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18 CHAPTER 1 ANALYZING ECONOMIC PROBLEMS

LEARNING-BY-DOING EXERCISE 1.4
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D
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Comparative Statics with Constrained Optimization
In the farmer’s fencing problem (Learning- F be reflected by changes in the endogenous variables
By-Doing Exercise 1.1), the exogenous variable is the L and W ?
perimeter of the fence F, and the endogenous variables
are the length L and width W of the pen. You may have Solution Since the optimal configuration of the
solved a problem like this one before: The area is maxi- pen is a square, we know that the length and width of
mized when the farmer builds a square pen. (You do not the pen will each be one-fourth of the perimeter, so L

need to know how to arrive at that conclusion in this ex- F 4 and W F 4. Therefore, L F 4 and W

ercise. Just trust that it is correct.) F 4. This comparative statics result tells us, for exam-
ple, that if the farmer is given an extra 4 feet of fence,
Problem If the farmer is given an extra length of the length and the width of the pen will each be in-
fence F (where , the Greek letter delta, means “the creased by one foot.
change in”), how will the dimensions of the pen change? In
other words, how will a change in the exogenous variable Similar Problem: 1.20

1.3 Microeconomic analysis can be used to study both positive and normative questions.
POSITIVE AND Positive analysis attempts to explain how an economic system works or to predict how
it will change over time. Positive analysis asks explanatory questions such as “What has
NORMATIVE happened?” or “What is happening?” It may also ask a predictive question: “What will
ANALYSIS happen if some exogenous variable changes?” In contrast, normative analysis asks pre-
scriptive questions, such as “What should be done?” Normative studies typically focus
on issues of social welfare, examining what will enhance or detract from the common
good. In so doing, they often involve value judgments. For example, policy makers may
want to consider whether we should raise the minimum wage to benefit the least skilled
positive analysis
Analysis that attempts to and least experienced workers.
explain how an economic We have seen illustrations of positive questions throughout this chapter. In the
system works or to predict farmer’s fencing problem (Learning-By-Doing Exercise 1.1), one positive question is,
how it will change over “What dimensions of the sheep’s pen will the farmer choose to maximize the area of the
time. pen?” Another is, “How will the area of the pen change if the farmer is given one more
normative analysis foot of fence?” In the consumer choice problem (Learning-By-Doing Exercise 1.2), pos-
Analysis that typically itive analysis will tell us how the consumer’s purchases of each good will depend on the
focuses on issues of social prices of all goods and on the level of her income. Positive analysis will help the manager
welfare, examining what of the electricity generator (Application 1.1) to produce any given level of service with the
will enhance or detract lowest possible cost. Finally, positive analysis enables us to understand why a particular
from the common good.
price of a commodity such as coffee beans is in equilibrium and why other prices are not.
It also explains why heavy rains, strikes, and frost result in higher commodity prices.
As all of these examples suggest, applying microeconomic principles for predictive
purposes is important for consumers and for managers of enterprises. Positive analysis
is also useful in the study of public policy. For example, policy makers might like to un-
derstand the effect of new taxes in a market, government subsidies to producers, or tar-
iffs or quotas on imports. They may also want to know how producers and consumers
are affected, as well as the size of the impact on the government budget.
Normative studies might examine how to achieve a goal that some people consider
socially desirable. Suppose policy makers want to make housing more affordable to low-
income families. They may ask whether it is “better” to accomplish this by issuing these