Question
5. The government is planning to build a motorway between Linares and Albacete (two Spanish cities). A consultancy report estimates that there are 10,000 potential
5. The government is planning to build a motorway between Linares and Albacete (two Spanish cities). A consultancy report estimates that there are 10,000 potential users, each one with a demand function , where stands for the number of travels and for the toll price. The total cost of the motorway is 2,000,000 euros and the government has decided not to charge any toll. The project will be carried on only if the consumers' surplus at least meets the total cost. a. Should the motorway be built? (Hint: compute the aggregate demand, find the total surplus and compare with the cost of building the motorway). b. The government plans an advertising campaign that will cost 1,000,000 euros and will double the demand. Should the government carry on with the advertising and the motorway? (Hint: compute the new aggregate demand, find the total surplus and compare with the resulting cost of the construction and the marketing of the motorway).
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