The country Narnia is considering building a new bridge between the two towns Dreamville and Huntsville . The major value of the bridge would be to reduce travel costs for residents of Dreamville and Huntsville . You discover that there is no congestion with or without the bridge, but that the bridge travel costs will be reduced because residents of Dreamville and Huntsville will not have to drive so far.

Suppose the aggregate demand for car trips is Q/day = 4000 - 800P.

P is defined in terms of travel cost, and travel costs are defined solely in terms of the value of travel time in dollars per hour. You determine that travel time for the average commuter is 20 minutes without the bridge and 10 minutes with the bridge. The average value of time is equal to 60% of the wage rate and this wage rate is $10.00/hr.

a. Calculate the daily benefits of the bridge if each car has only one passenger.

b. Draw simple demand and supply curves and show on the diagram the savings shown by the bridge.

c. Calculate the present value of the bridge benefits assuming that the bridge has an infinite lifetime and that the relevant rate of interest is 8% per year.

d. Calculate the present value of the bridge benefits given that its life is 40 years and continuing to assume that the interest rate is 8%.