500-2 S Page 4 of 9 p-Aie Q9-011 are based on the following information. the mar
ID: 1114469 • Letter: 5
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500-2 S Page 4 of 9 p-Aie Q9-011 are based on the following information. the marginal private the demand for travel along a road is given by V-500-2P, where V is (traffic volume) and P is the price per trip. Suppose further that the cost of travel equals (100 + V) per trip, and the marginal extermal cost number of trips ue to congestion equals V/2 per trip. A driver, Jack, values a trip through the road at 210o 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 mc=lubty (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) After the toll takes effect, Jack continues to drive. (b) After the toll takes effect, Jenna quits driving (c) After the toll takes effect, Jack is definitely worse off (d) After the toll takes effect, Jenna is definitely worse off. 012-Q13 are based on the following information. To run a public transit system, it costs S 4 illion dollars in total regardless of the number of riders. In other words, the marginal cost of operating the system is always zero. Demand for the service is Q 600.000-20,000×P where 0 is ridership and P is ,fare (measured in $'s) Ht12. Suppose that the public transit s to a profit maximizing monopoly firm, What is the profit made by the firm? 1 $0.5 million c) $ 1 million (d) $ 2 million - 15 13. The public transit authority knows the demand function and the cost function. However, it cannot commit any government expenditures to subsidize the operating firm. What is the reaulated price chosen by the transit authority in order to improve social weliraie from that of the monopoly outcome in the previous question? s15Explanation / Answer
V = 500- 2P
P= (500-V)/2 ------- (marginal benefit curve)
MPV(marginal private cost) = 100+V
And marginal external cost (MEC) =V/2
(i) Equilibrium traffic volume without any government intervention is
When MB = MPV
(500-V)/2 = (100+V)
( 300-3V)/2 = 0
V = 100
Therefore equilibrium traffic volume without any government intervention is 100.
When MB = MPV + MEC (For social welfare)
(500- V)/2 = (100+V)+ V/2
( 300-4V)/2 = 0
V = 75
Equilibrium traffic volume with any government intervention is 75.
(ii) Congestion toll per trip (that reduces) congestion and maximize social welfare is given by marginal external cost V/2 .
75/2 = 37.5
(iii) After the toll takes effect, jack is definitely worse off.
Because Jack values the trip through road at 210 and jenna values a trip at 220. And earlier MB= (500-100)/2 = 200 . So,both jack and jenna would be better off.
But now after toll , MB =( 500-75)/2 = 212.5 . So,now jack will definitely be worse off. Because his value to the trip is 210 which is less than MB.
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