The current social cost of funds is r = 0.05. A new project will widen sidewalks and narrow roads in

downtown Ann Arbor. This will cause cars to avoid driving through downtown, while those that do

drive through will go slower. It will create more room for sidewalk dining under shade trees. It will

improve the quality of life of pedestrians by a value of $1million per year, forever.

a. What is the present value of the benefits of this traffic-calming project?

b. Now the cost of public funds rises to r = 0.1. How does this change the public willingness-to-

pay for this project?

c. Explain how and why the willingness to pay for a project changes as the

interest rate rises.