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Assignment 1: Part 1 Fuel Economy Standards

This document outlines an assignment involving analysis of a hypothetical rail/truck transportation corridor. Students are asked to: 1) Analyze demand for a proposed new rail service using a logit model and sample data. 2) Forecast freight volumes on each service considering demand and how service times change with congestion. 3) Determine the profitability of the new rail service and how prices and costs would impact profits. 4) Consider how conclusions might change under different assumptions about demand, prices, and total freight volume.

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m saadullah khan
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25 views

Assignment 1: Part 1 Fuel Economy Standards

This document outlines an assignment involving analysis of a hypothetical rail/truck transportation corridor. Students are asked to: 1) Analyze demand for a proposed new rail service using a logit model and sample data. 2) Forecast freight volumes on each service considering demand and how service times change with congestion. 3) Determine the profitability of the new rail service and how prices and costs would impact profits. 4) Consider how conclusions might change under different assumptions about demand, prices, and total freight volume.

Uploaded by

m saadullah khan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment 1

Due Wednesday, March 25, 2020 (Week 4)

Submission: via Canvas website (oc.sjtu.edu.cn)

Part 1 Fuel Economy Standards

This part requires you to read and critique the paper: “Fuel Economy and Auto Safety Regulation: Is the Cure
Worse than the Disease?” by Charles Lave and Lester Lave (Chapter 8 in Essays in Transportation Economics
and Policy). Lave and Lave conclude the first half of the essay with the following recommendation on page
271:

“...Congress should either forgo the efforts at fuel economy and repeal CAFE or increase gasoline prices
(through taxes) to the point where consumers desire a mix of vehicles consistent with CAFE.”

Assuming that gas taxes cannot be increased (because no one wants higher taxes!), write a one-page single-
spaced (or two page double-spaced) report highlighting your arguments either in support of or against
removing the fuel economy standards.

Brevity is appreciated, and essays that are more than 2 pages will NOT be accepted.

Part 2 Case Study: A Rail/Tuck Corridor

The objective of this case study is to introduce the concepts and methodologies associated with multi-
modal transportation systems analysis. Consider a corridor service origin-destination (O-D) pair with
existing truck service and the possibility of adding rail service to that corridor. Figure 1 shows the corridor
connecting two points A and B, the existing truck service, and the proposed rail service. You can assume
that the rail service would be operated by a different company than the truck service.

Truck Service

Rail Service
Figure 1
The following notation will be used:

𝑉𝑇𝑂𝑇 : Total volume of freight transported between A and B (using both services).
𝑉𝑇 : Volume of freight transported using the truck service.
𝑉𝑅 : Volume of freight transported using the new rail service.
𝑡𝑇 : Service time between A and B by truck (in hours)
𝑡𝑅 : Service time between A and B by rail (in hours)
𝑓𝑇 : Price (per unit of volume) by truck.
𝑓𝑅 : Price (per unit of volume) by rail.

For the purpose of this case study, we will consider only prices and service times to compare the two
services, although there may be other variables that would influence the decision of which service to use
(such as reliability, for example). Also, we will assume that VTOT is fixed at 1500 tons/day. In other words,
we will only consider the mode split between truck and rail under different scenarios.

I. Demand Analysis
Since the rail service has not yet been put in place, the obvious way to assess its feasibility is to collect data
from similar O-D pairs elsewhere with similar commodities being shipped. The data, a portion of which is
shown in Table 1, include the share of total tonnage transported by rail (𝑉𝑅 ⁄𝑉𝑇𝑂𝑇 ), the difference in service
times (𝑡𝑅 − 𝑡𝑇 ), and the difference in prices (𝑓𝑅 − 𝑓𝑇 ) between the truck and rail services.

Table 1: Demand model data

A binary logit model was estimated on the data in Table 1 in order to measure the responsiveness of
demand to changes in service times and prices. Using the estimation results, the following equation can be
used to forecast the mode shares under various service time and price differentials:
𝑉𝑅 1
=
𝑉𝑇𝑂𝑇 1 + 𝑒 +0.02(𝑡 𝑅 𝑇 )+0.5(𝑓𝑅 −𝑓𝑇 )
−𝑡

Answer the following questions:


1. Why are the differences in service times and prices used in the above estimation, rather than the
absolute values of these attributes for each service?
2. For each of the ten data points in Table 1:
a. Calculate the predicted share for the rail service.
b. How good are the predictions compared to the actual shares?
c. What are the possible sources of error?
3. Sketch the demand for rail service in the corridor, with the relative disutility:
+0.02(𝑡𝑅 − 𝑡𝑇 ) + 0.5(𝑓𝑅 − 𝑓𝑇 ) on the x axis and the predicted share of the rail service on the y axis.

II. Equilibrium Analysis


In order to forecast the volume of freight on each of the two services, we have to consider both demand
and supply. In the section above, we provided the binary logit equation that characterizes the demand for
rail service under a given service time and price differential. Here, we will provide some information on the
supply side (i.e. the transportation network itself) and use that to produce a forecast for freight volumes on
each service.

As a service becomes more congested, the service time (or travel time) on that service will increase. In our
example, the performance of each of the two services is characterized by the following:

𝑡𝑅 = 100 + 0.066𝑉𝑅
𝑡𝑇 = 25 + 0.081𝑉𝑇
Where 𝑉𝑅 and 𝑉𝑇 are measured in tons, and 𝑡𝑅 and 𝑡𝑇 are measured in hours.

Answer the following questions:


4. If rail prices were set at $1.25/ton and truck prices at $2.25/ton, what would be the predicted
volumes of freight (to the nearest integer) on each service? (Hint: You have four equations and
four unknowns, and there exists one, unique solution. As long as you write all of your equations,
you may find your answer graphically or with a solver.)
5. Sensitivity Analysis: Suppose the demand model coefficient for price is uncertain and can vary
by ±40%. How would the results in question 4 change?

III. Profitability of the New Rail Service


Now that we have developed a framework to forecast volumes of freight on each service, we can
assess the feasibility of providing the new rail service.

Assume that the new rail service will require an investment equivalent to $350/day and that the
variable costs for providing such a service are $0.75/ton. (Prices, as indicated above, are $1.25/ton
for rail and $2.25/ton for truck.)

Answer the following questions:


6. Should the rail service be provided? Show your work.
7. Would your conclusion change under the uncertainty assumption highlighted in question 5?
Show your work.
8. Test the impact of different prices on the profitability of a new rail service. To do so, draw a
plot with net profit on the vertical axis and rail prices (ranging from $0/ton to $3/ton) on the
horizontal axis. Assume truck prices are fixed at $2.25/ton, and ignore the uncertainty in the
price coefficient.
9. If rail prices were set at the break-even point (i.e. the point at which net profits equal zero in
the plot in question 8), what would be the impact of a new rail service on the profits of the
truck service? Calculate the break-even point, and the associated decrease in profits of the
truck service. Based on your calculations, would truck operators support the new service?
Assume the fixed costs of the truck service are $150/day, and the variable costs of providing
that service are $1.50/ton.

IV. Activity Shift Analysis


In this section, we will relax our initial assumption of a fixed total volume (VTOT). Assume that, due
to economic growth, total volume between A and B increases from 1500 tons/day to 2500
tons/day. Rail and truck prices remain at $1.25/ton and $2.25/ton, respectively, and the fixed and
variable costs of the rail service are as indicated earlier.

Answer the following question:


10. Should the new rail service be provided? Did your conclusion change from question 6? Show
your work.

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