Page 4 of 9 -nwwrt P-DA Q9- Q11 are based on the following information. Suppose
ID: 1114474 • Letter: P
Question
Page 4 of 9 -nwwrt P-DA Q9- Q11 are based on the following information. Suppose that the demand for travel along a road is given by V-500- 2P, where V is the number of trips (traffic volume) and P is the price per trip. Suppose farther 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? (e) 100 mC iuitv MEC =v/> (b) (c) (d) 80 75 60 What is the congestion toll (per trip) that reduces congestion and maximizes social welfare? 10. (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.Explanation / Answer
Ans 9. V = 500 - 2P
Demand function in terms of price is
P = 250 - V/2
Total Revenue = P*V = 250V - (V^2)/2
MR = 250 - V
At equilibrium, without govt intervention is
MR = MPC
i.e. 250-V = 100+V
2V = 150
V = 75
Therefore correct answer is part (c) 75
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