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Problem Set 8

The document outlines Problem Set 8 for the ECO333 course at the University of Toronto, focusing on the economic analysis of highway usage and tolls. It includes questions on the inverse demand function, social costs, equilibrium conditions with and without tolls, and the effects on consumer surplus. Additionally, it poses a challenge question regarding the relationship between tolls and social welfare based on demand elasticity.

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mayank
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56 views2 pages

Problem Set 8

The document outlines Problem Set 8 for the ECO333 course at the University of Toronto, focusing on the economic analysis of highway usage and tolls. It includes questions on the inverse demand function, social costs, equilibrium conditions with and without tolls, and the effects on consumer surplus. Additionally, it poses a challenge question regarding the relationship between tolls and social welfare based on demand elasticity.

Uploaded by

mayank
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

University of Toronto

ECO333
Problem Set 8

You are responsible for ensuring your submission is not corrupted and is
viewable.
1. The inverse demand for traveling on a given highway is D (q) = 100 − q. This
function tells us the marginal benefit (measured in dollars) of adding another
vehicle to the road when there are already q vehicles on the road.
(a) Why might the marginal benefit of using the road differ across people?
If q people use the highway then travel times (measured in minutes) are
T (q) = 20 + q/4. Everyone values their time at 50 cents per minute.
(b) What is the total social cost (measured in dollars) of q people using the
highway?
(c) When there is no toll, what are the equilibrium
• quantity of road users,
• per person travel time (minutes),
• total travel time (minutes),
• per person cost (dollars), and
• consumer surplus.
(d) When the toll is set to maximize social welfare, what are the equilibrium
• quantity of road users,
• per person travel time (minutes),
• total travel time (minutes),
• per person cost (dollars),
• toll,
• toll revenue, and
• consumer surplus plus toll revenue.
To solve for the optimal quantity of road users you can either use calculus
or a spreadsheet (Excel/Google Sheets/etc). The optimal quantity of road
users is an integer. There are two related approaches you can take. First,
you can use the requirement that the social marginal cost equal the social
marginal benefit (this is what was shown in the videos) or you can write
down a
(e) Who is hurt, who is better off? Specifically, can you tell me for each agent
how much better or worse off they are?
(f) When the toll is set to maximize profits (assuming there are no variable
costs of tolling), what are the equilibrium
ECO333 Problem Set 8 Page 2 of 2

• quantity of road users,


• per person travel time (minutes),
• total travel time (minutes),
• per person cost (dollars),
• toll,
• toll revenue, and
• consumer surplus plus toll revenue.
(g) Is it better for the road to be free, or have a toll set to maximize prof-
its? Define better as the situation with a higher sum of consumer and
producer surplus (i.e., toll revenue).
(h) Challenge question (optional): Let D (q) = 100 − b · q. How does
whether it is better to have no toll or a toll set to maximize profits depend
on b? Is there a b such that the profit maximizing toll also maximizes
social welfare? What is the intuition behind these results, and how do
they relate to the elasticity of demand?

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