A government is considering undertaking a construction project of an increasing scale (ranging from 1, 2, 3, to 4). The estimated marginal costs and marginal benefits of each successive scale of the project are given in the table below. What is the total amount that the government should spend on the construction project to attain maximum net benefits for the society?

Question

Quizplus · Accepted Answer

To determine the optimal scale of the project, we need to calculate the net benefits for each level and choose the highest one. We can calculate the net benefit by subtracting the marginal cost from the marginal benefit.

For scale 1: MB1 - MC1 = 6 - 2 = 4
For scale 2: MB2 - MC2 = 10 - 4 = 6
For scale 3: MB3 - MC3 = 14 - 8 = 6
For scale 4: MB4 - MC4 = 16 - 12 = 4

The highest net benefit is achieved at scale 3, with a net benefit of $6 million. Therefore, the government should spend $19 million on the project (the marginal cost of scale 3).

A Government Is Considering Undertaking a Construction Project of an Increasing