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Principles Of Micro Economics Question Paper
Principles Of Micro Economics
Course:Economics And Statistics
Institution: Laikipia University question papers
Exam Year:2012
Instructions: Read the case below and answer the question that follows.
The Oresund Bridge, A not so popular Nordic Bridge.
Source: Wilkinson Nick (2005).Managerial economics, a problem solving approach .Cambridge New York.
It was not quite what planners had in mind when Sweden and Denmark opened their expensive bridge across the Oresund strait in July. After an early boost in summer tourism, car crossings have fallen sharply, while trains connecting Copenhagen, the Danish capitals, and Malmo, Sweden''s third city, are struggling to run on time. Many people think the cost of using the bridge are simply too high. And, from the point of view of Scandinavian solidarity, the traffic is embarrassingly one sided: far more Swedes are going to Denmark than vice versa. So last week the authorities decided to knock almost 50% off the price of a one way crossing for the three months for this year. The two governments, which paid nearly USD 2 billion for the 16 km (one mile) state owed bridge cum tunnel, reckoned that, above all, it would strengthen economic ties across the strait and create, within a few years, one of the fastest growing and richest regions in Europe. But ministers on both sides of the water especially in Sweden have been getting edgy about the bridges teething problems. Last month Leif Pagrotsky, Sweden''s trade minister, called for a tariff review: the cost of driving over the bridge, at USD 26.40 each way, was too high to help integrate the regions two bits. Business men have been complaining to. Novo Nordisk, Danish drug firm which moved to Scandinavian marketing activities to Malmo to take advantage of ''the bridge effect '', has been arguing Danish staff to limit their trips to Malmo by working more from home. Ikea, a Swedish furniture chain with headquarters in Denmark, has banned its employees from using the bridge altogether when travelling on company business, and has told them to make their crossings more cheaply if a lot more slowly by ferry. The people managing the bridge consortium say they always expected a dip in car traffic from a summer peak of 20,000 vehicles a day. But they admit that the current daily flow of 6,000 vehicles or so must increase if the bridge is to pay its way in the long run. So they are about to launch a new advertising campaign. And they are still upbeat about the overall trend: commercial traffic indeed is going up. The trains have carried more than 1 million passengers since the service began in July. Certain, the bridge is having some effect. Many more Swedes are visiting the art galleries and cafes of Copenhagen; more Danes are nipping northwards over the strait. Some 75% more people crossed the strait in the first in the first two months after the bridge the bridge opening than during the same year before. Other links are being forged to. Malmo''s Sydsvenska Dagbladet and Copenhagen''s Berlingske Tidende newspapers now produce a joint Oresund supplement every day, while cross border ventures in health, education and information technology have begun to bear fruit .Joint cultural ventures are also under way.
And now about linking the eastern Denmark more directly with Germans Baltic Sea coastline, enabling Danes to go by train from their capital Berlin in, say, three hours? Despite the Danes'' nej to the euro it is still a fair bet that this much talked about project will within ten years or so be undertaken.
Questions
1. Explain why the demand for bridge is price elastic.
2. If the Swedish government estimates that the elasticity of demand is -1.4, calculate the effect on traffic using the bridge, stating any assumptions.
3. Why is the calculation above not likely to give an accurate forecast for the long term?
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