Before listing a home, an owner considers four projects. Market evidence shows the value each would add: new roof, cost $14,000, adds $16,000; landscaping, cost $9,000, adds $5,000; kitchen remodel, cost $40,000, adds $28,000; interior paint, cost $6,000, adds $9,000. Under the principle of increasing and decreasing returns, which projects are economically justified?
Correct Answer
C) The roof and the paint, which add at least their cost
An added investment is justified when its added value equals or exceeds its cost. The roof ($16,000 vs $14,000) and paint ($9,000 vs $6,000) qualify; landscaping ($5,000 vs $9,000) and the kitchen ($28,000 vs $40,000) do not. Option A ranks by value added without regard to cost, Option B ignores that the four together cost $69,000, and Option D drops the roof even though it more than pays for itself.
Why This Is the Correct Answer
Option C is correct because the roof adds $16,000 for $14,000 and the paint adds $9,000 for $6,000, so both add at least their cost. Landscaping adds $5,000 for $9,000 and the kitchen adds $28,000 for $40,000, so neither is justified.
Why the Other Options Are Wrong
Option A: The kitchen and the roof, which add the most value
Option A picks the kitchen and the roof because they add the most value. The kitchen adds $28,000 but costs $40,000, a $12,000 loss, so size of added value alone does not justify it.
Option B: All four, since together they add $58,000
Option B says all four are justified because together they add $58,000. Together they cost $14,000 + $9,000 + $40,000 + $6,000 = $69,000, and landscaping and the kitchen each add less than their cost.
Option D: The paint alone, which has the highest return per dollar
Option D keeps only the paint because it has the highest return per dollar ($9,000 / $6,000 = 1.5). The roof also adds more than it costs ($16,000 vs $14,000), so it is justified too.
Each project pays its way
Test every project on its own: added value at least equal to cost means go, less than cost means stop.
How to use: Use this when a question lists several improvements with costs and added values and asks which make sense.
Exam Tip
Compute added value minus cost for each item before reading the options; the justified set is every item with a result of zero or more.
Common Mistakes to Avoid
- -Choosing projects by how much value they add instead of by net gain
- -Judging a bundle of projects by total added value without comparing total cost
- -Keeping only the highest-ratio project and dropping others that still pay for themselves
Concept Deep Dive
Analysis
Each project is a separate marginal decision. Compare each project's added value with its own cost and keep every project whose added value is at least its cost; ranking by size of added value or by highest ratio leads to the wrong set.
Background Knowledge
The principle of increasing and decreasing returns, closely tied to balance and contribution, says additional investment is justified as long as marginal benefits equal or exceed marginal costs. Owners and appraisers apply it to remodeling, repairs and additions by comparing each item's added value with its cost.
Real-World Application
A seller asks an appraiser which pre-listing projects are worth doing. Market evidence shows a new roof and fresh paint more than pay for themselves, while an expensive kitchen remodel would not be recovered in the sale price.
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