Problem 3. Imagine that you have been hired as a consultant by a government agen

Question

Problem 3. Imagine that you have been hired as a consultant by a government agency that runs a toll bridge. The agency wants to increase the revenue from the bridge, by raising the toll. There are two kinds of vehicles that use the bridge, private vehicles and commercial vehicles. The agency currently charges each type of vehicle the same toll, $3.00, but they are considering charging different tolls for the different types. Over the years, the government has charged different tolls, and they now have a large amount of data on how many vehicles of each type use the bridge at different levels of toll. They have given you data, which are shown in the two tables below. Based on these data, what changes would you advise the agency to make in the tolls for the two types of vehicles. You don't need to provide specific numbers, just up or down. Explain your answer clearly and thoroughly. [Assume that income and preferences have been constant over the time that these data were accumulated, and that cross-price effects and inflation are negligible. In other words, assume that the demand curves for the two types of vehicles have been the same over time. Also, assume that demand is linear for both types of vehicle.] Table 1: Bridge Crossings 2.25 2,750 8,200 1.50 | 3.50 8,800 1.75 3,250 8,600 3.50 1,500 7,200 2.00 3,000 8,400 2.75 2,250 7,800 3.00 2,000 7,600 2.50 2,500 8,000 3.25 1,750 7,400

Explanation / Answer

The entire problem can be tabulated as under

Witgh increasing toll, the rate of inrease in collection is decreasing (from 4.2 to 3.3 to 2.4) and is expected to decrease with the same rate.

Hence, we can expect that the toll to get increased to approximately 4 and then it may reach the threshold wherefrom it may come down once the toll is incraesed. Hence the present toll of 3 may be increased upto the incraesing growth trend i.e. approximately $4 per vehicle.

Toll Qp Qc Total (Qp+Qc) Total Toll 2.25 2750 8200 10950 24637.5 1.5 3500 8800 12300 18450 1.75 3250 8600 11850 20737.5 3.5 1500 7200 8700 30450 2.4% Change from previous level of 3.25 2 3000 8400 11400 22800 2.75 2250 7800 10050 27637.5 3 2000 7600 9600 28800 4.2% Change from previous level of 2.75 2.5 2500 8000 10500 26250 3.25 1750 7400 9150 29737.5 3.3% Change from previous level of 3

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.