Question

Cost of building a one lane highway = 1 million $; two lane highway = 2...

Cost of building a one lane highway = 1 million $; two lane highway = 2 million $ three lane highway = 3 million $.  The monetary value to society of having 1 lane = 3 million $; 2 lanes = 4.5 million $ and three lanes 5 million $.  This implies the efficient highway will have:
None of the other three answers is correct.
One lane since it is cheaper.
Three lanes since the benefit is maximized.
Two lanes since the second lane has marginal benefit = 1.5 million $ and marginal cost = 1 million $.

Homework Answers

Answer #1

Two lanes since the second lane has marginal benefit = 1.5 million $ and marginal cost = 1 million $.

As a consumer increases the consumption of a good or service the marginal utility obtained from each additional unit of the good or service decreases. Here, when the second lane construction is finshed, the marginal benefit derived from the second lane construction was maximum. With the construction of third lane , marginal benefit reduces to 0.5 million dollar.

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