Question

Suppose government can pursue up to three projects. The first has benefits of $1,080 and costs of $1,000; the second has benefits of $1,180 and costs of $1,000; the third has benefits of $1,230 and costs of $1,000. Suppose that it costs $0.20 for the government to raise a dollar in revenues. Which project(s) should the government pursue?

Answer 1

it costs $0.20 for the government to raise a dollar in revenues. All three projects involve a cost of $1000. So to raise $1000 in revenues, it will cost the government an additional 0.2*1000=$200. Thus, total cost for each project is $1000+$200=$1200.

The only project which has a benefit exceeding the total cost is the third project. For the first two projects the benefits are lower than the total cost. Hence the government should pursue the third project.