Question

Elasticity worksheet San Francisco Golden Gate Bridge is a toll bridge. Until Sept. 2002 the toll charge was $3. At that time the charge was raised to $5. During the subsequent three months 82,000 fewer cars used the toll brídge and the toll revenue increased by 45%. Answer and explain the following questions. 1. What factors might have affected the initial pricing decision for the toll bridge? 2. What might be the reason for increasing the price charged for the using the toll bridge? What can you say about the price elasticity of demand for the Golden Gate Bridge? 3. Considering the outcome for the increase in toll price, why wouldn't Caltran (that owns, operates and maintains the Bridge) increase the toll charge even further to $7, $8, or even $10? 4.

Answer 1

1 The aim is to recover investment cost with toll and earn some profit. Further the price is fixed at such level that there people aren't discouraged to use bridge because in that case total investment will not be recovered

2 Keeping in view the good demand it might have been decided to raise price in order to earn more revenue

3 it's inelastic. Only then higher price would lead to greater revenue

4 Because in this case reservation price of many cisttors will be lower than toll charge and thus demand will fall sharply which will reduce revenue. Further it serves no purpose as main aim in building bridge in the first place is to facilitate travel of people and goods. Higher price will discourage that