Problem 1 (50 points)
The city of San Diego is considering extending the trolley (the downtown mass transit train) 11 miles from Old Town up to La Jolla. The cost of construction would be $1.7 billion. The
estimated ridership along the new section is 18 thousand per day work day (use only the
weekday commuters for your calculations), and the daily cost of operation and maintenance is $60,000 (the trolley operates every day of the year). Assume that the opportunity cost of
financial capital is constant at 7%. The average time saved by commuters if using the trolley instead of driving during rush hour will be a half hour (30 minutes) each way, and they will save 3 gallons of fuel per day. The price of fuel is $3.50 per gallon. The average salary of commuters if $37,000 per year. To convert things to per-hour numbers, use 52 weeks per year and assume 40-hour work weeks.
a) Should the trolley extension be undertaken? Show your calculations.
b) What if you factor in that cars emit carbon dioxide? Scientists have estimated that
every metric ton of carbon dioxide leads to climate change that will generate a social
cost of $12. Does this change your answer in (a)? Use the fact that there are 20 pounds of CO2 per gallon of gas, and that there are 2,204 pounds to a metric ton. Again, show your calculations.
3 answers