1. Project L and M are two projects such as roads or dams. For L, Stage L1 would be the first stage; L2 the next stage, etc. No stage can begin unless preceding stages have been completed. Thus L2 must be preceded by L1. The projects show the following patterns of costs and benefits.
PROJECT L PROJECT M
Total Cost Total Benefit Total Cost Total Benefit
$5,000 9,000 Stage 1 $5,000 8,000
10,000 16,000 Stage 2 10,000 14,000
15,000 21,000 Stage 3 15,000 21,000
20,000 24,000 Stage 4 20,000 29,000
a.) For each stage of L and M, show: marginal cost, marginal benefit; net marginal benefit; net total benefit.
b.) The money can be split in $5,000 increments in any way between L and M. What should be funded if the agency has total funds of: $15,000; $20,000; $30,000; $40,000?
c.) To what extent does the cost/benefit pattern of project M contradict the principle of decreasing marginal benefits?
2.
Projects R and S show the following patterns of costs and benefits.
PROJECT R PROJECT S
Total Costs Total Benefit Total Cost Total Benefit
$ 5,000 7,000 $5,000 9,000
10,000 18,000 10,000 21,000
15,000 41,000 15,000 40,000
20,000 58,000 20,000 60,000
a.) Show the marginal cost, marginal benefit, net marginal benefit and net total benefit for each funding level.
b.) As in problem #1, available money can be split in $5,000 increments in any way between R and S. What should be funded if the agency has total funds of $10,000; $15,000; $20,000? Why?
3.
Projects C and D have the following patterns of costs and benefits.
Project C Project D
Marginal Costs($) Marg. Benefits ($) Marg. Costs Marg. Benefits
6,000 8,000 6,000 7,000
6,000 8,000 6,000 8,500
6,000 9,000 6,000 10,000
6,000 8,000 6,000 11,000
a.) Show the total cost, total benefit, net marginal benefit and net total benefit for each stage (i.e., funding level).
b.) As in previous problems, no stage can be chosen without first choosing its predecessors. What should be funded if the agency has total funds of $6,000; $12,000; $18,000; $30,000?
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