Question

Suppose that total costs (TC) double for each project listed in Table 5.2. Which project(s) is (are) now economically viable?

a. Plan A only

b. Plans C and D only

c. Plans B and C

d. Plans A and B only

Plan	Total cost of project (\()	Marginal cost (\))	Total Benefit	Marginal Benefit	Net Benefit (TB-TC)
No new construction	0	-	0	-	-
A: Widen existing highways	100	-	200	-	-
B: New 2-lane highways	280	-	350	-	-
C: New 4-lane highways	480	-	470	-	-
D: New 6-lane highways	1240	-	580	-	-

Short answer

Option (a): Plan A only.

Step-by-step solution

Calculating the marginal cost and marginal benefit of the four highway construction plans

The cost-benefit analysis helps in determining the economic feasibility of a plan. An optimal plan would be where maximum benefits are realized at the minimum cost possible, which happens when the marginal benefit is equal to the marginal cost of a plan.

The marginal cost is the change in the cost incurred to produce or shift to another plan. Thus, you can calculate the marginal cost of the present plan by subtracting the total cost of the previous plan from the total cost of the present plan.

For example, the marginal cost of plan A is calculated below:

$$\begin{gathered} M{C}_A=Total\cos tofplanA-Total\cos tofnewconstruction \\ =100-0 \\ =\$100 \end{gathered}$$

Similarly, calculate the marginal cost of each plan, as shown in the diagram below.

The marginal benefit is the change in the benefit due to the production (unit of a good) or shifts to another plan. Thus, calculate the marginal benefit of the present plan by subtracting the total benefit of the previous plan by the total benefit of the present plan.

For example, the marginal benefit of plan A is calculated below:

$$\begin{gathered} N{B}_A=TotalbenefitofplanA-Total\cos tofplanA \\ =200-100 \\ =\$100 \end{gathered}$$

Similarly, calculate the marginal benefit of each plan, as shown in the diagram below.

Plan	Total cost of project ($)	Marginal cost ($)	Total Benefit	Marginal Benefit	Net Benefit (TB-TC)
No new construction	0	-	0	-	-
A: Widen existing highways	100	100(=100-0)	200	200(=200-0)	-
B: New 2-lane highways	280	180(=280-100)	350	150(=350-200)	-
C: New 4-lane highways	480	200(=480-280)	470	120(=470-350)	-
D: New 6-lane highways	1,240	760(1240-760)	580	110(=580-470)	-

Comparing the marginal cost and marginal benefit to find the economically feasible plan

You can see in the table that none of the plans fulfills the MB=MC condition. Thus, check for feasibility. A project is economically feasible as long as the benefits exceed the cost, which is happening only in plan A (200>100), here the net benefit is also the maximum (=100, given by the net benefit column where the total cost is subtracted from total benefit for each plan).

Plan	Total cost of project ($)	Marginal cost ($)	Total Benefit	Marginal Benefit	Net Benefit (TB-TC)
No new construction	0	-	0	-	0
A: Widen existing highways	100	100(=100-0)	200	200(=200-0)	100(=200-100)
B: New 2-lane highways	280	180(=280-100)	350	150(=350-200)	70(=350-280)
C: New 4-lane highways	480	200(=480-280)	470	120(=470-350)	-10(=470-480)
D: New 6-lane highways	1,240	760(1240-760)	580	110(=580-470)	-660(=580-1240)

Thus, plan A is the only economically feasible plan where the benefits are maximum.