MIT1_201JF08_hw_3

MIT1_201JF08_hw_3 - 1.201 11.545 ESD.210 Analysis Demand...

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1.201 / 11.545 / ESD.210 Transportation Systems Analysis: Demand and Economics Assignment 3 Question 1 Cost Complementarities and Vertical Integration in US Railroads Ivaldi and McCullough (2001) specified and estimated a translog cost function for a set of US freight railroads. The dependent variable in this function was the natural log of total variable costs, and the independent variables included the unit prices of the inputs of production (labor, equipment, fuel, material, and other inputs), measures of the various types of output (intermodal, bulk, and general freight), and measures of infrastructure and maintenance investments. One of the purposes of the paper was to assess the efficiency of vertical integration in US freight railroads. Vertically integrated firms are those that manage both the infrastructure and maintenance investments and the operations. The estimation results indicated that US freight railroads benefit from economies of density. According to the estimated coefficients, a 1% increase in intermodal, bulk, and general freight and in infrastructure investments results in an increase in variable costs of about 0.61%. The results also provided interesting insight into the own and cross-cost elasticities across the various types of outputs and infrastructure investments. This is shown below: Own and cross-marginal cost elasticities* Resulting change in marginal costs Change in output ** Intermodal Bulk General Infrastructure Investments Intermodal -0.27 0.01 -0.22 0.23 Bulk 0.02 -0.3 -0.48 0.94 General -1.18 -0.91 -0.59 0.15 Infrastructure Investments 0.31 0.52 0.04 0.02 * The numbers in this table have been slightly modified for this assignment. ** Output is measured in car km for intermodal, bulk, and general freight and in km of track rebuilt for infrastructure investments. The values in the table indicate the percentage change in marginal costs resulting from a 1% change in the item in each row.
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Answer the following questions: [ Keep in mind that the values in the table represent elasticities with respect to marginal (not total) costs with respect to changes in output.] a. As mentioned above, there are economies of
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