The United States Defense Department has already spent $1billion on the developm

Question

The United States Defense Department has already spent $1billion on the development of a new weapon. It is now asking Congress for an additional $500M to finish the project. Senator Jones comments: "We have already spent $1billion and got nothing in return. I'm not spending another dollar." The United States Defense Department has already spent $1billion on the development of a new weapon. It is now asking Congress for an additional $500M to finish the project. Senator Jones comments: "We have already spent $1billion and got nothing in return. I'm not spending another dollar." Senator Smith comments: "We have already spent $1billion. I'm not going to waste our taxpayers’ money, so we need to spend the $500M to finish the project.”

1. Using what you have learned in class, and all “politics” aside, how would you respond to each of the Senator's comments?

2. What other factors should affect the decision to spend $500M to finish the project

Explanation / Answer

1 we will respond that 1 billion is sunk cost. What matters is what can be achieved by 500 million

2 We will have to compare marginal cost of raising additional 500 million with marginal benefit of utilizing these 500 million

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