(TCO B) Suppose the governor of California has proposed decreasing toll rates on

Question

(TCO B) Suppose the governor of California has proposed decreasing toll rates on California's toll roads and has presented two possible scenarios to implement these increases. The following are projected data for the two scenarios for the California toll roads. (20 points) Scenario 1: Toll rate in 2012: $10.00. Toll rate in 2016: $8.00. For every 100 cars using the toll roads in 2012, 140 cars will use the toll roads in 2016. Scenario 2: Toll rate in 2012: $10.00. Toll rate in 2016: $9.00. For every 100 cars using the toll roads in 2012, 120 cars will use the toll roads in 2016. (Part A) Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2. (10 points) (Part B) Assume 50,000 cars use California toll roads every day in 2012. What would be the daily total revenue received for each scenario in 2012 and in 2016? (6 points) (Part C) Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic? Briefly explain. (4 points) (Points : 20)

Explanation / Answer

Mid point elasticity

=(Q2-Q1)/(Q1+Q2)/2   / (P2-P1)/(P2+P1)/2

Scenario 1:

=(140-100)/(140+100)/2   / (8-10)/(8+10)/2

=-1.5

Scenario 2:

(120-100)/120+100/2 / (9-10)/(9+10)/2

= -1.72

The demand is more elastic under scenario 2.

(B)

For 50000 cars total revenue(price x quantity) is

50000x10 = $500000

2016 : 8x50000 = $400000

(C) Under both scenes price is leastic (elasticity greater than 1) . But it is mor elastic under scene 2.

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