Reference no: EM132197871

Question: City planners are deciding whether to have a new bridge built where there was no bridge before. The city would borrow to pay for the construction cost. The cost of maintenance plus debt repayment is expected to be $10M (M for million) per year for the 50 year lifetime of the bridge, with no other costs of the project. The planners expect only city residents to use the bridge and expect the demand curve for crossings to be linear with a choke price of $8. There will be no toll charged. The planners expect 5M crossings over the bridge per year and never any traffic congestion. Assume that the planners' expectations are correct.

a. Draw the demand curve for crossings over the bridge, showing the intercept amounts where it touches the axes.

b. What is the user benefit city residents will get from the bridge per year? Show all your work deriving it.

c. Estimate the numerator and denominator of the privateness ratio of the service pro- vided by the bridge during a year. Estimate the privateness ratio itself for that period. EXPLAIN why these are your best estimates of these variables.

d. A local firm could have borrowed money to finance construction of the bridge and repaid its debt plus maintenance and other costs by paying $10M per year. Then it could have operated the bridge, charging a profit-maximizing toll of $4 per crossing. With the linear demand curve in part a, how many crossings would there be per year? Find the firm's net profit per year if it did this (its revenue from tolls minus its $10M cost).

e. Explain why the annual total surplus of the city residents (including the firm's owner) would be higher if the city operated the bridge than if the local firm operated it as in part d even though the government makes a bigger loss than the firm.