Tia RE2102 Real Estate Economics Page 4 of 9 09-Q11 are based on the following i

Question

Tia RE2102 Real Estate Economics Page 4 of 9 09-Q11 are based on the following information. Suppose that the demand for travel along a road is given by V-500-2P, whre v the number of trips (traffic volume) and P is the price per trip. Suppose further that the marginal private cost of travel equals (100 +V) per trip, and the marginal external cost of travel due to congestion equals V/2 per trip. A driver, Jack, values a trip through the road at 210. Another driver, Jenna, values a trip at 220. Suppose the government proposes to charge a congestion toll on this road. Toll revenues will be used to improve bus services. 9. What is the equilibrium traffic volume without any government intervention? (a) 100 (b) 80 (c) 75 (d) 60 10. What is the congestion toll (per trip) that reduces congestion and maximizes social welfare? (a) 100 (b) 75 (c) 50 (d) 37.5 11. Which of the following statements concerning Jack and Jenna is cORRECT? (a) (b) (c) (d) After the toll takes effect, Jack continues to drive. After the toll takes effect, Jenna quits driving. After the toll takes effect, Jack is definitely worse off. After the toll takes effect, Jenna is definitely worse off. 12- Q13 are based on the following information. run a public transit system, it costs $ 4 million dollars in total regardless of the mber of riders. In other words, the marginal cost of operating the system is always o. Demand for the service is Q = 600,000-20,000 × P where Q is ridership and Pis

Explanation / Answer

9). Demand : v= 500-2p i.e, p= (500-v)/2

marginal cost: 100+v+ v/2 ( sum of both pvt and external cost)

At equilibrium demand will be equal to marginal cost. So solve the two equations simultaneosly to find equilibrium values.

solve : (500-v)/2 = 100+v+v/2

You will get v= 75 and p=212.5. so answer is c.

10). If there was no congestion then external cost (v/2) would have been zero.

This means we want to be on 100+v line . Put v=75 ( equilibrium value in ques 9) on this line will give p=175. In reality we are on 100+v+v/2 line where at v=75, p is 212.5. Now if govt imposes the tax of 212.5 - 175 = 37.5, then we have v=75 and effective p = 212.5 only. Here there will be no external cost of congestion, rather only tax on congestion. we will reach the same equilibrium, except that now people will pay tax to the govt instead of bearing congestion cost. This means same equilibrium but with govt revenue which will be used to promote public transportation.So answer will be d.

11). After the tax, p=212.5 so Jack wont drive as his cost is greater than his value of trip. Jenna will continue to drive. None of them are worse off as p is same as 212.5. Therefore, none of the options are correct.

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