**EC 420 – Spring 2013
**

**Assignment 4 – Due April 2, 2013**

1. Suppose the demands for airport car parking is given by the following graph. There are a total of 600 spaces for cars. The marginal cost of supplying a parking space is $1.00 until all 600 spaces are taken, then the marginal cost becomes vertical.

$-$1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 0100200300400500600700800900Fees for parkingCars parkedOff Peak DemandPeak DemandMarginal Cost

a. What would be the optimal price of a parking space during peak period? And how many cars will be parked at this price?

b. What should be the optimal price of a parking space during off-peak period? And how many cars will be parked at this price ?

c. Suppose there are 260 peak periods and 105 off-peak periods per year, if the optimal prices in (a) and (b) are applied, what would be the total revenue from car parking at the airport? assuming there is no demand transfer between peak and off-peak periods

d. If a uniform price of $3.00 is applied to both peak and off-peak periods, how much revenue the car parking can generate? Any comment/observation?

**2. ** In the graph below, we see congestion sets in at traffic level T1. D describes the **
demand for a runway
**, and MSC (marginal social costs) and MPC (marginal private costs) are costs for airlines.

(a) Explain the reasons why the social cost **(MSC)** diverges from private cost **(MPC)** of airlines.

(b) Suppose that a congestion tax were levied that reduced traffic level to its uncongested level T1. Is this economically optimal? Please explain!

(c) How much congestion revenues would be collected from such a tax (as in b.)? Please use the graph to explain. (no calculation is required)

D

T1

T2

T3

MPC or avg.

Cost

MSC

Traffic

Cost