Reference no: EM13378126

1) According to one automobile group, after the city imposed the congestion fee, average speeds in central London:
a) Increased by 25%
b) Doubled
c) Increased by 70%
d) Increased by 15%

2) According to this article, the number of cars entering the cordon zone fell by about how much on the opening day of the program?
__________% (Please enter a whole number, with no decimal point.)

3) The percentage change in the number of trips in central London gives you one of the numbers you need to calculate an estimate of the elasticity of demand. The other number you need is the percentage change in the price a driver pays for driving in the central city.
Part of the new cost of a car trip in central London is the fee that drivers now have to pay. In dollars, this fee is about:
a) $5
b) $20
c) $2
d) $10
e) $8

4) To calculate the percentage change in what it costs someone to drive in central London, you need to estimate what it cost before the city started charging the congestion fee. The answer is not zero. Even when there was no explicit fee, it cost motorists lost time waiting in traffic when they drove in the central city.
To quantify this cost of time, suppose that the average person driving in London values her time at 15 pounds per hour, or about $24 per hour. (To keep things simple, assume that there is only one person per car.) Before the fee for driving in the zone was introduced, suppose that the average travel time for a trip in the zone was 40 minutes.
Using these estimates of travel time and the cost of time, what was the cost of travel time for the average driver in central London before the city imposed the fee?
a) $20
b) $5
c) $10
d) $8
e) $16

5) Suppose that after the fee was imposed, the time of the average trip in central London fell from 40 minutes to 30 minutes. (Note: The travel time will not change by as much as the average speed because the average speed may not account for time spent waiting at traffic signals.)
Under these assumptions, now that the city has imposed the fee, what is the total cost per trip for someone who drives in central London?
a) $20
b) $12
c) $10
d) $8
e) $5

6) Now estimate the elasticity of demand for car trips at the time the new policy took effect.
If you correctly calculated the cost of driving in London before and after the fee, you should have found that the change in the cost of a trip in central London was an increase of about 25%.
Using this figure, and the figure that you calculated previously for the percentage change in the number of trips, what is the elasticity of the demand for car trips in central London? (Recall that the absolute value of the elasticity of demand is equal to the percentage change in quantity divided by the percentage change in price, where each change is expressed as a positive number.)
___________

7) Now suppose that the city doubles the fee from $8 to $16.
Let's determine what effect this will have on revenue for the city. To be conservative, let's assume that the absolute value of the elasticity of the demand for car trips in central London is 2, which is bigger than what you calculated in the previous question. Using a higher elasticity means that if you consider a given change in the total cost, the estimated number of trips will fall by more than it would if you used the true elasticity. Using this larger elasticity is conservative because it will cause you to underestimate the revenue the city will collect at the higher fee. It predicts a bigger fall in the number of drivers, which yields less revenue. So, if you find that revenue goes up when you use an elasticity of 2 to estimate the effect of changing the fee from $8 to $16, you can be sure that it will go up with a lower value of the elasticity.
Suppose that the increase in the fee from $8 to $16 reduces travel time in the central city from 30 minutes down to 20 minutes. What is the percentage change in the total cost of driving in central London?
__________%

8) Now suppose that the city doubles the fee from $8 to $16.
Let's determine what effect this will have on revenue for the city. To be conservative, let's assume that the absolute value of the elasticity of the demand for car trips in central London is 2, which is bigger than what you calculated in the previous question. Using a higher elasticity means that if you consider a given change in the total cost, the estimated number of trips will fall by more than it would if you used the true elasticity. Using this larger elasticity is conservative because it will cause you to underestimate the revenue the city will collect at the higher fee. It predicts a bigger fall in the number of drivers, which yields less revenue. So, if you find that revenue goes up when you use an elasticity of 2 to estimate the effect of changing the fee from $8 to $16, you can be sure that it will go up with a lower value of the elasticity. At a total cost of $20, the number of trips is 190,000. If you use an estimate of the elasticity equal to 2, how many trips will people take when the fee is $16?
__________trips

9) Now suppose that the city doubles the fee from $8 to $16.
Let's determine what effect this will have on revenue for the city. To be conservative, let's assume that the absolute value of the elasticity of the demand for car trips in central London is 2, which is bigger than what you calculated in the previous question. Using a higher elasticity means that if you consider a given change in the total cost, the estimated number of trips will fall by more than it would if you used the true elasticity. Using this larger elasticity is conservative because it will cause you to underestimate the revenue the city will collect at the higher fee. It predicts a bigger fall in the number of drivers, which yields less revenue. So, if you find that revenue goes up when you use an elasticity of 2 to estimate the effect of changing the fee from $8 to $16, you can be sure that it will go up with a lower value of the elasticity. If the city doubles the fee from $8 to $16, then payments to the city will _________.
a) Increase
b) Decrease
c) Stay the same