Exercises  Ch.2


  1. A government-owned rail authority wishes to estimate the likely impact of introducing a new rail service on freight prices between two major towns in a remote region of the region of the country.  The railway could carry 100,000 tonnes of general freight per annum.  Currently, 40,000 tonnes of freight is carried by road at an average price of $20 per tonne.  Surveys indicate that there is considerable unmet demand, and that local users would demand a further 30,000 tonnes of services at the price of $20 per tonne.  But further increases in demand would only  occur if the price were to drop.  A further 10,000 tonnes of service would be demanded if the fee dropped to $18, and 20,000 tonnes more if the rate were only $15 per tonne.  What will be the revenue earned by the rail service if:

a    it charges a uniform tariff

b    it discriminates between different types of users so as to fully exploit the willingness to pay of the three identified user groups?

  1. A telephone company wishes to provide 200,000 more telephone lines.  It can either import exchange equipment worth $20 million to do this or use locally produced equipment.  Although at current prices local producers could supply this equipment at $18 million, as a result of such a large order, the costs of local suppliers could be expected to rise $22 million.

What will be the cost of this equipment if:

a  there are no import restraints on telephone equipment

b  the government-owned telephone authority is required to purchase locally

c  there is a 7 per cent tariff on imported equipment, but no other  restraints on imports?