Question

1. Fill the blanks The overall effect of price change can be considered as the summation of __________effect and _________effect.

2. Usually, transportation brings negative externality.

2.1. What are the widely recognized negative externalities of transportation activities? Please list at least three.

2.2. Is there any positive externalities for transportation activities? Please list at least one.

3. Consider the following functional form that link the demand of a product to the factors that affect demand. Answer the questions below. [Note: ? is the quantity demanded, ? is the price of this product, and ? is income. ?0, ?1 and ?2 are model coefficients.]

Function: ? = ?0 + ?1? + ?2?

3.1. What are the price elasticity of demand, and income elasticity of demand?

3.2. Assuming ? = 10,? = 30, if the coefficients of the demand function are: ?0 = 50.0, ?1 = −0.5, ?2 = 0.08, what can you say about this type of goods? [Hint: income elasticity needs to be calculated]

3.3. Assuming ? = 10,? = 30, if the coefficients are: ?0 = 43.0, ?1 = −0.35, ?2 = −0.3, what can you say about this type of goods? [Hint: income elasticity needs to be calculated]

4. Suppose your tastes for subscribing a traffic forecast service (for ?1 days) and a road emergency assistance service (for ?2 days) can be represented by the utility function ?(?1, ?2 ) = ? ?1 ? + ?2. Your budget constraint is ? = ?1?1 + ?2?2. ? = 0.5, ? = 50. 4.1. Given ?1 = $5, ?2 = $1,? = $650. How many days of services should you purchase to get the maximum utility. What is the maximum utility? 4.2. Given ?1 = $1, ?2 = $1,? = $650. How many days of services should you purchase to get the maximum utility. What is the maximum utility?

Answer 1

Answer: 1: the overall effect of price change can be considered as the summation of

Income effect and substitution effect.

Income effect shows the changes in demand for a good or service due to change in consumer’s income

Substitution effect shows the change in demand for a commodity due to change in the price of its substitute goods

Answer: 2. 1: negative externality means when an economic activity of a person effects the third party adversely. Transportation also brings many negative externalities such as:

• Air pollution: emission of gases from vehicle
• Noise pollution
• Traffic congestion

Answer: 2.3 positive activity means when an activity of a person positively affects the third party.

For example: due to transportation we can travel long distance in short times, important during any kind of emergencies.