A country is considering the adoption of two different telephone networks. Network A is an older network. It involves initial capital expenditures of $2 million, but will pay off $120,000 per year for a lifetime of fifty years. The newer network B involves a capital expenditure of $5 million, but will pay off at the rate of $200,000 per year over a lifetime of fifty years. Assume there is no discounting of the future so that to make comparisons, the government simply adds up all costs and revenues and looks at net worth, choosing the project with the higher net worth.

(a) Which network will a government with no installed telephone network choose?

(b) Suppose that a government had just installed network A (before the new technology B came along). Would it now shift to network B?

(c) Explain why this example helps you understand why “leapfrogging” in infrastructure might occur.