uestion 1. Elasticities (9 points) A) Suppose you are the administrator in charg

Question

uestion 1. Elasticities (9 points) A) Suppose you are the administrator in charge of setting tolls for the Golden Gate Gate Bridge. If the Atthe ament toll of 1Arip. 100,000 trips per hour are taken price elasticity of demand for trips is 2.0, what will happen to the number per hour if you raise the toll by 10 percent? What will happen with across the bridge. to the number of trips taken total revenue? Explain! (4 p) ) Now suppose that the price elasticity had been not 2.0 but 0.5. How would the number of trips and total revenue then be affected by a 10 percent increase in the toll? (4 p) Under what conditions is it a good idea to increase price in order to increase total revenue? (1 p) on 2. Externalities (7 points) Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river efirm benefits tion. This causes from dumping waste into the river, the waste reduces the fish and bir damage to local fishermen and the aviarist. At a cost, Erie Textile out the toxins, in which case local fishermen or aviarist will not suffer any damage ant daily gains and losses for the three parties are listed below

Explanation / Answer

Elasticity

(A) 10% raise in toll tax of $1 means $0.1 raise. The new toll tax woudl be $1.1.

The number of trips would be :

elasticty = % change in price / % change in demand

-2 =   10 / change in quantity

change in quantity = -5%

The quantity would fall by 5000

With increase in price by 0.1, the traffic would fall by 5000. The new toll traffic woudl be 95000.

change in revenue = 1.1 x95000 - 100000x1

change in revenue = 4500

Revenue increased with price increase of $0.1.

(b) If price elasticty was 0.5, then:

-0.5 =   % change in price / % change in demand

chaneg in quantity = -0.1 / 0.5 = - 0.2%

With increase in price by 0.1, the traffic would fall by 0.2% The new toll traffic woudl be 0.98 x 100000 = 98000

change in revenue =   1.1 x98000 -100000x1

change in revenue = 7800

(c) A price increase would be more beneficial when the demand is inelastic. A price decrease would be more beneficial when the demand is elastic.

Externality

(A) The maximum amount that could be given to manufacturer of textile to produce with filter would be the difference between what other two parties gain with filter and without filter.

maximum amount that woudl be paid by two parties = (180+130)-(50+25)

= $235.

However this amount need not to be paid by two parties they can pay slightly higher amount to the difference between eric's with and without filter gain:

400-200 = 200

Any amount greater than 200 would convince textile manufacturer to prpduce with filter.

(B) If all can communicate, then other two parties can convince Eric to use filter and pay an amount slightly higher than the difference between his gains with and without filter.(greater than 200)

(C) Gain of 440 means difference with and wihout filter woudl be 240 now. This is higher than the difference two parties can pay ($235) to convince Eric to use filter. Hence Eric will not use filter with gain of 440 to him without the use of filter.

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