Name______
ECON 5822: Spring 2014: Assignment #2 –Grad Due Thursday, 4/17
1. (35) Suppose the marginal benefits and costs associated with driving on a major interstate are described as follows (quantities are scaled to 1,000s).
Rush hour MPB = 50 – 0.5QRush hour MPC = 5 + 0.2Q
Off peak MPB = 20 – 0.5QOff peak MPC = 5 + 0.2Q
MEB = 0MEC = 0.1 Q
a. Find the private market equilibrium and the efficient equilibrium quantities for both rush hour and off peak hours.
b. Calculate the deadweight loss associated with the private market equilibrium quantities.
c. Graph the MPB, MPC, and MSC curves and label the deadweight loss areas.
d. What are the efficient toll levels to remove this deadweight loss and relevant quantities?
e. Suppose the government applies a uniform toll equal to $2.50. Calculate the new equilibrium quantities with this toll.
f. What is the uniform inefficiency associated with this flat toll (ie. what is the amount of deadweight loss when there is a toll equal to $2.50)? .
2. (12) Consider Scareville, a city that will vote on a proposed revenue-neutral congestion tax. Consider the following statement from the Chamber of Commerce: “The tax will be bad for business, so we urge all business owner to vote NO.” Suppose “bad for business” means “sales revenue will decrease.”
a. Do you think the congestion tax be good or bad for business? Briefly explain.
b. Do you think a typical landowner in Scareville should vote yes or no? Briefly explain.
c. Do you think a typical commuter in Scareville should vote yes or no? Briefly explain.
3a. (10) Fill in the relevant blanks in the table below.
AutoBusRail
Collection CostCollection Time (min) / 0 / 12 / 16
Cost per minute ($) / 0.20 / 0.20 / 0.20
Collection Time Cost ($)
Line-Haul Cost
Line-Haul Time (min) / 30 / 40 / 20
Cost per minute ($) / 0.15 / 0.15 / 0.15
Line-Haul Time Costs ($)
Monetary Cost ($) / 3 / 1.5 / 2
Distribution Cost
Distribution Time (min) / 0 / 4 / 11
Cost per minute ($) / 0.20 / 0.20 / 0.20
Distribution Time Cost ($)
Parking Cost / 4 / 0 / 0
Total Time Cost
Total Monetary Cost
TOTAL COST
3b. (5) Suppose this represents the costs of traveling for a representative individual in a city. Policymakers deem that the rail system is over-crowded, and want to encourage more people to ride on the bus. List two specific alternatives policymakers could use to accomplish this goal.
4. (12) Martha, a transportation planner, is considering how to improve ridership on public transit (buses) in her city. She’s given a report which shows the following elasticities for public transit nationwide:
Price elasticity = -0.18
Access time elasticity = -0.71
Line-haul time elasticity = -0.39
a. Suppose for $1 million the city can decrease access time by 8% and line haul time by 10%. If they reduce fares by 10% they would receive $1 million less in revenue. Given this information, if the city can invest in only one option, which should they invest in and what would be the expected effect of her policy in terms of ridership?
b. If the city is unable to generate $1 million to pay for any of these policies, what could they do to increase ridership that is revenue neutral and what would be the effect of this policy? Note: you can assume if they increase fares 10% they would receive $1 million in additional revenue.
c. Suppose Martha’s city has exceptionally cold winters and hot and humid summers. What would this likely indicate in terms of the value of any of the elasticities in Martha’s city compared to the nationwide values listed above?
5. (20) A rational individual is considering committing a crime with the following characteristics:
Expected value of loot: $5,000
Expected probability of getting caught: 0.2
Opportunity cost of time in prison: $50/day
Anguish cost: $0
a. If caught, what must his expected prison sentence be in order to deter him from committing this crime?
b. If the value of loot were $20,000 instead of $5,000, what must the expected prison sentence equal? What economic principle does this reflect?
c. If the expected prison sentence were 500 days and everything remained the same as in b., calculate the necessary expected probability of getting caught to prevent him from committing this crime?
d. Theoretically, the values you calculated in b. and c. (if realized) would be equal in deterring this individual from committing this crime. However, in the real world, it has been estimated that they would not be equal. Which one (b. or c.) may be more effective at deterring this individual from this crime and why?
e. Can we say anything about whether it is efficient to prevent this individual from committing this crime? If we cannot, what would we need to know in order to judge the efficiency?
6. (15) Consider a city with two neighborhoods with different crime rates. The burglary rate in the low-income neighborhood is 15, compared to 5 in the high-income neighborhood. The two neighborhoods have the same victim costs per burglary ($1,500).
a. Explain how it can be efficient to have a higher crime rate in one neighborhood compared to another (in this case the low-income neighborhood has a higher crime rate).
b. Illustrate your answer with the appropriate graph.
c. Offer two economic reasons why crime rates would be expected to be higher in the low-income neighborhood.
7. (10) Read the following article from the New York Times: (the article is titled “For Car Thieves, the Older and Heavier the Ride, the Better”). Then answer the following questions.
a. Use the rational criminal model to explain why car thefts are down so dramatically (by about 50%) in the U.S. over the past decade.
a. Use the rational criminal model to explain why thefts of older vehicles have increased in the past year.
8. (16) Read the article handed out in class titled “What Do Economists Know About Crime” to answer the following questions.
a. What are the four “deterrence variables”? Briefly explain what the article finds about the effects of these variables on crime.
b. The authors use simple correlation statistics to judge the effectiveness of these variables. Using correlation be particularly problematic in the case of judging the effectiveness of increasing police on crime. Briefly explain why using simple correlation is a problem in this case.
c. Briefly explain two of the alternative determinants of crime and what the paper finds regarding these hypotheses.
d. Briefly explain the “drug-enforcement-generates-violence” hypothesis. Do you agree or disagree with this hypothesis? Explain why.
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