Suppose That the Government Is Trying to Decide Between Allocating

question 264

Multiple Choice

Suppose that the government is trying to decide between allocating its resources to build more dams or to build more freeways. In terms of forgone dams, as more freeways are constructed, the marginal benefit of additional freeways ________ and the marginal cost of additional freeways ________.

• A) increases; increases
• B) increases; decreases
• C) decreases; increases
• D) decreases; decreases

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Definitions:

NPV

Net Present Value, a financial metric used to evaluate the profitability of an investment, considering the time value of money.

Mutually Exclusive

Events or decisions that cannot occur or be taken simultaneously; selecting one option precludes the choice of the other.

Profitability Index

A financial metric used to evaluate the desirability of an investment or project, calculated as the present value of future cash flows divided by the initial investment cost.

Cash Outflow

The total amount of money being spent by a business, including expenses, investments, and any other payments.