Suppose the Army Corps of Engineers has proposed for buildin

Suppose the Army Corps of Engineers has proposed for building six dams with the social benefits (B) and costs (C) listed as follows:

Dam B C Net Benefits B-C Ratio

1 40 20
2 25 10
3 30 20
4 10 20
5 15 10
6 15 20

a. (5 points) Compute the net benefits and the benefit-cost ratio for each project and enter these figures in the table above.

b. If the government\'s budget was constrained to $125 million, which project or projects should it choose in order to maximize social welfare? Briefly explain. [Note: For purposes of answering this question, assume that social costs and the government\'s budgetary costs are identical.]

Solution

1)

Project

Social Benefits

Social Costs

Net Benefits

B to C ratio

1

40

20

20

2

2

25

10

15

2.5

3

30

20

10

1.5

4

10

20

-10

0.5

5

15

10

5

1.5

6

15

20

-5

0.75

2)

If the government\'s budget was constrained to $125 million, Project No: 1, 2 , 3 and 5 can be choosen as they yield ppsitive net benefits