1. The Tokyo Bay Aqualine bridge and tunnel cuts travel time by an hour between
ID: 1245417 • Letter: 1
Question
1. The Tokyo Bay Aqualine bridge and tunnel cuts travel time by an hour between some points in the Tokyo region and costs ¥3,000 for the kind of vehicle most Americans in Japan drive.Officials on both sides of the Bay would like the traffic on the bridge to be heavier than it is, but most motorists appear to be taking a much longer route through the heart of Tokyo to avoid the fare.
(a)Based on the above information, what can you speculate as to the price elasticity of demand for traffic
on the bridge?
(b)An economist has estimated that if tolls fell to ¥2000, traffic would rise from the current 3,000 vehicles
to 6,000. What is the price elasticity?
(c)What do you recommend the bridge operators should do with regard to fares, assuming that additional
traffic cost the operators nothing?
(d)If engineers discover that maintenance of the bridge, whether or not cars use the bridge, is 20 percent
more than expected than when the fares were initially established, how does that affect your
recommendation
Explanation / Answer
a) price elasticity of demand shoud be elastic since motorists are taking alternative routes rather than using bridge. b) price elasticity of demand is chg in quantity/original quantity / change in price /original price. 3,000/6000 / 1,000/3,000= 1/2 /1/3= 3/2 = 1.5 demand is elastic. c) drop prices, since when demand is elastic price and revenues move in opposite directions. d0 since maintenance is the same no matter how much the bridge is used, the costs shouldn't affect the decision.
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