ECON 149: Transport Economics

Homework Assignment 1
Nilopa Shah
Spring 2016

Department of Economics
University of California, Irvine

1. Suppose that consumers are choosing a vehicle between non-hybrid vehicle (A) and hybrid vehicle (H). The consumer utility is assumed to depend on the vehicles purchase
price (denoted by P P , unit: 1,000 dollars) and the vehicles gallons per mile (denoted
by GP M ). Note that the GP M variable indicates how many gallons of fuel the vehicle
consumes to travel one mile, so it measures the operating cost of travel.
The indirect utility that a consumer receives by choosing A is specified as

UA = VA + A
= 0 + 1 P PA + 2 GP MA + A .

The indirect utility that would be attained by choosing H is

UH = VH + H
= 1 P PH + 2 GP MH + H .

The researcher assumes that s are an i.i.d extreme values, such that A H follows
the logistic distribution. The researcher then estimates the parameters 0 , 1 , and 2 .
(a) Can you make a guess regarding the expected the signs of 1 and 2 ? Explain.
Using the National Household Travel Survey dataset, the researcher estimated
the above model, and the result is as follows:

VA = 2.55 0.009P PA 1.27GP MA .

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Answer the following questions based on the above estimation result.

(b) What are the values for

VH
P PH

and

VH
?
GP MH

Interpretations?

(c) Lets define the demand function for A as the share of consumers choosing A as
a function of P PA .
i. Draw the demand curve for A on the plane where the vertical axis represents
P PA .
ii. On the same plane, explain what would happen if GP MA increases by one
unit.
iii. What would happen to the demand curve if P PH increases?
iv. What would happen to the demand curve if GP MH increases?
(d) Suppose that a consumer is facing the following menu of vehicle attributes:

P PA = 1.70,

GP MA = 0.05,

P PH = 2.05,

GP MH = 0.04.

Based on the estimation results above, compute the share of consumers choosing
A and that for H (i.e., compute PA and PH , respectively). Explain in words.
(e) The ratio of the coefficient, 2 /1 , has some important economic meanings. Compute this number and interpret it. (Be careful about the units of the variables.)
(f) Further, the researcher estimated a more interesting model by including the
cars interior size (variable denoted by SIZE) as an attribute influencing vehicle
choices. The estimates are as follows:

VA = 0.85 0.012P PA 1.95GP MA + 0.13SIZEA .

Based on these estimates, how much would the average consumer be willing to
pay for one-unit larger cars interior size?
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2. The California government is considering building a high-speed rail that connects Los
Angeles and San Francisco. To determine the price of a high-speed rail travel service,
the government carried out a survey to ask California residents about their potential
mode choices. There are three potential modes of travel, which include automobile
travel (A), airline travel (F ), and high-speed rail travel (R).
The consumer utility from each alternative is assumed to depend on the modes monetary cost (c) and the time cost (t) involved with the mode. The consumer utility that
would be attained by choosing A is specified as

UA = 0A + 1 cA + 2 tA + 3A y + A ,

where A is an i.i.d. extreme value and y is the consumer income. Similarly, the
consumer utilities from F and R are respectively given by

UF = 0F + 1 cF + 2 tF + 3F y + F
UR = 1 cR + 2 tR + R .

Under the assumption of the logit model, the researcher estimates 0A , 0F , 1 , 2 , and
3A , and 3F , and the result is given by

VA = 0.6 0.0055cA 0.048tA 0.00001y

VF = 1.2 0.0055cF 0.048tF + 0.00002y
VR = 0.0055cR 0.048tR .

Answer the following questions based on this estimation result:

(a) The demand curve depicts the relationship between the quantity demanded of
each mode and the monetary cost (c) for a given value for time cost (t). Provide

a graph of the demand curve for the high-speed rail mode. What is the sign of
the slope of the demand curve? Why?
(b) Suppose that tR increases from the original value. In what direction would the
original demand curve shift?
(c) Compute the value of time and interpret it. Note that the unit of monetary cost
is dollar and the unit of time cost is hour.
(d) The government has the following information regarding the attributes of the
three modes:

cA = 78,
cF = 320,

tA = 8,
tF = 3.5,
tR = 6.

The government wants the market share of high-speed rail to be 20%. In other
words, the governments target is that 20% of the commuters should choose to
travel by high-speed rail. Given the estimated values, in order to induce this
level of market share, how much cR should the government charge to consumers
with income $50,000? (Hint: Compute cR such that for a consumer with income
$50,000 the probability of choosing high-speed rail travel (PR ) becomes 0.2.)
(e) Assume that there are 1,000,000 potential commuters between LA-San Francisco.
If the governments plan works out such that 20% commuters start using the highspeed rail, then how many people are expected to use air travel and automobile
travel, respectively?