I. Measuring Benefits From Projects That Reduce Private Good Costs Of Production (No distortions.)

The inverse demand function for a good is given by: P = 30 − Q/3.

Assume that the initial supply curve is given by P = 9 + Q/6.

Now due to a government project the supply curve shifts because at each Q the project reduces costs by $6/unit.

Find the old and new price and quantity equilibrium.

Next calculate numerical values for gains to consumers, producers, and society.

Include a graph of the problem.

II. The town of No Bear lies in a desolate part of Alaska, so desolate that even bears fear to roam.

The only major town nearby is Wasilla, but there lies an enormous gorge between the two towns.

Currently this gorge can be crossed only by flying on Shooting Wolf Airlines.

This private firm consists of a small Piper Cub plane that can take one passenger at a time.

Shooting Wolf charges $50/trip, and there are 40,000 trips being taken per year.

The costs are $35/trip; that is, average costs equal marginal costs equal $35/crossing.

We also know that several years before, the government regulated the firm to charge $35 per trip.

At that price, there had been 55,000 trips.

The government no longer regulates this firm.

The government is considering the building of a bridge across this gorge under a project called The Bridge to No Bear.

If the bridge were built, a toll of $22/trip would be charged to cover exactly the marginal cost of a car being driven across the bridge (high maintenance costs due to rumbling cars causing rocks to slide).

The bridge and plane trips are seen as equally desirable by customers if the same price were to be charged.

a. Assuming a linear demand curve calculate the dollar benefits created by the bridge for old trip takers. (Provide a diagram of your estimated demand curve.)

In addition, calculate the dollar benefits to new trip takers.

b. Assuming a linear demand curve calculate the net benefits to society from building the bridge, where the annualized fixed costs for building the bridge (charged to taxpayers) equals $1,500,000.

Extra Credit:

c. Now assume a constant-elasticity demand curve describes the demand for bridge crossings. (Calculate the elasticity to three decimal places.) Estimate the number of crossings taking place at $22/crossing in this case.

No benefit and cost calculation needed.

**Subject Business Economics**