Chapter 2

Exercise 1

(a) If the rail authority charges a uniform tariff it must charge $15 per ton in order to fully utilise its 100,000 tons capacity

Revenue = Price x Quantity

= 15 x 100,000

= $1.5 million per annum

(b) If the rail authority fully discriminates between different types of users, it will be able to charge $20 per ton for 70,000 tons, $18 per ton for 10,000 tons and $15 per 20,000 tons.

Revenue = (20 x 70,000) + (18 x 10,000) + (15 x 20,000)

= $1.88 million per annum

Exercise 2

(a) In the absence of import restrictions on telephone equipment the telephone company will import the equipment at a cost of $20 million (the world price, P_w).

(b) If the telephone company is required to purchase locally, it will have to pay local suppliers more than the current price $18 million due to the size of the order. The cost of the equipment will be $22 million.

(c) If there is a 7% tariff on imported equipment the cost will increase from Pw to Pw * (1+t_m). The equipment will cost $21.4million, which is still lower than the domestic cost.