Question 2 - (25 marks)

Read the following newspaper excerpts relating to the Portmore leg of Highway 2000 and answer questions which follows

A.Jeffrey drives a Toyota pickup, the height of which ranks him in Class Two. It will now cost him a total of $460 both ways per day to get to his Corporate Area job and back home.

(Gleaner July 1, 2013)

If Jeffery utilizes the alternative route, Mandela Highway, he could avoid the toll charges but he estimates that it would cost approximately $400 both ways per day in delay, wear and cost, and inflated petrol cost.

Assume that Jeffery spends only $11,500 every month on either of these routes.

i.How many round trips per month can Jeffery make if he only travels on the Toll Road?

(2 marks)

ii.How many round trips per month can Jeffery make if he only travels on the Mandela Highway?

(2 marks)

iii.Jeffery is currently spending his entire income and his marginal utility of using the toll road is 1500 and his marginal utility of using Mandela Highway is 1000. Explain what should he do to maximize his utility?

(3 marks)

iv.Suppose the toll operators announced a 20% roll back in toll rates for all classes of vehicles travelling on the highway. Construct Jeffery's budget constraint to show how the budget line will change after the new rate was announced.

(Ensure that you label the axes and show all intercepts)

(5 marks)

B.Coaster operators plying the Half-Way Tree and downtown Kingston to Portmore routes appeared to be worst impacted. Route operators are prohibited by Transport Authority regulations from travelling on Mandela Highway for fear of seizure.

Horace Hamilton, a bus operator on the Half-Way Tree to Portmore route, said it costs him approximately $10,000 a day to travel along the toll road.

(Gleaner July 9, 2013)

Assume Hamilton Bus Service operates in a perfectly competitive industry where he makes 10 trips to Portmore via the toll road.The total cost for these trips are as follows

Trips (Q)

Total Costs (TC)

Marginal Cost (MC)

0

$685

1

$750

2

$805

3

$855

4

$902

5

$950

6

$1,002

7

$1,060

8

$1,130

9

$1,210

10

$1,310

a.Fill in the column for MC to complete the table above.

(5 marks)

b.Suppose that price is $80.

i)What is the profit maximizing (loss minimizing) number of trips (output) for Hamilton Bus Service in the Short Run?

(2 marks)

ii)Calculate the total economic profit (or loss) that Hamilton Bus Service would receive at this particular level of output.

(3 marks)

iii)Should this firm continue to produce or should it shut down in the short run? Why?

(3 marks)