objectives, preferences, and constraints (including realistic funding projections).
2. Carefully structure the problem and identify feasible alternatives that contribute to those goals/objectives and that satisfy the constraints.
3. Determine the relevant time horizon over which the CBA will be conducted and select an appropriate discount rate.
4. Estimate relevant time-phased costs of each alternative over the relevant period.
5. Forecast time-phased benefits that will accrue over the relevant period. If benefits can be monetized, then the project or program with the highest net present value (NPV) can be recommended.
6. Recognize uncertainty and conduct sensitivity analyses to determine whether results change with changes in key parameters (costs, benefits, budgets, discount rates, etc.).
7. Report the results of the analysis (rankings of projects, programs, etc., along with key assumptions).
8. Make well-informed recommendations.

Question 12

Allocative Efficiency

Answer 12

Resources are deployed to their highest valued use to maximize social welfare.

Question 13

Private Good:

Answer 13

Rival and excludable.

Question 14

Common Resource:

Answer 14

Rival and non-excludable.

Question 15

Club Good:

Answer 15

Non-rival and excludable.

Question 16

Public Good:

Answer 16

Non-rival and non-excludable.

Question 17

Marginal Utility:

Answer 17

The extra utility one gets from purchasing one extra unit of a good.

Question 18

Expected Utility Theory:

Answer 18

This model assumes individuals make decisions under uncertainty by maximizing their expected utility.

Question 19

Rational Choice Theory:

Answer 19

This theory argues that individuals make decisions by weighing the costs and benefits of different options and choosing the one that maximizes their personal utility. Hence this choice is considered a rational choice.

Question 20

Rational Choice Theory Assumptions:

Answer 20

• Completeness- individuals have complete (perfect) information about the options they have to make, and they can rank them.
• Transitivity- Individuals have consistent preferences. E.g.: If an individual prefers option A over option B and option B over option C, then they must also prefer option A over option C. Individuals can calculate the best choice (even when new choices are presented) and will always choose it.
• Independence of relevant alternatives- a choice between two options, should not be dependent on a third unrelated outcome.

Question 21

Determinants of Demand for Defence:

Answer 21

pm/pc = relative prices of military and civilian goods
GDP = National Income
q = defence spending of allies
th = a threat variable often proxied by rivals’ defence expenditure
x = other relevant and strategic variables, such as the politics of the governing party, defence reviews, etc
The variables are β0 for the intercept term, MEt−1 for Canadian defence expenditures lagged
one period, GDP for real Canadian GDP, US and NATO, for real US and NATO (European)
defence expenditures.
The variables Q(NATO) and Q(US) indicate the defence burden of NATO and the US,
respectively. If Canada were a free-rider, the coefficient of NATO and/or the US will be
negative. The spending of allies particularly the US does act both as a signal of threat and
has spill-in effects, and may be difficult to sort out. The relative effect may also differ over
time.
The variable Z is a catch-all variable that includes a range of factors such as defence White
Papers, geopolitical shocks, non-defence expenditures, etc.