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problem2 - Problem Set 2 Econ 115a The rules for problem...

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Problem Set 2 Econ 115a September 24, 2007 The rules for problem sets in this course are that [1] you should feel free to discuss the problems with others, but [2] in the end you must write up your own results. This problem set is due Monday, Oct. 1, at the beginning of lecture. No late assignments accepted. 1. Give your name, the name of your Teaching Fellow and the time of your assigned section. 2. Define (a) Marginal Rate of Substitution (b) Perfect Complement (c) Income Effect of a Price Change 3. Say that the Connecticut Department of Transportation (DOT) has done a study and con- cluded that the dollar benefit of constructing x miles of road is given by the function B ( x ). You can assume diminishing marginal benefits of road-miles. The total cost of constructing those miles of road is tx , where t is the per-mile cost of roads. (a) Draw a graph that illustrates the optimal miles of road to construct (on your graph, put x on the horizontal axis and dollars on the vertical axis.) (b) Show how the optimal x changes if t increases.
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