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Tutorial 3

This document summarizes a tutorial problem about demand for crossings of a toll bridge: 1) The demand curve is linear and downward sloping with a vertical intercept of 15 and horizontal intercept of 30, so no toll would have 30 crossings. 2) With a $5 toll, quantity demanded is 20, and consumer surplus loss is $125. 3) With a $7 toll, quantity demanded is 16, and toll revenue increases to $112, indicating demand is inelastic.

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Feyb Riyanna
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180 views

Tutorial 3

This document summarizes a tutorial problem about demand for crossings of a toll bridge: 1) The demand curve is linear and downward sloping with a vertical intercept of 15 and horizontal intercept of 30, so no toll would have 30 crossings. 2) With a $5 toll, quantity demanded is 20, and consumer surplus loss is $125. 3) With a $7 toll, quantity demanded is 16, and toll revenue increases to $112, indicating demand is inelastic.

Uploaded by

Feyb Riyanna
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Tutorial 3 1. Suppose you are in charge of a toll bridge that costs essentially nothing to operate.

1 =5 Q The demand for bridge crossings Q is given by P 1 . 2 a. Draw the demand curve for bridge crossings. How many people would cross the bridge if there were no toll? The demand curve is linear and downward sloping. The vertical intercept is 15 and the horizontal intercept is 30.
Price
15 10 A B C

Demand Curve for Bridge Crossings

$7

10

20

30

Bridge Crossings

At a price of zero, 0 = 15 (1/2)Q, so Q = 30. The quantity demanded would be 30. b. What is the loss of consumer surplus associated with a bridge toll of $5? If the toll is $5 then the quantity demanded is 20. The lost consumer surplus is the difference between the consumer surplus when price is zero and the consumer surplus when price is $5. When the toll is zero, consumer surplus is the entire area under the demand curve, which is (1/2)(30)(15) = 225. When P = 5, consumer surplus is area A + B + C in the graph above. The base of this triangle is 20 and the height is 10, so consumer surplus = (1/2)(20)(10) = 100. The loss of consumer surplus is therefore 225 100 = $125.

c. The toll-bridge operator is considering an increase in the toll to $7. At this higher price, how many people would cross the bridge? Would the toll-bridge revenue increase or decrease? What does your answer tell you about the elasticity of demand? At a toll of $7, the quantity demanded would be 16. The initial toll revenue was $5(20) = $100. The new toll revenue is $7(16) = $112. Since the revenue went up when the toll was increased, demand is inelastic (the 40% increase in price outweighed the 20% decline in quantity demanded).

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