Question

Governor Smith of Georgia is presented with the following data: currently the state derives a total of $400 million of benefits from education spending and it only costs $250 million. The legislature proposes increasing spending to $300 million. Quality studies show that this new spending will increase the total benefit of education to $425 million. Choose the correct relevant answer below.

A)
Since the new total benefit of $425 million is so much larger than the new total cost of $350 million, it clearly makes economic sense to spend the extra money according to the Cost-Benefit Principle.

B)
To get the economically wise decision made according to the Cost-Benefit Principle, we need to compare the marginal benefit of $25 million with the total cost of $350 million. This new spending makes no economic sense.

C)
In order to use the Cost-Benefit Principle correctly we need to compare the marginal benefit of the new spending, which is $25 million, with the marginal cost of the new spending, which is $50 million. This new spending makes no economic sense.

D)
Education spending by the state clearly makes no sense under any circumstances according to the Cost-Benefit Principle. As we can see from the data above, there is no amount of spending where the total benefits exceed the total costs.

Answer 1

C)

In order to use the Cost-Benefit Principle correctly we need to compare the marginal benefit of the new spending, which is $25 million, with the marginal cost of the new spending, which is $50 million. This new spending makes no economic sense.

Step-by-step explanation:

The cost-benefit principle in accounting states that the additional benefit must outweigh additional cost in an accounting system.

Spending of $250 million is giving $400 million revenue. The new proposal of spending $300 million to get $425 million implies we are spending extra $50 million to make extra $25 million.

This is not a good investment according to the cost-benefit principle.