Question from Past Microeconomics Qualifying ExamEdit
Spring 2006 - Section II, Question one, George Mason University
An urban rapid-transit line runs crowded trains (200 passengers per car) at rush hours, but very empty trains (ten passengers per car) at off peak hours. A management consultant makes the following argument: "The cost of running a car for one trip on this line is about $50 regardless of the number of passengers. So the per passenger cost is about 25¢ at rush hour but rises to $5 per passenger in off peak hours. Consequently, we had better discourage off-peak hour business."
- Explain the fallacy in the consultant’s argument.
- "Commutation tickets" sold by some transit systems (reduced-price, multiple-ride tickets) are predominantly used in rush hours. Are such tickets a good idea?
- The fallacy is confusing price with cost of production. Price is determined by supply and demand. The space on the cars is fixed, and so supply does not change between rush hour and off peak. However, demand is significantly higher during rush hour, and so the price should be higher than during off peak hours. Fittingly though, the comment about "discouraging off-peak hour business" will take place under the proposed pricing scheme, the opposite of what would be desired to "properly" ration the space on the trains.
- These tickets are not a good idea, provided that the transit authority is interested in allocating spaces on the trains to their highest valued users. This may not be the case though. For real-life examples, the Metropolitan Transit Authority (New York City) sells unlimited ride cards that can be used at any time. On the other hand the Washington (DC) Metropolitan Area Transit Authority also sells unlimited ride tickets, but these can not be used during peak hours. Additionally, the WMATA has different prices for peak versus off-peak single rides.