It was not quite what the planners had in mind when Sweden and Denmark opened their expensive bridge across the Oresund strait in July. After an early boost from summer tourism, car crossings have fal

It was not quite what the planners had in mind when Sweden and Denmark opened their expensive bridge across the Oresund strait in July. After an early boost from summer tourism, car crossings have fallen sharply, while trains now connecting Copenhagen, the Danish capital, and Malmo, Sweden’s third city, are struggling to run on time. Many people think the costs 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

last three months of this year. The two governments, which paid nearly $2 billion for the 16km (10-mile) state-owned bridge-cumtunnel, 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 bridge’s teething problems. Last month Leif Pagrotsky, Sweden’s trade minister, called for a tariff review: the cost of driving over the bridge, at SKr255 ($26.40) each way, was too high to help integrate the region’s two bits. Businessmen have been complaining too.Novo Nordisk, a Danish drug firm which moved its Scandinavian marketing activities to Malmo to take advantage of ‘the bridge effect’, has been urging 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 is indeed going up. The trains have carried more than 1m passengers since the service began in July. Certainly, the bridge is having some effect. Many more Swedes are visiting the art galleries and cafe´s of Copenhagen; more Danes are nipping northwards over the strait. Some 75% more people crossed the strait in the first two months after the bridge’s opening than during the same period a year before. Other links are being forged too. 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 how about linking eastern Denmark more directly with Germany’s Baltic Sea coastline, enabling Danes to go by train from their capital to Berlin in, say, three hours? Despite the Danes’ nej to the euro, it is still a fair bet that this lastmuch-talked-about project will, within ten years or so, be undertaken.

Q1

A. Explain why the demand for the bridge is likely to be price-elastic.

B. If the Swedish government estimates that the price elasticity is -1.4, calculate the effect on traffic using the bridge, stating any assumptions.

C. Why is the calculation above not likely to give an accurate forecast for the long term? (

Q2

Explain the concept of marginal principle and how this principle is used to determine profit maximising price and output. Explain with diagram.

Q3

State the cross price elasticity (of demand). Suppose the price of the good X is 5 that is increases by 5%. As a consequence, the demand of another good Y decreases by 20%. Calculate the cross-price elasticity for the other good Y. Is the other good is a substitute good or a complementary good to the first one?

Q4

A potential entrepreneur is trying to decide whether to open a new health spa. She currently makes $35,000 per year as an aerobics instructor and will have to give upthis job if she opens the new health spa. If she chooses to open the spa, it will cost her $200,000 per year in rent and other operating expenses.

a) What are her accounting costs?b) What are her opportunity costs?