Consider two public projects, Project A and Project B, each with different demand curves and constantmarginal costs. The government is considering funding one of these projects. Project A is in a marketwhere demand is QAD= 100-2p and MCA-20. Project B is in a market where demand is QB-80-p and theMCB = 30. Both Markets are competitive.a) What is the maximum willingness to pay for each project by the government if the project isexpected to reduce the marginal cost in each market by 20%?b)If The government could only fund one of the projects and the cost of project A is $1,100 andthe cost of project B is $1,500, which project would the government fund (if any)?c)Suppose now, the government has decided to fund Project A. Suppose now, the MCA=20+ 0.5Q.The project will lower the MC by 4 at every Q. The cost remains the same. Will the project gothrough if there was no ability to redistribute? What if the government could redistribute theincrease in CS?

c)In both cases, the government would fund the project with the higher benefit-cost ratio. If the…

Answered: Consider two public projects, Project A…

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter9: Applications Of Cost Theory

Section: Chapter Questions

Problem 2.5CE

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