Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose the state wants to try and reduce traffic congestion by imposing tolls on drivers. To figure out the socially optimal toll, make the following

Suppose the state wants to try and reduce traffic congestion by imposing tolls on drivers. To figure out the socially optimal toll, make the following assumptions:

The value of a driver's time not spent in a car is $60/hour. The number of cars on the road is denoted N, and the overall traffic speed in miles per hour is denoted S. When there are less than 6 cars on the road (N<6), traffic moves at 60 MPH. When there are 6 or more cars (N6), the speed is S=360/N.

a. What is the average cost per mile (AC), in terms of the number of cars on the road? Calculate this for N<6 and N6. Graph the AC curve, with N on the x-axis, $ on the y-axis.

[One can show that for N<6, the marginal cost MC=AC. For N6, MC=N/3. Graph this on the same graph as part a.]

b. During rush hour, the marginal benefit for drivers is MB=3-(N/6).

  1. What is the market equilibrium number of drivers at rush hour?
  2. What is the socially efficient equilibrium number of drivers at rush hour?
  3. What is the deadweight loss?
  4. What, if any, is the optimal toll level?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Commercial Fishing On The Outer Banks

Authors: R Wayne Gray, Nancy Beach Gray

1st Edition

1439667055, 9781439667057

More Books

Students also viewed these Economics questions

Question

8. What are the costs of collecting the information?

Answered: 1 week ago