Question

Suppose that your local internet provider, USA-line, is congested around 8 p.m. on Thursday nights, which is when many students download Friday’s homework assignments from their professors’ home pages. Thursday nights represent the peak volume time for USA-line. USA-line’s supply curve can be represented as: QS = – 1 + 0.5P The cost of the congestion during peak times can be represented as: Q = P. The marginal benefit during peak times can be represented as QD = 18 – P.

(a) Graph the above information.

(b) If USA-line does not consider the social cost of the congestion at peak volume times, what price will they charge for their (monthly) service? Show this on your graph.

(c) If USA-line does consider the social cost of the congestion at peak volume times, what price will they charge for their (monthly) service? Show this on your graph.

(d) Suppose that USA-line decides to impose a surcharge for users during the peak time. What is the optimal surcharge or toll?

(e) If USA-line is unaware of the externality effects of the congestion during peak on-line times, what is the value of the deadweight loss?

Answer 1

18 0. PMB -9