les is set equal to the marginal arginal costs are constant (i.c., t d no externalities result from th creased use of the subway, are t e increased demand for subway Ecause of the reduced use of the arket for gasoline falls by 20,00 A on gasoline, one that existed p e marginal cost of producing ga arginal costs are constant (i.e., t o externalities result from the co soline tax adds 30 percent to th sts or benefits due to this shift?
les is set equal to the marginal arginal costs are constant (i.c., t d no externalities result from th creased use of the subway, are t e increased demand for subway Ecause of the reduced use of the arket for gasoline falls by 20,00 A on gasoline, one that existed p e marginal cost of producing ga arginal costs are constant (i.e., t o externalities result from the co soline tax adds 30 percent to th sts or benefits due to this shift?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:Exercises for Chapter 7
1. Recall exercise 1 from Chapter 5 in which an increase in the toll on a highway
from $.40 to $.50 would reduce use of the highway by 5,000 cars per week.
Because of the reduced use of the highway, demand in the secondary
market for subway rides increases. Assuming that the price of subway
rides is set equal to the marginal cost of operating the subway and
marginal costs are constant (i.c., the supply schedule is horizontal),
and no externalities result from the reduced use of the highway and the
increased use of the subway, are there additional costs or benefits due to
the inereased demand for subway rides? Why or why not?
a.
Because of the reduced use of the highway, demand in the secondary
market for gasoline falls by 20,000 gallons per year. There is a stiff
tax on gasoline, one that existed prior to the new toll. Assuming that
the marginal cost of producing gasoline is $1 per gallon, that these
marginal costs are constant (i.c., the supply schedule is horizontal), that
no externalities result from the consumption of gasoline, and that the
b.
gasoline tax adds 30 percent to the supply price, are there any additional
costs or benefits due to tus shift If so, how large are they?
Expert Solution
Step 1
A. No there are no extra costs or gains because of excess DD( demand) for subway rides. We neglect the effect in the secondary market as long as if the prices in the secondary market remain to fix and we calculate the various change in the social surplus in the primary market.
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