Question #3: Second Best Pricing Assume the MTA’s production cost curve is given
ID: 1197061 • Letter: Q
Question
Question #3: Second Best Pricing
Assume the MTA’s production cost curve is given by C=1,200,000,000 + 3.5q where q denotes the number of subway trips. From past fare changes we know that a 20% drop in fares will increase the number of transit trips by 4%. In contrast, the fare drop has lowered the number of automobile trips by only 0.2%. Currently, the ratio automobile trips to transit trips is 20. Current the private cost of the average automobile is $1.20. However, it’s overall social marginal cost is $3.20. Calculate the first best transit fare per trip.
a) Calculate the first-best transit fare per trip.
b) Calculate the second-best transit fare per trip.
Explanation / Answer
Question #3: Second Best Pricing Assume the MTA’s production cost curve is given