a. A commonly used benefit-cost rule is to undertake a program if and only if its ratio of benefits to cost (both in present-value terms) is greater than 1 (B/C > 1). Does this rule make sense?
b. A city is deliberating what to do with a downtown vacant lot that it owns. Should it build a parking garage or a public library? According to its studies, the benefit-cost ratio for the garage is 2 and the ratio for the library is 1.5. Accordingly, the city decides to build the garage. Is this conclusion justified, or is additional information needed? Explain carefully.
c. A state must decide which of its deteriorating bridges to repair within its limited budget. The total number of such bridges (some currently closed for safety reasons) is between 450 and 500. The state has gathered estimates of repair costs and projected traffic benefits for each bridge. It has decided to repair those bridges with the greatest benefit-cost ratios until its budget is exhausted. Does this strategy make sense? Explain carefully.

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January 30, 2013

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