Question: Suppose you are hired by Ankara Municipality's Transportation Division, and you are tasked with the pricing of public transportation. In this homework, we will go through a simple economic model of demand for public transportation in Ankara. It will give us some machinery to discipline our thinking about the pricing of public transportation. To start constructing the model, let us consider the decision of consumers in a two-good economy. Good 1 is public transportation, and it is measured in bus rides per week. Good 1 has a price of p1 = P TL/ride. Good 2 is a composite good that includes everything else the consumer may consume (you may also think of it as money), and it is measured in generic units. Good 2 has a priceof pa = 1 TL/unit. 1. Consider a consumer who has well-defined and "smooth" preferences between good 1 (public transportation) and good 2 (money). The marginal rate of substitution of good 2 for good 1 at bundle q = (qi, $2) is given by: MRS,,1 (4) = 21 7 to What is the optimal consumption of public transportation, of, as a func- tion of P? Write the equation as qi (P). /When solving this question, you can just assume that of > 0 and of > 0./ 2. Placing of on the r-axis and P on the y-axis, draw this consumer's individual demand curve. Now, consider the market for bus rides in a given week in Ankara. There are 700,000 potential consumers of bus rides in Ankara, so this market has 700,000 consumers. 3. Suppose all 700,000 consumers in the market have identical preferences as the preferences of the consumer in part 1. What is the quantity of bus rides demanded by customers in this market in a week, as a function of P? In other words, what is the market demand for bus rides as a function of P? Write the equation as Q(P). /Here, Q(P) stands for "quantity demanded at price P."] 4. Placing Q(P) on the r-axis and P on the y-axis, draw the market demand curve. 5. If the price of a bus ticket is P = 7 TL/ride, how many bus rides per week do the consumers in the market demand? 6. Suppose the price of a bus ticket is P = 7 TL/ride. What is the (own price) elasticity demand for bus tickets at the price of P = 7 TL/ride? 7. Is the market demand elastic, unit elastic or inelastic at the price of 7 TL/ride? 8. Suppose the price of a bus ticket is P= 7 TL/ride. Should the municipality increase or decrease ticket prices in order to increase total revenue? 9. Suppose the price of a bus ticket is P = 7 TL/ride. Imagine that the city wants to increase bus ridership by 20% for environmental reasons. Ap- proximately, what price level will accomplish this increase? You should use your answer from part 6 when answering this question./