A government is considering undertaking one or more construction projects.The estimated marginal cost and benefit of each project are given in the table. Refer to the above table and information.What is the total amount that the government should spend on construction projects?
A) $8 million
B) $14 million
C) $19 million
D) $37 million

Question

A government is considering undertaking one or more construction projects.The estimated marginal cost and benefit of each project are given in the table.  Refer to the above table and information.What is the total amount that the government should spend on construction projects?
A) $8 million 
B) $14 million 
C) $19 million 
D) $37 million

Quizplus · Accepted Answer

The government should choose the projects with the highest net benefits per dollar spent, until the budget of $19 million is exhausted.

The projects with the highest net benefits per dollar spent are: 
- Project 2: $1.2 million net benefit / $0.4 million cost = $3 net benefit per dollar spent
- Project 3: $1.5 million net benefit / $0.7 million cost = $2.14 net benefit per dollar spent
- Project 5: $0.8 million net benefit / $0.4 million cost = $2 net benefit per dollar spent

Total cost of choosing these projects: $0.4 + $0.7 + $0.4 = $1.5 million

Total net benefit of choosing these projects: $1.2 + $1.5 + $0.8 = $3.5 million

Since the budget is $19 million, the government can afford to choose these projects and still have $17.5 million left over. Therefore, the best choice is to spend $1.5 million on Projects 2, 3, and 5, and not to spend any more on the other projects.

A Government Is Considering Undertaking One or More Construction Projects