Suppose a government is considering the following proposed projects (all amounts are in millions). Use the Kaldor-Hicks criterion in answering the questions.

Benefits to consumers Costs to firms Governments cost

Project Arm $400 $100 $200

Project Bull $1110 $120 $800

Project Cage $900 $100 $600

Project Dip $200 $20 $200

a. Which projects would you recommend be adopted if at most two projects can be constructed in the area? Explain.

b. Now suppose the constraint changes. Assume the government has budgeted $1.2 billion to be spent on such projects. If it is possible to replicate particular projects, what would you recommend, and why?

c. If you learn that the governments cost estimate for Project Bull includes a $200 million charge for work completed two years ago, would your recommendations for (a) and (b) change? Explain.

d. If you learn that the governments cost estimate for Project Arm consists entirely of wages paid to currently unemployed workers, while the other three projects involve no such hiring, would your recommendations change? Explain?