# ps2 - UC BERKELEY Department of Economics Economics 101A...

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UC BERKELEY Department of Economics Economics 101A – Fall 2008 Problem Set Number 2 Due: Tuesday September 16 in class 1. In the 1980s people were still using pay telephones, and prices were regulated to 10 cents per call. After deregulation, prices rose in many states to 20 cents per call. Here are some real data on the changes in the volume of phone calls: State Old price New Price Change in # Calls Mississippi .10 .20 -26.9% Arizona .10 .20 -26.3% North Carolina .10 .20 -39.0% Virginia .10 .20 -37.0% Illinois .10 .20 -21.0% a) Given an estimate of the elasticity of demand. (there is no single “right” answer) b) Suppose a state were to raise its price to 25 cents. Give a prediction for the change in the volume of calls. 2. Consider the utility function U(x 1 , x 2 ) = x 1 + x 2 ½ . a) Prove that indifference curves have DMRS. Hint: find the equation of an indifference curve, find the MRS (negative of the slope) along an indifference curve at a given level of x 1 , and find the rate of change of the slope as you increase x

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## This note was uploaded on 04/01/2009 for the course ECON 101a taught by Professor Staff during the Fall '08 term at Berkeley.

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ps2 - UC BERKELEY Department of Economics Economics 101A...

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