Principle of Microeconomic

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Professor Kosten Banifoot, a prominent supporter of the National Aeronautics and Space Administration’s (NASA) space shuttle program, estimated that the gains from the program are currently $24 billion per year (an average of $6 billion per launch) and that its costs are relationship between the number of shuttles launched and the total cost of the program is as described in Table 1.1. On the basis of these estimates, Professor Banifoot testified before Congress that NASA should definitely expand the space shuttle program. Should Congress follow his advice? Explain. In your opinion, how many space shuttles should NASA launch? Number of launches | Total cost ($ billion) | Average cost ($ billion) | 0 | 0 | 0 | 1 | 3 | 3 | 2 | 7 | 3.5 | 3 | 12 | 4 | 4 | 20 | 5 | 5 | 32 | 6.4 | Table 1.1 Answer: First at all, we must compare the marginal cost of a launch to its marginal benefit. However, the professor just tells us only the average cost and average benefit of the program. There are the total cost of the program divided by the number of launches and the total benefit divided by the number of launches. The average benefit and average cost per launch for all shuttles launched thus far is simply not useful for deciding whether to expand the program. The average cost of the launches undertaken so far might be the same as the cost of adding another launch. But, it also might be either higher or lower than the marginal cost of a launch. The benefit of an additional launch is in fact the same as the average benefit per launch thus far, $6 billion. If not expand, the cost of adding the fifth launch would be more than $6 billion. In fact that the average cost per launch is only $5 billion simply and the professor does not tell us anything about the marginal cost of the fifth launch. Suppose that the relationship between the number of shuttles launched and
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