Question

1. Consider the following data on travel costs to Whiteface Mountain, a tourist destination in the High Peaks region of the Adirondacks. Currently, the toll to drive up the mountain is $8. The following travel cost schedule includes this toll. Travel Cost (S) Number of trips/person/year $8 $12 S20 $24 (a) Graph to scale the demand curve for trips (per person, per year) as a function of the price" the travel cost. Assume the demand curve is continuous and extends to both axes. Label your axes clearly. (b) Suppose there are 1,000 people with a travel cost of $8,3,000 people with a travel cost of $12.5,000 people with a travel cost of $20, and 6,000 people with a travel cost of $24. Calculate the consumers' surplus of each of the groups, and then add them together to get the total surplus. Show your work. (Recall that the area of a triangle is "base"height.) (c) By how much will the total surplus change, if at all, if the toll is lowered from $8 to $4? (Assume again that there are 1000, 3000, 5000, and 6000 travelers in each of the groups, respectively.) Show your work. 2. Suppose you have been hired as an environmental

Answer 1

A. The graph is plotted below.

Price - 151 1 2 3 4 5 6 7 ro

B. Consumer surplus is basically the difference between what the consumer was willing to pay and what he/she actually paid. To calculate it, we need to calculate the area of the triangle above the price the consumer actually paid. Since we have 4 different sets of customers. we will have 4 different triangles. One such triangle is shown below (the shaded area is consumer surplus) for customers whose travel cost is $8.

Price 2 24) (२,२०) २- 15- (G,12) -10-

Lets calculate each triangle area one by one.

For customers who pay $8

Area of the Triangle=1/2*base*height. The base is 8. Height is 24-8=16. Hence, area=.5*16*8=64. This is for one customer. There are 1000 such customers. Their total surplus=64000.

For customers who pay 12.

Area=.5*6*12=36.There are 3000 such customers, so total surplus

=36*3000=108000.

For customers who pay 20.

Area=.5*2*4=4. There are 5000 such people. So, total surplus

=5000*4=20000.

For customers who pay 24

Area=.5*0*24=0. Total surplus=0.

Total surplus of all the customers=64000+108000+20000=192000.

C. If the toll is lowered to 4, all costs would become lower by 4.For example, 8 trips per year per person would now cost $4 now. This will increase the consumer surplus further. The increase will be the area of a rectangle having height of 4 and base of the same triangle as before. This is because the drop in price will not increase the quantity (here the trips) but would lower the price on Y-axis (hence the height of the rectangle is 4), which will be the increased surplus.

With this in mind,we can calculate the new surpluses for each group

For customers who pay 8-

Extra surplus=4*8=32. Again, this is for one customers. Total new surplus=1000*32=32000.

Overall surplus for these customers=older surplus+new extra surplus=64000+32000=96000.

For customers who pay 12.

Extra surplus=6*4=24. Total extra surplus=3000*24=72000.

Overall surplus for these customers=108000+72000=180000..

For customers who pay 20.

Extra surplus=2*4=8. Total extra surplus=5000*8=40000.

Overall surplus for these customers=40000+20000=60000..

For customers who pay 24

Extra surplus=4*0=0.

Total surplus of all the customers=96000+180000+60000=336000.