Question

Tom and Karen are economists. In an attempt to limit their son Harry’s use of the family car, they charge him a user fee of 20 cents/ mile. At that price he still uses the car more than they would like, but they are reluctant to antagonize him by simply raising the price further. So Tom and Karen ask him the following question: What is the minimum increase in your weekly allowance you would accept in return for having the fee raised to 40 cents/ mile? Harry, who is a known truth- teller and has conventional preferences, answers $10/wk.
a. If Tom and Karen increase Harry’s allowance by $10/wk and charge him 40 cents/ mile, will he drive less than before? Explain.
b. Will the revenue from the additional mileage charges be more than, less than, or equal to $10/wk? Explain.



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  • CreatedDecember 12, 2014
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