There are ten states in the democratic nation of Fatlandia, and each state has ten thousand residents. Although incomes vary, each Fatlandian 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 Fatlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year. The marginal benefit of adding a third army base equals the local marginal benefit of $2 million plus the marginal benefit to Fatlandia of ______.

Question

There are ten states in the democratic nation of Fatlandia, and each state has ten thousand residents. Although incomes vary, each Fatlandian 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 Fatlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year.  The marginal benefit of adding a third army base equals the local marginal benefit of $2 million plus the marginal benefit to Fatlandia of ______.

Quizplus · Accepted Answer

The marginal benefit of adding a third army base equals the local marginal benefit of $2 million plus the marginal benefit to Fatlandia. From the graph, we can see that the marginal benefit to Fatlandia of having an additional army base is $1 million. Therefore, the total marginal benefit of adding a third army base is $2 million + $1 million = $3 million. Since the cost of an army base is $8 million per year, the net benefit of adding a third army base is $3 million - $8 million = -$5 million. Thus, it is not worth it for Fatlandia to add a third army base.

There Are Ten States in the Democratic Nation of Fatlandia