Explain why the demand for the bridge is likely tobe price-elastic.

A not-so-popular Nordic bridgeIt was not quite what the planners had in mind whenSweden and Denmark opened their expensive bridgeacross the Oresund strait in July. After an early boostfrom summer tourism, car crossings have fallen sharply,while trains now connecting Copenhagen, the Danishcapital, and Malmo, Sweden’s third city, are strugglingto run on time. Many people think the costs of using thebridge are simply too high. And, from the point of viewof Scandinavian solidarity, the traffic is embarrassinglyone-sided: far more Swedes are going to Denmarkthan vice versa. So last week the authorities decided toknock almost 50% off the price of a one-way crossingfor the last three months of this year.The two governments, which paid nearly $2 billionfor the 16km (10-mile) state-owned bridge-umtunnel, reckoned that, above all, it would strengtheneconomic ties across the strait and create, within afew years, one of the fastest-growing and richestregions in Europe. But ministers on both sides of thewater, especially in Sweden, have been getting edgyabout the bridge’s teething problems. Last month LeifPagrotsky, Sweden’s trade minister, called for a tariffreview: the cost of driving over the bridge, at SKr255($26.40) each way, was too high to help integrate theregion’s two bits.Businessmen have been complaining too. NovoNordisk, a Danish drug firm which moved itsScandinavian marketing activities to Malmo to takeadvantage of ‘the bridge effect’, has been urgingDanish staff to limit their trips to Malmo by workingmore from home. Ikea, a Swedish furniture chain withheadquarters in Denmark, has banned its employeesfrom using the bridge altogether when travelling oncompany business, and has told them to make theircrossings – more cheaply if a lot more slowly – by ferry.The people managing the bridge consortium saythey always expected a dip in car traffic from asummer peak of 20,000 vehicles a day. But theyadmit that the current daily flow of 6,000 vehicles orso must increase if the bridge is to pay its way in thelong run. So they are about to launch a newadvertising campaign. And they are still upbeat aboutthe overall trend: commercial traffic is indeed goingup. The trains have carried more than 1m passengerssince the service began in July.Certainly, the bridge is having some effect. Manymore Swedes are visiting the art galleries and cafe ´ s ofCopenhagen; more Danes are nipping northwardsover the strait. Some 75% more people crossed thestrait in the first two months after the bridge’sopening than during the same period a year before.Other links are being forged too. Malmo’sSydsvenskaDagbladet and Copenhagen’sBerlingskeTidende newspapers now produce a jointOresund supplement every day, while cross-borderventures in health, education and informationtechnology have begun to bear fruit. Joint culturalventures are also under way.And how about linking eastern Denmark moredirectly with Germany’s Baltic Sea coastline, enablingDanes to go by train from their capital to Berlin in, say,three hours? Despite the Danes’ nej to the euro, it isstill a fair bet that this last much-talked-about projectwill, within ten years or so, be undertaken.

Questions

1. Explain why the demand for the bridge is likely tobe price-elastic.

2. If the Swedish government estimates that the priceelasticity is 1.4, calculate the effect on trafficusing the bridge, stating any assumptions.

3. Why is the calculation above not likely to give anaccurate forecast for the long term?

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