Blair rides the subway train at a cost of $2.00 per trip, but would switch if the price for

the existing service were any higher. Her only alternative is a bus that takes 10 minutes

longer, but costs only $1.25. She makes 10 trips per year. The city is considering

renovations of the subway system that would reduce the trip by 20 minutes. However,

fares would have to increase by 80 cents per trip to cover the costs. The fare increase and

reduced travel time both take effect in one year and last forever. The interest rate is 10

percent.

a. As far as Blair is concerned, what are the present values of the projects benefits

and costs? (2 marks)

b. The citys population consists of 55,000 middle-class people, all of whom are

identical to Blair, and 9,000 poor people. Poor people are either unemployed or

have jobs close to their homes, so they do not use any form of public

transportation. What is the present value of the benefits for society as a whole?

What is the present value of the costs to society as a whole? What is the net

present value of the project? (1 mark)

c. Some members of the city council propose an alternative way to finance the

renovation costs. Instead of raising the price of subway tickets by 80 cents

forever, every resident of the city would pay a one-time city improvement fee

of $68.75 immediately. If the distributional weight attached to the net benefits of

Blair is 1.0, what is the minimum weight on a poor person, such that the project

ceases to be worthwhile if it is financed with the city improvement fee, instead of

the fare increase? (1 mark)

Please make sure C is answered!