Over 30% of Hamilton’s population lives on the eastern side of the river Welland.

Over 30% of Hamilton’s population lives on the eastern side of the river Welland.

Vehicular traffic across the river Welland to Hamilton is served by several links. One
is the Hamilton-Burlington Toll (HBT) Bridge, which is owned and operated by the
GTA+ Toll Bridge Company Limited. Two government- owned and operated bridges compete with the HBT bridge. The Pearson Bridge lies upstream and carries about 135,000 PCUs per day. The Trudeau Bridge lies downstream and carries 85,000 PCUs per day. At peak times, the government bridges operate at full capacity. The government bridges lack resources for maintenance and expansion of capacity.
The HBT was opened in February 2001. The bridge is 6 km long
and comprises eight lanes. It has interchanges with the Ring Road at the
western end and the Hamilton-Burlington link road at the eastern end. The HBT
includes a 552 metre long bridge with 13 spans.
Traffic on the HBT has grown steadily to exceed 50,000 vehicles
per day. Maple Leaf Consultants remarked that recent traffic growth had exceeded
forecasts for two reasons. One was substantial commercial development in the
Burlington area. Another was the sharply rising price of fuel. Higher fuel prices have
increased the monetary benefit to drivers who use the HBT and reduce
distance traveled.
Toll rates on HBT are revised annually according to changes in
the Consumer Price Index (CPI) for urban non-manual employees. The
adjustment is based on the increase in CPI, but rounded off to the nearest dollar
for two-wheelers and cars and to the nearest 5 dollars for other classes of
vehicles.
Initially, the HBT gave substantial discounts to vehicles using electronic
toll collection. Over time, these discounts have been reduced and now vary from
5 to 22% for the various classes of vehicle. The rate of electronic payment is
19.2% among two-wheelers, 32.8% among cars, and between 0% to 19.5%
among other classes of vehicles. In 2005, the HBT carried an average of 52,838 vehicles daily, comprising 14,587 two-wheelers, 37,040 cars, and 12,211 buses and trucks.
Average revenue per vehicle was 13.94 dollars. The corresponding numbers for
2004 were 47,552 vehicles per day and 12.92 dollars. The capacity of the HBT
is the minimum of the capacities of the toll plaza (11,500 PCU per hour) and road
(8,900 PCU per hour in each direction).
Despite the sustained growth of population and commercial developments
east of the Welland, the GTA+ Toll Bridge Company Ltd has incurred persistent
losses. In 2005, the Company generated revenue from all sources of 290.08
million dollars but incurred a loss of 91.09 million dollars before depreciation and
taxes.
GTA+ Toll Bridge Company Ltd
Profit/loss (Million dollars)
2005 2004
Operating revenue 290.08 226.34
Operating expenditure 91.05 80.34
Operating profit 199.03 146.00
Interest 290.12 279.12
Gross profit) (91.09) (133.12)
(before depreciation and taxes)
In 2005, the estimated population of Hamilton and Greater Burlington was
660,000. By 2007, this was estimated to grow by 128,266 and generate 2,212
additional daily trips on the HBT.
Required:
(a) What is the elasticity of the demand for services of the HBT with respect to increases in population?
(b) Assume that there 365 days per year. Use the 2005 traffic and average revenue statistics to calculate toll revenue. By what percentage must toll revenue increase for the Company to break even in terms of gross profit? (Suppose that there is no change in operating expenditure.)
(c) Suppose that the Company raises tolls by 33% and the price-elasticity of demand is ?. Taking into account the projected increase in population, what would be the net effect on traffic in percentage terms?
(d) Recall that the percentage change in revenue equals the percentage change in price plus the percentage change in quantity. Calculate what the price-elasticity of demand must be if the Company is to break even in terms of gross profit by 2007. Comment on whether the required demand is elastic or inelastic.
(e) Do you agree with Maple Leaf Consultants that increases in fuel prices would increase the demand for services of the HBT? Why or why not?