Question

Given: When entering a highway, a driver saves 300 seconds minus 5 seconds per driver in the highway. The driver gets personal benefits = 300 - 5N and the external costs imposed on all drivers = 5N, where N is the total number of drivers.

1. What is the number of entrants that maximize net benefits for the highway? And what what is the number of entrants at the market equilibrium? (assume no cooperation or regulation, this is an example of the tragedy of the commons).

a) 45 and 90, respectively

b) 30 and 60, respectively

c) 15 and 30, respectively

d) 60 and 120, respectively

2. The Net Benefits from the highway at the optimal level of entrants equals $4500 every year, starting today. Assume the highway generates these benefits for an infinite period (forever). What is the present value of net benefits (NPV) for this highway? Assume r = 5%.

a) 90000

b) 4500

c) 9000

d) 45000

3. Now assume we start receiving these benefits ($4500/year) 10 years from now (every year, forever). What is the new NPV? Assume r still = 5%.

a) 2762.6

b) 55252.2

c) 5525.2

d) 27626.1

Answer 1