There are ten states in the democratic nation of Katlandia, and each state has ten thousand residents. Although incomes vary, each Katlandian pays a tax equal to the total cost of all government projects divided by the number of residents in the country. Currently, two states each have one army base. An army base adds $2 million to a state's local economy each year. In addition, in terms of increased security, the annual marginal benefit to Katlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year. If Katlandia builds a third army base, the country will have:

Question

There are ten states in the democratic nation of Katlandia, and each state has ten thousand residents. Although incomes vary, each Katlandian pays a tax equal to the total cost of all government projects divided by the number of residents in the country. Currently, two states each have one army base. An army base adds $2 million to a state's local economy each year. In addition, in terms of increased security, the annual marginal benefit to Katlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year.  If Katlandia builds a third army base, the country will have:

Quizplus · Accepted Answer

The marginal benefit of the third army base is $5 million ($2 million for the state in which it's built plus $3 million for Katlandia as a whole). The marginal cost of the third base is $8 million. Thus, the marginal cost of the third base is greater than its marginal benefit, implying that three bases is more than is socially optimal.

There Are Ten States in the Democratic Nation of Katlandia