Chapter 10 - Autos and Highways

Applying the Concepts Chapter 10

1. Thump Thump Data

a. At V = 1,500, the private trip cost is $3.40 , computed as $3.40 = $1 + 24 minutes •
$0.10 per minute.
b. At V = 1,500, the external trip cost is $3.00, computed as $3.00 = 0.02 minutes x
1,499 vehicles x $0.10 per minute.
c. At V = 1,500, the social trip cost is $6.40, computed as $6.40 = $3.40 + $3.00.
d. The demand curve intersects the social trip cost curve at V = 1,300 and intersects the
private trip cost curve at V = 1,500
e. The length of the curly bracket at V = 1,500 is $3.40, the external trip cost. The length
of the bracket at V = 1,300 is the congestion tax.
f. The optimum congestion tax is [larger, smaller] than the equilibrium external trip cost
because imposing the tax decreases the equilibrium volume, decreasing the external trip
cost.

2. Congestion Table
a. The equilibrium volume = 1,600.
b. The optimum volume = 1,400.
c. The congestion tax = $2.94
d. The equilibrium volume exceeds the optimum volume because each driver ignores the
external effects of their use of the road on other drivers.

3. Am I Stupid?
a. If the tax makes Upton worse off, his loss will be [greater, less] than $5 because he will
pay lower payroll taxes and bear lower time cost (private trip cost) as a result of the lower
volume of travel.
b. The tax will actually make Upton better off if the sum of the savings in time cost and
payroll taxes exceeds the $5 tax.
c. If the tax makes Dawn worse off, her loss will be [greater, less] than $5 because she
will pay lower payroll taxes and her lost consumer surplus is less than $5.
d. The tax will actually make Dawn better off if the savings in payroll tax exceeds her
lost consumer surplus.

4. Chamber of Commerce and the Congestion Tax

a. The congestion tax will be [bad, good] for business because the congestion-tax city
will grow at the expense of other cities in the region.
b. A landowner in Snarsville should vote [no, yes] because the tax will increase the
demand for land and its price.
c. A person who owns land in a nearby city should vote [no, yes] because the tax will
decrease the demand for land and its price.

5. Substitution Effects of a Gas Tax

a. The best predictor of a person's vote on the gasoline tax is his or her initial
consumption of gasoline

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b. Petra purchased 500 gallons of gasoline last year. The tax will [increase, decrease, not
affect] Petra's gasoline consumption because the substitution effect decreases gasoline
consumption because the relative price of gasoline increases.
c. In the consumer choice model, the new budget line goes through the initial choice, so
although the initial choice is affordable, it won’t be chosen because the MRS now
exceeds the price ratio. The substitution effect causes movement upward along the new
budget line to a smaller quantity of gasoline.

6. New Sellwood Bridge?

a. The demand curve intersects the original trip-cost curve with v = 1,000 and p = $3, and
intersects the new trip-cost curve with v = 1,200 and p = $2 (at the end of the horizontal
part of the new trip-cost curve).
b. The outcome shown in the graph will occur if the price elasticity of demand is equal to
–0.40, computed as –0.40 = 20% increase in quantity demanded / 50% decrease in price.

7. Latent Demand
a. The demand curve is horizontal—perfectly elastic.
b. As the price elasticity of demand for highway travel [increases, decreases] in absolute
value, the Peabody principle becomes a more accurate prediction of reality because the
more elastic the demand, the larger the increase in quantity demanded as the price
decreases.

8. Bikers Against Seat Belts

It is sensible for bikers to oppose the proposed law because the theory of risk
compensation suggests that automobile drivers required to fasten safety belts will drive
faster and more recklessly, endangering pedestrians, bicyclists, and motorcyclists. The
author of the article suggests that bikers oppose seat-belt laws because they fear the laws
will lead to mandatory motorcycle-helmet laws. Seatbelts will make the roads more
dangerous for motorcyclists, encouraging legislatures to make helmets mandatory.

9. Vaporville: Ma’am, Step Away From The Car

a. A peak-period accident stops 4,000 vehicles. The cost of the tow-truck system is $200
plus $8,000 in delay costs. The cost of the vaporizer system is $1,200 plus the value of
the vaporized vehicles. If the value of the vaporized vehicle is greater than $7,000, you
should vaporize; if not, you should use the tow truck.
b. An off-peak- accident stops 400 vehicles. It will always be sensible to use the tow
trucks because the delay cost is only $800 and the cost of the tow-truck system is only
$1,000, always less than the cost of the vaporizer system.
c. Impose a delay tax equal to the number of delayed vehicles times the delay cost per
vehicle. In peak periods, more vehicles will be delayed, so the delay cost is higher and
the perpetrator of the accident is more likely to choose the vaporizer to avoid paying a
larger delay tax.
10. Speed, Makeup Violations, and the Invisible Hands
a. Makeup violations: Duke's speed [increases, decreases, doesn't change] because the
benefit of speed decreases and the marginal-benefit curve shifts downward, decreasing
the chosen speed.

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b. Smith and the Invisible Hands: Duke's speed [increases, decreases, doesn't change]
because the benefit of speed increases and the marginal-benefit curve shifts upward,
increasing the chosen speed.
c. Speed limit is set at 40 mph: Duke's speed [increases, decreases, doesn't change]
because the marginal-cost curve shifts upward by $10 for speeds in excess of 40 mph,
decreasing the chosen speed.

11. Youngsters Pay to Drive

a. The demand (marginal benefit) curve has a vertical intercept of 100 cents and a slope
of one half cent per mile. The marginal private cost curve is horizontal at 20 cents.
b. In the initial market equilibrium, the distance traveled is 160 miles.
c. The marginal social cost of travel is 31 cents, and the socially efficient travel distance
is 138 miles.
d. If the insurance company switches to a per-mile fee equal to the marginal external
accident cost, the net gain to society (per young drive) from the change in pricing is 242
cents (or $2.42), computed as the area of the deadweight loss triangle, equal to (1/2) x 11
cents x 22 miles.

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