Page 47 - Microeconomics, Fourth Edition

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PROBLEMS 21

REVIEW QUESTIONS

1. What is the difference between microeconomics and 5. What is the difference between an exogenous vari-
macroeconomics? able and an endogenous variable in an economic
model? Would it ever be useful to construct a model
2. Why is economics often described as the science of that contained only exogenous variables (and no endoge-
constrained choice?
nous variables)?
3. How does the tool of constrained optimization help 6. Why do economists do comparative statics analysis?
decision makers make choices? What roles do the objec- What role do endogenous variables and exogenous vari-
tive function and constraints play in a model of con- ables play in comparative statics analysis?
strained optimization?
7. What is the difference between positive and norma-
4. Suppose the market for wheat is competitive, with tive analysis? Which of the following questions would
an upward-sloping supply curve, a downward-sloping entail positive analysis, and which normative analysis?
demand curve, and an equilibrium price of $4.00 per
bushel. Why would a higher price (e.g., $5.00 per a) What effect will Internet auction companies have on
bushel) not be an equilibrium price? Why would a the profits of local automobile dealerships?
lower price (e.g., $2.50 per bushel) not be an equilib- b) Should the government impose special taxes on sales
rium price? of merchandise made over the Internet?

PROBLEMS

1.1. Discuss the following statement: “Since supply and 1.3. In early 2008, the price of oil on the world market
demand curves are always shifting, markets never actually increased, hitting a peak of about $140 per barrel in July
reach an equilibrium. Therefore, the concept of equilib- 2008. In the second half of 2008, the price of oil declined,
rium is useless.” ending the year at just over $40 per barrel. Suppose that
the global market for oil can be described by an upward-
1.2. In an article entitled, “Corn Prices Surge on sloping supply curve and a downward-sloping demand
Export Demand, Crop Data,” the Wall Street Journal curve. For each of the following scenarios, illustrate
identified several exogenous shocks that pushed U.S. graphically how the exogenous event contributed to a
15
corn prices sharply higher. Suppose the U.S. market for rise or a decline in the price of oil in 2008:
corn is competitive, with an upward-sloping supply curve
and a downward-sloping demand curve. For each of the a) A booming economy in China raised the global demand
following scenarios, illustrate graphically how the exoge- for oil to record levels in 2008.
nous event described will contribute to a higher price of b) As a result of the financial crisis of 2008, the United
corn in the U.S. market. States and other developed economies plunged into a severe
recession in the latter half of 2008.
a) The U.S. Department of Agriculture announces
that exports of corn to Taiwan and Japan were “surpris- c) Reduced sectarian violence in Iraq in 2008 enabled
ingly bullish,” around 30 percent higher than had been Iraq to increase its oil production capacity.
expected.
1.4. A firm produces cellular telephone service using
b) Some analysts project that the size of the U.S. corn equipment and labor. When it uses E machine-hours of
crop will hit a six-year low because of dry weather. equipment and hires L person-hours of labor, it can
c) The strengthening of El Niño, the meteorological provide up to Q units of telephone service. The rela-
trend that brings warmer weather to the western coast of tionship between Q, E, and L is as follows: Q 2EL .
South America, reduces corn production outside the The firm must always pay P E for each machine-hour of
United States, thereby increasing foreign countries’ de- equipment it uses and P L for each person-hour of labor
pendence on the U.S. corn crop. it hires. Suppose the production manager is told to pro-
duce Q 200 units of telephone service and that she
wants to choose E and L to minimize costs while
15 See the article by Aaron Lucchetti, August 22, 1997, p. C17. achieving that production target.