Assume that the City council in city X, has decided to improve the roads leading into the city, which is particularly beneficial for daily commuters driving cars or travelling by bus. A consulting firm has helped the city council by developing different solutions to the traffic problems. They have come up with six different proposals, whose costs and benefits are summarized below: Cost Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Time savinga (min/day 3 6 8 9,5 10,5 11 5 million 10 million 15 million 20 million 27,5 million 35 million There are 1000 daily commuters in the city, and they work on average 250 days per year each, and travel in and out of the city twice per day. The new traffic solutions will work for ten years, after that the city has grown so much so it is time to rebuild. The commuters all have the same valuation of a minute of time saved per day, they value it to one krona, i.e., they are willing to pay one krona to travel in and out of the city one minute faster each day. 2) If the projects are mutually exclusive (only one can be implemented), which one should be adopted? Om. We assume that the discount rate is equal to zero, so that all benefits are worth the same, irrespective of when they occur. b) The city must also finance the project chosen. This can be done by introducing toll fees for commuters, or the city can raise the city tax, so that all citizens contributes to project, in proportion to their labor income. We assume here that it chooses the latter altemative. To evaluate the project's net benefit we must also consider that the increased tax has a cost in itself. Assume that the tax rate before the project has been started is t=0,30 and that there are 10.000 persons working in the city and that their average wage rate before tax is 200 kr/hour. The labor supply hours per year) for an average citizen depends on the wage rate after tax (w) according to the following function: L* = -100 + 10w How many hours per year does the average citizen work at the pre-project tax rate? Oms! The wage before tax is independent of the tax rate, i.e., it is always equal to 200 kr. 9 How large are the city tax revenue before the project? d) Assume that the tax rate is increased by 1,5%-point to t' = 0,315. By how much does tax revenue increase? Is it enough to finance the best project Assume that the City council in city X, has decided to improve the roads leading into the city, which is particularly beneficial for daily commuters driving cars or travelling by bus. A consulting firm has helped the city council by developing different solutions to the traffic problems. They have come up with six different proposals, whose costs and benefits are summarized below: Cost Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Time savinga (min/day 3 6 8 9,5 10,5 11 5 million 10 million 15 million 20 million 27,5 million 35 million There are 1000 daily commuters in the city, and they work on average 250 days per year each, and travel in and out of the city twice per day. The new traffic solutions will work for ten years, after that the city has grown so much so it is time to rebuild. The commuters all have the same valuation of a minute of time saved per day, they value it to one krona, i.e., they are willing to pay one krona to travel in and out of the city one minute faster each day. 2) If the projects are mutually exclusive (only one can be implemented), which one should be adopted? Om. We assume that the discount rate is equal to zero, so that all benefits are worth the same, irrespective of when they occur. b) The city must also finance the project chosen. This can be done by introducing toll fees for commuters, or the city can raise the city tax, so that all citizens contributes to project, in proportion to their labor income. We assume here that it chooses the latter altemative. To evaluate the project's net benefit we must also consider that the increased tax has a cost in itself. Assume that the tax rate before the project has been started is t=0,30 and that there are 10.000 persons working in the city and that their average wage rate before tax is 200 kr/hour. The labor supply hours per year) for an average citizen depends on the wage rate after tax (w) according to the following function: L* = -100 + 10w How many hours per year does the average citizen work at the pre-project tax rate? Oms! The wage before tax is independent of the tax rate, i.e., it is always equal to 200 kr. 9 How large are the city tax revenue before the project? d) Assume that the tax rate is increased by 1,5%-point to t' = 0,315. By how much does tax revenue increase? Is it enough to finance the best project