Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table. Refer to the above table and information. What project should the government select to achieve the maximum net benefit?

Question

Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table.  Refer to the above table and information. What project should the government select to achieve the maximum net benefit?

Quizplus · Accepted Answer

The maximum net benefit is achieved by selecting the project with the highest difference between marginal benefits and marginal costs.

For project A, the marginal benefit is 70 and the marginal cost is 80, resulting in a net benefit of -10.

For project B, the marginal benefit is 60 and the marginal cost is 65, resulting in a net benefit of -5.

For project C, the marginal benefit is 50 and the marginal cost is 45, resulting in a net benefit of 5.

For project D, the marginal benefit is 40 and the marginal cost is 35, resulting in a net benefit of 5.

Therefore, the government should select project C, as it has the highest net benefit.

Assume That a Government Is Considering a New Social Program