MIT1_201JF08_pricing_prob

MIT1_201JF08_pricing_prob - TEPE: Transport Economics and...

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TEPE: Transport Economics and Project Evaluation “Transport Demand and Pricing” Module Question 1 Pricing a Bus Company in SmallTown (12 p) Consider the beloved city of SmallTown where a single bus company operates in the single OD pair of the city. The morning peak demand (Y [People/Morning Peak]) for bus trips can be described as a function of the bus fare (P [$/Trip]) by the following demand function: Y = 30 P Assume now that the morning peak total cost (C [$/Morning Peak]) of the bus firm can be described as a function of the patronage, with the following function. C = 28 + 0.05 Y 2.8 Considering the morning peak isolated, answer the following questions: a. (1p) What is the service fare that maximizes the social welfare? Explain and plot. b. (1p) What is the amount of the subsidy required to run this service at the social optimum fare? Explain and plot. c. (1p) What is the fare that maximizes social welfare subject to no losses for the bus company? Explain and plot. d. (1p) Considering that the company is privately managed and deregulated, what would be the fare of the service? Explain and plot. e. (1p) What is the amount of social welfare loss due to private deregulated operation compared to the social optimum situation? Explain and plot. Assume now that, due to a technological change (a change in the size of the doors and the room available to carry people in the buses), the cost function of the bus company changes to the following C = 28 + 0.0005 Y 2.8 f. (1p) Which kind of technological change (an increment or a decrement in the size of the doors and the room available for carrying people in the buses) may produce such a change in the cost function? Explain. g. (5p) Answer questions a, b, c, d and e, but now for this new cost function. Explain the potentially different results obtained for this new cost function, compared to the previous one. h. (1p) Consider that SmallTown has to decide whether or not to perform this revolutionary technological change. Constraining the analysis to the morning peak, what would be the
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maximum cost X [$/Morning Peak] that the city should be willing to pay to perform such a hi- tech upgrade? Question 2
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This note was uploaded on 12/04/2011 for the course ESD 1.210j taught by Professor Mosheben-akiva during the Fall '08 term at MIT.

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MIT1_201JF08_pricing_prob - TEPE: Transport Economics and...

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