The city of Metropolita added a new subway station in a neighborhood between two

Question

The city of Metropolita added a new subway station in a neighborhood between two existing stations. After the station was built, the average house price increased by $10,000 and the average commute time fell by 15 minutes per day. Suppose that there is one commuter per household, that the average commuter works 5 days a week, 50 weeks a year, and that the benefits of reduced commuting time apply to current and future residents forever. Assume an interest rate of 5%. Produce an estimate of the average value of time for commuters based on this information.

Explanation / Answer

Letting V denote the value of an hour, the annual value of the time savings from the change can be written as (5 days/week × 50 weeks/year × .25 hours/day) × V, or 62.5 V per year.

The present value of 62.5 V per year, forever, at a 5% discount rate, is 62.5 V / 0.05.

The implication of the change in house prices is that households were willing to pay $10,000 to gain 15 minutes per commuting day, i.e., that the present value of the time savings is $10,000.

Setting 62.5 V / 0.05 = $10,000 and solving gives V = $8

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

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