- Benefit-Cost Ratio
- total benefits divided by total costs with criteria of proceed if greater than one, reject otherwise. Logic is usually to accept project if it is > 1 and reject if < 1 or adopt the alternative with highest ratio. SOMETIMES this gives same result as "maximize net benefits" but NOT ALWAYS. Can produce results that are contrary to the maximize net benefit principle. Problematic with mutually exclusive choices and resource constraints. Sensitive to how costs and benefits are tallied (see Stokey & Zeckhauser 146.6) In general, DON'T USE.
Example. Imagine two options. One is to spend $1000 on advertising with expectation of $10,000 in benefits. The other is to spend 25,000 with expectation of $100,000 in benefit. The first option gives you a better "bang for the buck rate" (i.e., benefit/cost ratio) but provides 90,000 less in benefits. If we don't have a resource/budget constraint it is the better choice .