Assignment:
Suppose there are three potential users of a freeway: Mr. 1, Mr. 2, and Mr. 3.
The cost of the best alternative route for each commuter is as follows
Commuter Alternative cost
Mr. 1 $7
Mr. 2 $5
Mr. 3 $3
The average cost AC of using the freeway (i.e., the cost per car) as a function of traffic volume T is as follows:
T Ac
1 $2
2 $5
3 $9
Using this information, answer the following questions:
(a) Find the equilibrium allocation of traffic between the freeway and alternate routes.
(b) Compute the total commuting cost for all commuters for the following four allocations of traffic. Total cost is the cost incurred by freeway users plus the cost incurred by commuters who use their alternate routes.
On freeway On alternate routes
No one Mr. 1, Mr. 2, Mr. 3
Mr. 1 Mr. 2, Mr. 3
Mr. 1, Mr. 2 Mr. 3
Mr. 1, Mr. 2, Mr. 3 No one
(Hint: Remember the definition of AC.)
(c) Remember that the socially optimal allocation of traffic between the free-way and alternate routes is the one that minimizes total commuting cost for all commuters. On the basis of your answer to (b), which allocation is socially optimal? How does total cost at the optimum compare with the total cost at the equilibrium? (Note that you don't have to use an MC curve to get the answer to this question.)