Microeconomics

Original Scenario: Thomas is a New Yorker who rides the subway system. Each month Thomas spends $110 on his transportation costs, which include both subway rides and other types of transportation (such as cabs, rideshares, and buses). The price of a subway ride is $2.75 per ride, while the price of other transportation is $1 per ride.

Fare reduction: The New York City Council would like to increase the weekend ridership of the subway system. One proposal is to lower the fare for riders to $2.5. In order to do so the City Council promises to reimburse the Metropolitan Transit Authority (MTA) $.25 for each of the reduced fare rides (so the MTA still receives $2.75 per ride).

Voucher system: An alternative proposal to increase ridership is to simply provide free subway rides to individuals. One way to do so is to send to each individual vouchers that are good for free subway rides. The cost to the City Council of each voucher is the full cost of a subway ride $2.75.

a. Which of the two proposals will be preferred by Thomas? Which of the two proposals will result in a greater number of subway rides? Explain

b. Is Thomas' optimal choice under the voucher system pareto efficient? Explain