Académique Documents
Professionnel Documents
Culture Documents
to accompany
Mathematical Economics
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 1
( Solutions to problems from Chapters 2, 3, 4, and 5 )
Copyright © 1996 by Harcourt Brace & Company.
All rights reserved. Subject to the restrictions hereof, permission is hereby granted until further
notice, to duplicate this diskette without alteration onto another diskette or the hard disk drive
of a computer for use in connection with a course for which Mathematical Economics, First
Edition, by Jeffery Baldani, James Bradfield and Robert Turner has been adopted, and not for
resale, provided the copies are made from this master diskette only, and provided that the
following copyright notice appears on the label of all copies in diskette form: © 1996 by
Harcourt Brace & Company. The program may not be merged into another program or modified
in any way. Copies may not be made of copies.
Problems and solutions may be displayed and may be reproduced in print form for instructional
purposes only, provided a proper copyright notice appears on the last page of each print-out.
Except as previously stated, no part of the computer program embodied in this diskette may be
reproduced or transmitted in any form or by any means, electronic or mechanical, including input
into or storage in any information system, without permission in writing from the publisher.
ISBN: 0-03-011578-7
Table of Contents
Chapter 1 Chapter 4
no problems 4.1 30 – 35
4.2 36 & 37
Chapter 2 4.3 38 & 39
2.1 4 4.4 40 & 41
2.2 5 4.5 42 & 43
2.3 6 4.6 44 – 46
2.4 7 4.7 47 & 48
2.5 8 4.8 49 & 50
2.6 9
2.7 10 Chapter 5
2.8 11 5.1 51 – 54
2.9 12 5.2 55 & 56
2.10 13 & 14 5.3 57
2.11 15 5.4 58 – 60
2.12 16 5.5 61 & 62
2.13 17 5.6 63 – 65
5.7 66 – 68
Chapter 3 5.8 69 & 70
3.1 18
3.2 19
3.3 20
3.4 21
3.5 22
3.6 23
3.7 24
3.8 25
3.9 26
3.10 27
3.11 28
3.12 29
and
(a)
(b)
2-1
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2.2
α is the relative weight put on the goal of income maximization as opposed to rent
maximization.
(b)
(c)
2-2
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2.3
with K fixed
(a)
From FOC,
(b)
2-3
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2.4
(a)
For
(b)
(i) so
(ii)
2-4
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2.5
(a)
(b)
2-5
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2.6
2-6
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2.7
(a)
(b)
(c)
(d)
(e)
2-7
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2.8
2-8
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2.9
(a)
by symmetry
(b)
2-9
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2.10
(a) Solutions from text:
equation (2.70):
equation (2.71):
equation (2.72):
so
2-10
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Note also that
(c)
2-11
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2.11
(a) From the text,
and
(b)
2-12
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2.12
(equation (2.84))
2-13
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2.13
(a)
(c)
When g is larger, there are two possible effects: government spending increases by more
when equilibrium GDP is lower than the target level, but government spending decreases
by more when equilibrium GDP is higher than the target level.
Either way, a higher value of g will move equilibrium GDP closer to the target level.
2-14
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3.1
(a)
3-1
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3.2
(a)
(b)
(c)
3-2
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3.3
(a)
(b)
(c)
3-3
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3.4
(a)
(b) BA is not defined. Since A is a 4x2 matrix and B is a 2x1 vector, the vector products we
3-4
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3.5
In matrix form, the given system of equations is:
3-5
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3.6
Similarly,
3-6
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3.7
3-7
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3.8
(a)
(b)
3-8
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3.9
(a)
3-9
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3.10
The cofactor matrix for matrix A is :
Now,
Similarly,
Now,
3-10
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3.11
The given system of equations can be written as :
We have,
x = 3 / 11 , y = 2 / 11, z = - 1 / 11.
3-11
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3.12
Using Cramer’s Rule :
Now,
3-12
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4.1
Now,
so,
we know,
so,
(1)
(2)
To get the equal prices in the presence of a unit subsidy b1 granted to producers of good 1,
following the reasoning in page 106, we just need to substitute s1 + s11 b1 for s1 in
equations (1) and (2). This gives us the following equilibrium expressions:
Now,
(a)
(b)
P.T.O.
Now,
so,
so,
(iii)
Now,
(iv)
From (iii),
so,
(c)
From (iv),
(d)
Interpretations:
Thus, a unit increase in subsidy for good A will reduce the price of good A.
Thus, a unit increase in subsidy for good A will increase the price of good B.
Thus, a unit increase in the subsidy for good A will increase the quantity of good A
produced.
We can similarly analyze the effects of a unit increase in subsidy on the quantity of good B
produced.
If two goods are complements, we can interpret equations (a), (b), (c), and (d) in a similar
fashion as above.
We can do similar analyses if two goods are neither complements nor substitutes.
4.2
The equation (4.36) gives us:
For the equilibrium quantities of output of firm 1 to be positive, the signs of the numerator and
the denominator of the R.H.S. of equation (1) has to be the same.
Now, assume that both the numerator and the denominator are positive.
Then,
and, (4)
One way of (4) being true is to have:
.
But, when
The economics of this is quite clear. Firm 2 is simply not posing any competition to firm 1.
Thus firm 1 can make a positive quantity of goods and sell them at a price that will let the firm
make positive profits.
Then,
From (4.28),
Now, Let
Then,
or,
(1)
If the value of the R.H.S. of equation (1) is positive, then we need a tax of that amount.
Otherwise, we need a subsidy of that amount.
4.4 Assume
also
Now,
(i)
(ii)
P.T.O If we let c2 = c, then we see that the price in this case will be higher than in
equation 4.48. Thus, everything else being equal, a higher degree of conjectural
variation leads to a higher price in a duopoly.
4.5
The demand function is:
.
Given is:
Now,
(i)
Similarly,
(ii)
And,
(iii)
We can get the solution of this system from (4.56) by changing the constant c:
(iv)
(v)
Comparing (iv) and (v) with (4.56) and (4.57) respectively, we find that the aggregate triopolist
output and the triopolist price is the same as those of a monopoly with no taxes or subsidies.
4.6
We are given that
and so,
(i)
Similarly,
(ii)
(iii)
So,
a) Now,
So, for a unit upward shift of the inverse demand function, price will change by
b) In this case,
From (4.65),
(iv)
(v)
Similarly,
(vi)
Since equilibrium total quantity is unchanged, equilibrium price for the industry will be
unchanged.
Comparing (i), (ii), (iii) with (iv), (v), (vi) , we find that
the equilibrium quantity of firm 1 decreases,
the equilibrium quantity of firm 2 increases, and
the equilibrium quantity of firm 3 remains unchanged.
4.7 If
Now,
a) By Cramer’s Rule:
(1)
(2)
c) If budget is balanced,
(3)
d) The multiplier for autonomous spending in the case of a balanced budget is:
(4)
Equation (1) shows that the equilibrium income will be higher than the income in Equation
(4.70).
Similarly, the balanced budget income and multiplier as specified by Equations (3) and (4) are
higher than those in equations (4.73) and (4.74).
4.8 From (4.82), we know,
So,
(i)
(ii)
(iii)
From Equation (1), we find that an increase in b increases C*. Thus, an increase in marginal
propensity to consume will increase the equilibrium level of consumption. A reduction in tax
rate t will have similar effect on C* as an increase in MPC.
The equilibrium values and the rates of changes of can be calculated in a process
similar to that of the calculation of Equations (i), (ii), and (iii).
5.1
(a)
(b)
(c)
(d)
(e)
Now let
and
Then so
and
Now let
and
Then , so
and
5.2
(a)
(b)
(c)
(d)
(e)
(f)
5.3
(a)
(b)
(c)
(d)
(e)
(f)
5.4
(a) at the particular
values of x and y that are of interest.
OR
(b) at the
particular values of x and y that are of interest.
OR
(c) at the particular
values of x and y that are of interest.
OR
(d) at the
particular values of x and y that are of interest.
OR
(e) at the particular
values of x and y that are of interest.
OR
OR
5.5
(a)
(b)
(c)
5.6
(a) the Jacobian
determinant given in the answer to problem 5.5(a),
at the particular values of x and y that are of interest.
(b)
all exist as long as the Jacobian determinant given in the answer to problem 5.5(b),
at the particular values of x, y, and z that are of interest.
(c)
all exist as long as the Jacobian determinant given in the answer to problem 5.5(c),
at the particular values of x, y, and z that are of interest.
5.7
, or
Note that since two values of x exist for one value of y, x is not a function of y, except in
the locality of particular combinations of x and y.
Evaluated at x = 1 and y = 1,
Evaluated at
and y = 1,
So when x is positive the slope of the level curve becomes more negative when y increases
but if x is negative the slope of the level curve becomes less negative when y increases.
, or
Note that since two values of x exist for one value of y, x is not a function of y, except in
the locality of particular combinations of x and y.
Evaluated at
x = 1/4 and y = 1,
Evaluated at
and y = 1,
So when x is positive the slope of the level curve becomes more negative when y increases
but if x is negative the slope of the level curve becomes less negative when y increases.
when evaluated at
.
So the slope of the level curve becomes less negative when y increases.
, or
when evaluated at
.
So the slope of the level curve becomes less negative when y increases.
(e) Let .
If y = 1, then
, or
when evaluated at
.
So the slope of the level curve becomes less negative when y increases.
(f) Let .
If y = 1, then
, or
when evaluated at
.
So the slope of the level curve becomes less negative when y increases.
5.8
(a)
so homogeneous of degree 2
(b)
so homogeneous of degree 2
(c)
so homogeneous of degree 1
(d)
so homogeneous of degree
(e)
not homogeneous
(f)
so homogeneous of degree 1
Instructor’s Manual on Disk
to accompany
Mathematical Economics
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 2
( Solutions for Chapters 6 and 7 )
Copyright © 1996 by Harcourt Brace & Company.
All rights reserved. Subject to the restrictions hereof, permission is hereby granted until further
notice, to duplicate this diskette without alteration onto another diskette or the hard disk drive
of a computer for use in connection with a course for which Mathematical Economics, First
Edition, by Jeffery Baldani, James Bradfield and Robert Turner has been adopted, and not for
resale, provided the copies are made from this master diskette only, and provided that the
following copyright notice appears on the label of all copies in diskette form: © 1996 by
Harcourt Brace & Company. The program may not be merged into another program or modified
in any way. Copies may not be made of copies.
Problems and solutions may be displayed and may be reproduced in print form for instructional
purposes only, provided a proper copyright notice appears on the last page of each print-out.
Except as previously stated, no part of the computer program embodied in this diskette may be
reproduced or transmitted in any form or by any means, electronic or mechanical, including input
into or storage in any information system, without permission in writing from the publisher.
ISBN: 0-03-011578-7
Table of Contents
Chapter 6 Chapter 7
6.1 4 7.1 43 – 46
6.2 5 7.2 47 – 49
6.3 6 7.3 50
6.4 7 7.4 51 – 56
6.5 8 7.5 57 – 59
6.6 9– 12 7.6 60
6.7 13 & 14 7.7 61
6.8 15 7.8 62
6.9 16 7.9 63 – 67
6.10 17 & 18 7.10 68 & 69
6.11 19 & 20
6.12 21
6.13 22
6.14 23
6.15 24
6.16 25
6.17 26 & 27
6.18 28 – 30
6.19 31
6.20 32
6.21 33 & 34
6.22 35
6.23 36
6.24 37 & 38
6.25 39
6.26 40
6.27 41
6.28 42
so
6.2
Equation (6.2) gives
so
6.3
Equation (6.8) gives
so
6.4
As long as dT = dG, the balanced budget multiplier is given by equation (6.9) regardless of
the nature of the income tax system. This can be shown by letting the tax function t be a
function of some parameter, say , as well as income Y, and solving the following system of
equations:
setting dT = dG.
6.5
Equation (6.6) gives
so
if dr = 0 then
As the marginal propensity to consume increases, dY increases. The higher is dG, the
higher is dY. When the Fed makes r constant, we are in the simple Keynesian world with
letting dG = dT and dM = 0,
dP is higher the higher is dG since the AD curve shifts higher up the AS curve.
Now, letting N be the numerator and D be the denominator of the expression for dP/dG,
if gets algebraically larger, it becomes smaller in absolute value, that is, less sensitive to interest
rates. This means there is less crowding out, so the AD curve will shift further up the AS curve and
Since the denominator is also positive, a greater slope of the AS curve leads to a greater
increase in P when there is a balanced-budget increase in G and T. With a steeper AS curve, more
of money demand to interest rates leads to a smaller increase in P when there is a balanced-budget
increase in G and T. The less sensitive money demand is to interest rates, the higher interest rates
must go to restore equilibrium in the money market when money demand increases due to higher G.
This leads to more crowding out and a smaller shift of the AD curve.
Since the denominator is positive, a greater MPC leads to a smaller increase in P when there
is a balanced-budget increase in G and T. With a greater MPC, the balanced budget multiplier in
the IS-LM model is smaller. (See equation 6.9.) So the AD curve shifts by less, leading to a smaller
increase in P.
if money demand becomes more sensitive to income, a larger increase in interest rates is needed to
restore equilibrium in the money market since the higher G will create more excess demand for
money. So there is more crowding out and the AD curve will not shift as far up the AS curve.
and
letting
be such that
dr ,
so or
as G increases, equilibrium Y will increase which should drive P up because of the
Since
The tax cut has an effect similar to, but smaller in absolute value than, an increase in government
purchases of goods and services. This is because the tax cut causes an increase in autonomous
demand of the marginal propensity to consume times the tax cut whereas the government
while
;
so when , ; and
so when , .
In the classical model, interest rates and the price level increase sufficiently to choke
respect to M yields
6.12
so
it used to be. As Y starts to increase (and P with it), net exports NX fall, which reduces the
multiplier effect.
:
since aggregate demand doesn't increase by as much, neither does the price level.
6.13
(equation 6.25) so
so
Using symmetry,
6.16
If
So
If
The high-cost firm increases output by less. This is because the high-cost firm gets a smaller share
of market output; if market demand increases, the high-cost firm gets a smaller share of the increase
too.
6.17
SOC: or
as long as
.
6.18
so the first- and second-order conditions for firm i are
Putting together these equations for the two firms (i = 1,2) yields
If
then
and
If
then
and
If
then
So ,
, and
So
6.20 For the IS curve,
The IS curve is steeper ( is larger in absolute value) the greater are the tax rate
and the marginal propensity to import and the smaller (in absolute value) are the marginal
propensity to consume the sensitivity of investment to income and the sensitivity of
investment to the interest rate As the interest rate r falls, investment increases and so does
output, through the multiplier process. A higher tax rate and marginal propensity to import reduce
the multiplier, while a higher marginal propensity to consume increases it, as does a greater tendency
for investment to increase when output increases. For the IS curve to be steep, there should be a
small multiplier since Y should not increase much when r falls. A small sensitivity of investment to
interest rates yields a steep IS curve because a decrease in the interest rate will not lead to much
increase in investment, and therefore not much increase in output.
The LM curve is steeper ( is greater) the larger is the sensitivity of money demand
to income and the smaller are the effect of interest rates on the money supply and the
sensitivity of money demand to interest rates (That is, the less negative is ) For the LM
curve to be steep, it must take a large increase in interest rates to restore equilibrium when an
increase in income increases money demand. This will be the case if money demand is very sensitive
to income and is not very sensitive to interest rates, or if money supply is not very sensitive to
interest rates.
6.21
For the IS curve,
Flexible exchange rates tend to make the IS curve flatter since lower interest rates will
lower the foreign exchange value of the dollar (depending on the magnitude of ), as will higher
income (depending on the magnitude of ), which will increase exports and decrease imports
(depending on the magnitudes of ), leading to a greater increase in output. The IS curve
is steeper ( is larger in absolute value) the greater are the tax rate and the marginal
propensity to import and the smaller (in absolute value) are the marginal propensity to consume
the sensitivity of investment to income and the sensitivity of investment to the interest rate
As the interest rate r falls, investment increases and so does output, through the multiplier process.
A higher tax rate and marginal propensity to import reduce the multiplier, while a higher marginal
propensity to consume increases it, as does a greater tendency for investment to increase when output
increases. For the IS curve to be steep, there should be a small multiplier since Y should not increase
much when r falls. A small sensitivity of investment to interest rates yields a steep IS curve because
a decrease in the interest rate will not lead to much increase in investment, and therefore not much
increase in output.
For the LM curve,
The LM curve is steeper ( is greater) the larger is the sensitivity of money demand
to income and the smaller are the effect of interest rates on the money supply and the
sensitivity of money demand to interest rates (That is, the less negative is ) For the LM
curve to be steep, it must take a large increase in interest rates to restore equilibrium when an
increase in income increases money demand. This will be the case if money demand is very sensitive
to income and is not very sensitive to interest rates, or if money supply is not very sensitive to
interest rates.
6.22
We want to maximize
subject to
,
or to maximize
FOC:
SOC:
6.23
The marginal rate of substitution MRS is defined by
(a)
(b)
(c)
(d)
6.24
(a)
(b)
(c)
(d)
6.25
The marginal rate of technical substitution MRTS is defined as
6.26
(a)
(b)
(c)
homogeneous of degree 0 if
(e)
homogeneous of degree 0
6.27
so
Now let
The first term in parentheses in the numerator of the expression for dK equals
Similarly, the third term in parentheses in the numerator of the expression for dK equals
So dK = 0.
6.28
and
7.1
(a)
(b)
(c)
(d)
(e)
7.2
(a)
(b)
(c)
(d)
(e)
7.3
The answers to all parts follow, corresponding to each part of 7.2:
(a)
(b)
(c)
(d)
(e)
7.4
(a)
(b)
(c)
(d)
(e)
7.5
(a) The derivatives of x*, corresponding to each part of 7.4:
(a)
(b)
(c)
(d)
(e)
(b) The derivatives of y*, corresponding to each part of 7.4:
(a)
(b)
(c)
(d)
(e)
(c) the derivatives of z*, corresponding to each part of 7.4:
(a)
(b)
(c)
(d)
(e)
7.6
By definition 7.1, a function f is concave if
f(x̄) (1 )f(x̂) f( x̄ (1 )x̂ )
and f is convex if
f(x̄) (1 )f(x̂) f( x̄ (1 )x̂ )
Max ,
n
For a linear function, f(x)
i i
i
1
f(x̄) (1 )f(x̂)
M a x̄ (1 ) M a x̂
M a x̄ (1 )a x̂
i i i i i i i i
M a ( x̄ (1 ) x̂ )
f(x̄ (1 ) x̂ )
i i i
So the linear function is concave but not strictly concave, and is convex but not strictly convex.
7-18
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7.7
Let g(x)
f(x) . Then
so g is convex.
7-19
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7.8
Since the functions f and g are concave,
so h is concave.
7-20
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7.9
(a)
(b)
(c)
(d)
(e)
7.10
The first-order conditions are
(a)
(b)
(c) From equations (7.52),
Instructor’s Manual on Disk
to accompany
Mathematical Economics
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 3
( Solutions for Chapters 8 and 9 )
Copyright © 1996 by Harcourt Brace & Company.
All rights reserved. Subject to the restrictions hereof, permission is hereby granted until further
notice, to duplicate this diskette without alteration onto another diskette or the hard disk drive
of a computer for use in connection with a course for which Mathematical Economics, First
Edition, by Jeffery Baldani, James Bradfield and Robert Turner has been adopted, and not for
resale, provided the copies are made from this master diskette only, and provided that the
following copyright notice appears on the label of all copies in diskette form: © 1996 by
Harcourt Brace & Company. The program may not be merged into another program or modified
in any way. Copies may not be made of copies.
Problems and solutions may be displayed and may be reproduced in print form for instructional
purposes only, provided a proper copyright notice appears on the last page of each print-out.
Except as previously stated, no part of the computer program embodied in this diskette may be
reproduced or transmitted in any form or by any means, electronic or mechanical, including input
into or storage in any information system, without permission in writing from the publisher.
ISBN: 0-03-011578-7
Table of Contents
Chapter 8 Chapter 9
8.1 4 9.1 21 & 22
8.2 5–7 9.2 23 – 26
8.3 8 9.3 27 – 34
8.4 9 & 10 9.4 35 – 37
8.5 11 & 12 9.5 38 – 40
8.6 13
8.7 14
8.8 15
8.9 16
8.10 17
8.11 18
8.12 19 & 20
For this problem, the easiest way to get elasticities is to use logarithms. In general, the elasticity
So and
So
8-1
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8.2
(a)
(b)
by symmetry,
8-2
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(c)
(d)
8-3
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(e)
so
The elasticities sum to zero. If input prices and the output price rise by the same percentage,
then the market conditions have not changed in real terms, so output will not change.
8-4
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8.3
Letting
8-5
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8.4
(a) the FOC are
For each input, the value of marginal product equals the input price.
8-6
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(c) If dP=dw=0,
8-7
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8.5
8-8
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(c) Since
.
Note we could get this result by treating the FOC as implicit functions:
If dP=dw=0,
8-9
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8.6
. From equations (8.40),
In perfect competition, so
8-10
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8.7
From equation (8.41),
Since
,
If the alternative wage increases, increases by more. They will increase by the
same percentage.
8-11
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8.8
.
8-12
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8.9
8-13
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8.10
8-14
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8.11
For firm 2,
so
since de > 0.
8-15
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8.12
For firm x,
For firm y,
8-16
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(b) Implicitly differentiating the three FOC with respect to c,
8-17
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9.1
(a)
(b)
(c)
(d)
9-1
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(e)
(f)
(g)
9-2
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9.2
(a)
(b)
The second-order conditions are not satisfied globally, but are satisfied at the values of x, y,
and z that solve the first-order conditions (see answer to problem (9.1a):
:
9-3
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(c)
(d)
9-4
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(e)
9-5
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(f)
9-6
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9.3
9-7
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9-8
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9-9
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9-10
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9-11
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9-12
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9-13
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9-14
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9.4
9-15
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9-16
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9-17
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9.5
9-18
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Now let all exogenous differentials equal 0 except
:
The numerator is (-1) times a border-preserving principal minor of order n-1 of , while the
numerator is a border-preserving principal minor of order n.
By the SOC, the border-preserving principal minors alternate in sign, so the numerator and
the denominator have the same signs.
9-19
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Now letting all exogenous differentials equal zero except for
,
9-20
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Instructor’s Manual on Disk
to accompany
Mathematical Economics
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 4
( Solutions for Chapter 10 )
Copyright © 1996 by Harcourt Brace & Company.
All rights reserved. Subject to the restrictions hereof, permission is hereby granted until further
notice, to duplicate this diskette without alteration onto another diskette or the hard disk drive
of a computer for use in connection with a course for which Mathematical Economics, First
Edition, by Jeffery Baldani, James Bradfield and Robert Turner has been adopted, and not for
resale, provided the copies are made from this master diskette only, and provided that the
following copyright notice appears on the label of all copies in diskette form: © 1996 by
Harcourt Brace & Company. The program may not be merged into another program or modified
in any way. Copies may not be made of copies.
Problems and solutions may be displayed and may be reproduced in print form for instructional
purposes only, provided a proper copyright notice appears on the last page of each print-out.
Except as previously stated, no part of the computer program embodied in this diskette may be
reproduced or transmitted in any form or by any means, electronic or mechanical, including input
into or storage in any information system, without permission in writing from the publisher.
ISBN: 0-03-011578-7
Table of Contents
Chapter 10
10.1 4– 14
10.2 15 – 19
10.2 a 20 & 21
10.2 b 22 – 24
10.2 c 25 & 26
10.2 d & e 27 & 28
10.2 f 29 – 31
10.2 g 32
10.3 33 – 40
10.4 41 – 44
10.5 45
10.6 46
10.7 47
10.8 48
10.9 49
10.10 50
10.11 51
10.12 52 & 53
10.13 54 & 55
10.14 56 & 57
10.15 58
10.16 59
10.17 60 – 65
10.18 66
10.19 67
10.20 68
while the derivatives of the unconditional demand for labor come from the solution to
equation (10.29):
10-1
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(a) so
10-2
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(b) so
10-3
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but for this production function,
10-4
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For parts (c) and (d), the derivatives of the conditional demand for labor function come from
the total differentials of the FOC (10.16), where v is the rental price of input R:
10-5
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The derivatives of the unconditional demand for labor function can be derived following the
procedure of section 10.3:
10-6
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The total differentials of the FOC are
10-7
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(c) so
10-8
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10-9
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(d) so
10-10
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10-11
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10.2
For the two-input cases, the derivatives of the marginal cost curve come from solving
equation (10.7) for :
10-12
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For the three-input cases, the derivative of the marginal cost curve with respect to w comes
from solving equation (10.18) while the derivative with respect to output comes from solving
equation (10.23):
For the two-input cases, the derivatives of the conditional demand for labor function with
respect to output come from equation (10.8):
10-13
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For the three-input cases, the derivatives of the conditional demand for labor function with
respect to output come from solving equation (10.23):
For the two-input case, the derivatives of the unconditional demand for labor function with
respect to price come from equation (10.29) while the slope of the supply curve and the
derivative of the firm's output with respect to w come from equation (10.34):
10-14
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The same derivatives for the three-input case are similar:
10-15
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10-16
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10.2 (a) The derivatives for each production function in problem 10.1 are as follows
(see the answers to problem 10.1 for the formulas and signs of the first and
second derivatives of F):
but
10-17
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10-18
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10.2 (b) The derivatives for each production function in problem 10.1 are as follows
(see the answers to problem 10.1 for the formulas and signs of the first and
second derivatives of F):
10-19
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10-20
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The slope of the marginal cost curve depends on returns to scale.
10-21
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10.2 (c) The derivatives for each production function in problem 10.1 are as follows
(see the answers to problem 10.1 for the formulas and signs of the first and
second derivatives of F):
(a)
(b)
but
10-22
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10-23
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10.2 (d) The unconditional demand for labor does not depend on output; this derivative
is undefined since output is an endogenous variable in the profit maximization
problem.
10.2 (e) The derivatives for each production function in problem 10.1 are as follows
(see the answers to problem 10.1 for the formulas and signs of the first and
second derivatives of F):
(a) but for this production function, the SOC are not satisfied
since
:
(b) but for this production function, the SOC are not satisfied
since
:
10-24
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(see answer to problem 10.2 (b) for this production function)
is not defined since there is no unique profit-maximizing output level.
but
10-25
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which cannot be signed without more information about parameter values.
10.2 (f) The derivatives for each production function in problem 10.1 are as follows (see
the answers to problem 10.1 for the formulas and signs of the first and second
derivatives of F):
(a) Since the SOC for the profit-maximization problem are not satisfied for this
production function (see problem 10.2 (b) for this production function), there is no
unique profit-maximizing output level, so there is no supply curve.
(b) Since the SOC for the profit-maximization problem are not satisfied for this
production function (see problem 10.2 (b) for this production function), there is no
unique profit-maximizing output level, so there is no supply curve.
10-26
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(c) . If the SOC are satisfied,
so
This is easiest to show for this production function by solving explicitly for Q*:
10-27
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(d) . If the SOC are satisfied,
so
.
10-28
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10.2 (g) The derivatives for each production function in problem 10.1 are as follows
(see the answers to problem 10.1 for the formulas and signs of the first and
second derivatives of F):
(a) As in part f, this derivative does not exist for this production function because
there is no unique Q*.
(b) As in part f, this derivative does not exist for this production function because
there is no unique Q*.
(c) The easiest way to derive this derivative for this production function is to solve
explicitly for Q* (see problem 10.2 (f) for this production function):
10-29
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10.3
The Hicksian demand derivatives come from the expenditure minimization problem of
Chapter 9:
10-30
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The Marshallian demand derivatives come from the utility maximization problem of
Chapter 9:
10-31
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(a) so
The Marshallian derivatives in this case are most easily derived by solving explicitly for the
demand functions:
10-32
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(b) so
The Marshallian derivatives in this case are most easily derived by solving explicitly for the
demand functions:
10-33
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(c) so
10-34
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The Marshallian derivatives in this case are most easily derived by solving explicitly for the
demand functions:
10-35
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(d) so
10-36
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10-37
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10.4
The Marshallian demand derivatives come from the utility maximization problem of
Chapter 9:
10-38
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(a) so
(b) so
10-39
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(c) so
10-40
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(d) so
10-41
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10.5
10-42
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10.6
10-43
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10.7
10-44
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10.8
10-45
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10.9
10-46
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10.10
If the compensated demand for good i increases when the price of good j increases, then the
compensated demand for good j will increase when the price of good i increases, and the
goods are substitutes. But because the income effects may differ, this symmetry does not
necessarily hold for the uncompensated (ordinary) demands. It is not so obvious what the
concepts of substitutability and complementarity mean in terms of ordinary demand functions.
10-47
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10.11
maximize
subject to
10-48
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10.12
From equations (10.52)
10-49
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10-50
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10.13
From equations (10.52)
10-51
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since from the FOC
so
10-52
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10.14
maximize
subject to
10-53
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SOC not sufficient to sign numerator
10-54
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10.15 From equations (10.56)
A higher value of implies that increasing C2 yields more extra utility than before, while the
marginal utility of C1 is the same as before. Thus total utility can be increased by buying less
C1 and more C2.
Said another way,
10-55
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10.16
From equations (10.50),
So
Thus
and .
10-56
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10.17
From equation (10.63), the substitution effect is given by . From (10.60),
(a) so
10-57
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10-58
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(b) so
10-59
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Now let . Then
Let . Then
10-60
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so
(c) so
10-61
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10-62
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10.18
consumer 1:
consumer 2:
10-63
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10.19
consumer 1:
consumer 2:
10-64
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10.20
for each consumer s:
The condition for Pareto efficiency is that for any two individuals s and r,
10-65
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Instructor’s Manual on Disk
to accompany
Mathematical Economics
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 5
( Solutions for Chapter 11, 12, 13 and 14 )
Copyright © 1996 by Harcourt Brace & Company.
All rights reserved. Subject to the restrictions hereof, permission is hereby granted until further
notice, to duplicate this diskette without alteration onto another diskette or the hard disk drive
of a computer for use in connection with a course for which Mathematical Economics, First
Edition, by Jeffery Baldani, James Bradfield and Robert Turner has been adopted, and not for
resale, provided the copies are made from this master diskette only, and provided that the
following copyright notice appears on the label of all copies in diskette form: © 1996 by
Harcourt Brace & Company. The program may not be merged into another program or modified
in any way. Copies may not be made of copies.
Problems and solutions may be displayed and may be reproduced in print form for instructional
purposes only, provided a proper copyright notice appears on the last page of each print-out.
Except as previously stated, no part of the computer program embodied in this diskette may be
reproduced or transmitted in any form or by any means, electronic or mechanical, including input
into or storage in any information system, without permission in writing from the publisher.
ISBN: 0-03-011578-7
Table of Contents
Chapter 11 Chapter 13
11.1 4–7 13.1 60
11.2 8 – 10 13.2 61
11.3 11 – 20 13.3 62
11.4 21 – 27 13.4 63 & 64
11.5 28 – 31 13.5 65
11.6 32 & 33 13.6 66 – 68
13.7 69 – 72
Chapter 12
12.1 34 Chapter 14
12.2 35 14.1 73 – 75
12.3 36 14.2 76
12.4 37 & 38 14.3 77
12.5 39 – 41 14.4 78
12.6 42 – 44 14.5 79 – 80
12.7 45 14.6 81 – 84
12.8 46 & 47
12.9 48
12.10 49
12.11 50 – 52
12.12 53
12.13 54
12.14 55 & 56
12.15 57
12.16 58
12.17 59
(a)
so check
so
(b)
SOC: and
(c)
so check
11-4
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(d)
so check
(e)
so check
11-5
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(f)
so check
when
11-6
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SOC:
so
(g)
SOC:
so
11-7
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11.2
(a)
so check
(b)
SOC: and
(c)
so check
11-8
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(d)
so check
when
SOC:
so
11-9
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(e) ,
SOC:
so
11-10
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11.3
There are two ways to approach these problems: (1) assume that the constraint will be binding,
solve the first-order conditions for optimizing the Lagrangian, and check to see that all choice
variables and the Lagrange multiplier are positive (if not, check border solutions or redo the
problem with a slack constraint); and (2) assume that the constraint will not be binding (that is,
do Problem 11.1) and check to see that the constraint is slack (if not, redo the problem taking
the constraint into account).
(a)
11-11
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Since
we might try doing the problem as unconstrained (see Problem 11.1a) which leads to the solution
which does indeed satisfy the constraint. Or, since solving the FOC for the Lagrangian leads to
we might try optimizing the Lagrangian assuming the border condition that
so
Since
11-12
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(b)
These first-order conditions are highly nonlinear and not easy to solve, so we will hope that the
constraint is not binding and solve the problem with a slack constraint (see Problem 11.1b),
which yields as solutions
so the solution to the constrained problem is the same as the solution to the unconstrained
problem:
11-13
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(c)
Since
,
we might try doing the problem as unconstrained (see Problem 11.1c) which leads to the solution
,
which does not satisfy the constraint. Or, since solving the FOC for the Lagrangian leads to
,
we might try optimizing the Lagrangian assuming the border condition that
so
11-14
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When
(d)
Since
,
we try doing the problem as unconstrained (see Problem 11.1d) which leads to the solution
,
which does indeed satisfy the constraint. So the solution to the constrained problem is the same
as the solution to the unconstrained problem:
11-15
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(e)
These first-order conditions are nonlinear and not easy to solve, so we will hope that the
constraint is not binding and solve the problem with a slack constraint (see Problem 11.1e),
which yields as solutions
so the solution to the constrained problem is the same as the solution to the unconstrained
problem:
11-16
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(f)
11-17
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11-18
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Since
,
we might try doing the problem as unconstrained (see Problem 11.1f) which leads to the solution
,
which does indeed satisfy the constraint. Or, since solving the FOC for the Lagrangian leads to
,
we might try optimizing the Lagrangian assuming the border condition that
so
Since
,
the constraint is slack so the solution to the constrained problem is
11-19
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(g)
11-20
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11.4
There are two approaches to this problem: assume that the constraint will be binding, solve the
first-order conditions for optimizing the Lagrangian, and see if the Lagrange multiplier or any
of the choice variables are negative (if they are, redo the problem assuming the constraint is slack
and/or check border conditions); or assume that the constraint will be slack and check to see if
the constraint is binding at the values of the choice variables that minimize the objective function
(if they are, redo the problem as a Lagrangian).
(a)
Since all three variables are positive, the solution to the constrained minimization problem is
11-21
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(b)
Since
,
the constraint is slack, so solve the problem as an unconstrained problem (see Problem 11.2b),
which yields
This does satisfy the constraint, so the solution to the constrained minimization problem is
11-22
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(c)
Since
,
the constraint is slack, so we could solve the problem as an unconstrained problem (see Problem
11.2c), which yields
Since
,
the constraint is slack, so the solution to the constrained minimization problem is the solution to
the unconstrained problem,
11-23
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(d)
11-24
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11-25
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Since solving the FOC for the Lagrangian leads to
,
we should try optimizing the Lagrangian assuming the border condition that
so
Since all variables are positive, this gives the solution to the constrained problem:
11-26
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(e)
So
(see Problem 11.2e). At these values, the constraint is satisfied, so the solution to the constrained
minimization problem is the same as the solution to the unconstrained minimization problem:
11-27
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11.5
(a)
so
11-28
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(b)
so
11-29
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(c)
By graphing or by searching all nodes, we find that the middle constraint is not binding at the
optimum. So
This leaves
11-30
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Evaluated at
11-31
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11.6
(a)
(b)
11-32
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(c)
11-33
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12.1
From equation (12.3), x = 0 when
.
(a) so
(b) so
(c) so and
12-1
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12.2
By graphing or by trial and error it can be determined that the optimum occurs at the intersection
of the two constraints
So 0
So .
12-2
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12.3
(a)
(b)
so relaxing the second constraint (adding more testers) would add more to profits.
12-3
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12.4
If
then both Lagrange multipliers are positive, so both constraints are binding,
If
so the first constraint is not binding. Thus the firm can choose any combination of B and U that
satisfies the second constraint.
If the firm chooses to make only basic computers, it can make B = 160,
leading to profits of 16,000.
If the firm chooses to make only upscale computers, it can make U = 80,
leading to profits of
since
12-4
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If
so the second constraint is not binding. Thus the firm can choose any combination of B and U
that satisfies the first constraint.
If the firm chooses to make only basic computers, it can make B = 200,
leading to profits of 20,000.
If the firm chooses to make only upscale computers, it can make
U= ,
leading to profits of
since
12-5
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12.5
12-6
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So and the second constraint is not binding. Thus
so B = 0.
12-7
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Thus
12-8
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12.6
12-8
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So and the second constraint is not binding. Thus
12-9
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so B = 0.
Thus
12-10
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12.7
12-11
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12.8
12-12
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If the first constraint is not binding and
,
12-13
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12.9
12-14
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12.10
12-15
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12.11
12-16
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(a) If
then
Since
12-17
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(b) The firm would choose to hold no inventories if the first constraint is binding,
that is if
12-18
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12.12
We are told that the profit constraint is binding and that capital is needed for production,
so those two first-order conditions hold with equality. The Kuhn-Tucker conditions can
therefore be written as
(a) If
12-19
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12.13
. If L = 0 then
, or
(a) If
,
so
(b) If
,
so
12-20
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12.14
We want to maximize
subject to
.
The Lagrangian is
If both constraints are binding (the representative consumer is liquidity constrained), all four
partial derivatives of the Lagrangian equal zero, which yields as solutions
If
which means that the first constraint is not binding (there is no liquidity constraint), and
.
When
and
,
the solutions are:
12-21
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12-22
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12.15
.
Note that if
12-23
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12.16
From equation (12.26),
so
12-23
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12.17
Maximize
subject to
If both constraints are binding (the representative consumer is liquidity constrained), all four
partial derivatives of the Lagrangian equal zero, which yields as solutions
If
which means that the first constraint is not binding (there is no liquidity constraint).
or .
12-24
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13.1
The demand function is:
If the monopolist wants to maximize profit, then the objective function is:
13-1
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13.2
Here,
Objective function,
13-2
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13.3
From 13.1, we have the value function,
(1)
(2)
13-3
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13.4
The consumer’s utility function is:
Now,
(1)
(2)
(3)
(4)
13-4
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Now, let
Similarly,
13-5
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13.5
From 13.4, we have,
Similarly,
Now,
(1)
Similarly, (2)
The marginal effects of the prices and on utility are given by equations (1) and (2).
13-6
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13.6
The consumer’s utility function is:
(1)
(2 )
(3)
13-7
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So, the value function is:
13-8
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(b) From equation (1), we have,
Now,
13-9
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13.7
(a) The utility function is:
Now,
13-10
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Now, from (3),
So, we have:
13-11
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For an interior solution of
we must have,
So,
13-12
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(b) If , then the value function would be:
Now,
where
13-13
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14.1
The consumer’s utility function is U(x, y) = axy + by .
Let the consumer’s fixed income be M, and fixed prices of x and y be Px and Py respectively.
Then, the first order conditions for utility maximization are:
(a1)
14-1
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From eq. (1), we get,
Now, we turn to the expenditure minimization problem. The first order conditions for this
problem are :
14-2
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Now, let’s test the three duality conditions.
Here,
14-3
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14.2
For problem 1, the consumer’s Marshallian demand functions are equations (a1) and (a2).
The Hicksian demand functions for this problem are given by equations (b1) and (b2).
14-4
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14.3
Now,
14-5
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14.4
From eq. (14.35), Shepard’s Lemma states that for the consumer in this problem :
14-6
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14.5
From eq. (14.43), the Slutsky equation for the consumer in this problem is :
Now,
14-7
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Substituting this value back into (4), we obtain,
Thus, the Slutsky equation has been demonstrated for the consumer in problem 14.1.
14-8
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14.6
Part a.
14-9
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From (4),
14-10
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Part b.
M - T - ((ay - bp) / a) - y = 0
aM - aT - ay - bP - ay = 0
2ay = bP + aM - aT
y* = (aM - aT + bP) / 2a
Similarly,
14-11
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So, the consumer’s value function is
14-12
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Instructor’s Manual on Disk
to accompany
Mathematical Economics
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 6
( Solutions for Chapter 15, 16, 17, 18 and Appendix )
Copyright © 1996 by Harcourt Brace & Company.
All rights reserved. Subject to the restrictions hereof, permission is hereby granted until further
notice, to duplicate this diskette without alteration onto another diskette or the hard disk drive
of a computer for use in connection with a course for which Mathematical Economics, First
Edition, by Jeffery Baldani, James Bradfield and Robert Turner has been adopted, and not for
resale, provided the copies are made from this master diskette only, and provided that the
following copyright notice appears on the label of all copies in diskette form: © 1996 by
Harcourt Brace & Company. The program may not be merged into another program or modified
in any way. Copies may not be made of copies.
Problems and solutions may be displayed and may be reproduced in print form for instructional
purposes only, provided a proper copyright notice appears on the last page of each print-out.
Except as previously stated, no part of the computer program embodied in this diskette may be
reproduced or transmitted in any form or by any means, electronic or mechanical, including input
into or storage in any information system, without permission in writing from the publisher.
ISBN: 0-03-011578-7
Table of Contents
(b) Eliminate L and R since both are dominated by C, then eliminate T and M since both
are dominated by B. The equilibrium is (B,C) and the payoffs are (6,8).
15-1
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15.2
(a) (T,L) and (B,R) are Nash equilibria:
L R
T 4,4 2,3
B 1,3 13,9
L C R
T 3,7 2,8 3,4
M 4,3 3,9 4,2
B 5,4 6,8 3,1
L C R
T 8,8 9,8 3,4
M 4,9 3,7 1,2
B 5,4 3,8 6,8
L C R
T 3,7 2,8 2,4
M 4,3 1,4 4,9
B 5,4 6,3 3,4
15-2
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15.3
(a) There are two kinds of Nash equilibria: in one,
In the other,
Proof:
Given that
If
,
then
.
Let
If
then
.
Let
(b) There are two kinds of Nash equilibria: in one, every player i has
.
15-3
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15.4
(a)
except that
is required.
So
15-4
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(b)
15-5
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(c) Assuming interior solutions,
15-6
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15.5
15-7
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15.6
(a)
so
(b)
(c)
15-8
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15.7
If
15-9
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16.1
16-1
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16.2
(a)
(b)
16-2
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16.3
(This is the same as problem 8.12)
For firm x,
For firm y,
16-3
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(b) Implicitly differentiating the three FOC with respect to c,
16-4
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16.4
(This is the same as problem 15.5)
16-5
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16.5
by symmetry,
16-6
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16.6
(a)
(b)
16-7
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16.7
(a)
can never be a Nash equilibrium since at least one firm could earn greater profit by
cutting price.
For any
,
(b) If prices are measured in pennies, the Nash equilibria are any prices for which
and .
16-8
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16.8
The solutions for prices and quantities in general are (note that < 1 and the problem is
symmetric)
(a)
16-9
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(b)
(c)
16-10
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16.9
A strategy consists of two simultaneous elements: an entry decision and a price.
Let demand be
Q = Q(P) where .
_
Define P
_
^
Define P > P
16-11
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16.10
.
By symmetry, , so
16-12
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16-13
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16.11
.
Then
.
^
Let X by the social optimum, so
16-14
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Proof (by contradiction) that
Suppose that
.
Then
which is a contradiction.
So
.
16-15
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16.12
so the Nash equilibrium comes from
: .
so
.
Any distribution (not necessarily symmetric) of the firms' outputs that satisfies
is a Nash equilibrium.
15-16
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16.13
(a) Let be the location for seller i. For player 1 the payoff function is:
Specifically,
15-17
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(b) Let the three vendors' location choices be x1 , x2 , and x3
(i)
(ii)
(iii)
All other forms are analogous to these since the firms can be ordered arbitrarily. If none of
these are pure strategy Nash equilibria then there are no pure strategy Nash equilibria.
(i) If
,
then
But either
(ii) If
then
yields a higher Π1
If
then
yields a higher Π2
15-18
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If
But if
yields a higher Π2
(iii) If
then for players 1 and 3 to be in equilibrium they must be as close as possible to player 2, so
This leads to
,
15-19
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16.14
Let . The demand equations are
(a)
with FOC
15-20
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The FOC for firm y's unconstrained profit-maximization problem is
15-21
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Since
.
So
Thus when x increases and y decreases by the same amount, the market price rises. Firm x
would like to price discriminate, charging a monopoly price at home and a lower price in the
duopoly market. Since it can't, it lowers price at home and raises the price for exports. The
mix of the two depends on which market is bigger. When the home market is bigger, price
equalization is achieved largely through a higher export price.
15-22
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16.15
(a)
(b)
15-23
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(c)
So .
15-24
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17.1
(a) Player 1 has an information set at the initial node. Player 2 has two singleton
information sets: one following L, one following R. There are two subgames: one
after R, one after fL. Yes, perfect information.
(b) Player 1 has two wingleton informations sets: one at the initial node, one at the node
following L,U. Player 2 has two singleton information sets: one following L, one
following R. There are 3 subgames, starting at each of player 2's singleton
information sets and at player 1's second information set. Yes, perfect information.
(c) Each of player 1's nodes is a singleton information set. Player 2 has a singleton
information set and an information set with two nodes. There are 3 subgames. 2 start
at player 1's information sets and one starts at player 2's singleton information set.
No, imperfect information.
(d) All information sets are singletons (each player has two information sets). There are 5
subgames: 2 at player 2's nodes, 2 at player 3's nodes, and 1 at player 1's second node.
Yes, perfect information.
(e) There is a singleton information set for player 1, 2 singleton information sets for
player 2, and 1 doubleton information set for player 3. There are 2 subgames, one
starting at each of player 2's nodes. No, imperfect information.
17-1
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17.2
(a) (i) Strategy sets: Player 1 {L,C,R}
Player 2 {(U,U,U), (U,D,U), (U,U,D), (U,D,D), (D,U,U), (D,D,U),
(D,U,D), (D,D,D)} where (i,j,k) represent responses to player 1's choices of
L,C, and R.
C D,U,D
C D,D,D
R U,U,U
R U,D,U
R D,U,U
R D,D,U
R D,U,U
R D,D,U
17-2
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(ii) U,U U,M U,D D,D D,M D,U M,M M,U M,D
L 2,3 2,3 2,3 2,6 2,6 2,4 2,4 2,4 2,4
R 1,1 3,3 1,2 1,2 3,3 1,1 3,3 1,1 1,2
Nash equilibrium strategies are
L D,D
L D,U
R U,M
R D,M
R M,M
(iii) Subgame perfection requires that player 2's response to (L,R) be (D,M) so the only
subgame perfect Nash equilibrium is R, (D,M).
L U,U,U
R U,U,D
R D,U,D
17-3
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(iii) Subgame perfection requires that the responses to L,C, and R must be (U,U,D) so
the only subgame perfect Nash equilibrium is R, (U,U,D).
Each strategy for player 1 is an initial move followed by a set of responses to each of
player 2's strategies:
17-4
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The Nash equilibrium strategies are
Since each X,X pair represents 4 combinations, there are 24 Nash equilibrium strategies.
(iii) is a dominant strategy for player 1 in the final subgames. Thus, in the
subgame following L, player 2 is indifferent between U and D. In the subgame
following R, player 2 will choose D. Thus U,D and D,D are subgame perfect
strategies for player 2. Given this, player 1 will never choose R. Thus the
subgame perfect Nash equilibria are
17-5
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17.3
(a) Following L, player 2's best response is D. Following R, player 2's best response is
U. Given that player 2 will play strategy (D,U), player 1's best choice is R. So the
subgame perfect Nash equilibrium is for player 1 to play R and player 2 to play
(D,U).
(b) At player 1's second decision point the best response is B. Following L, player 2's
best response is D. Following R, player 2's best response is U. Given that player 2
will play strategy (D,U), player 1 is indifferent between L and R. Thus player 1's T -
B choice is irrelevant. The subgame perfect Nash equilibria are L, (D,U) and R,
(D,U).
(c) D is a dominant action in both of player 2's information sets. Thus (D,D) is player 2's
equilibrium strategy. Given (D,D) for player 2, player 1 will choose T if Nature
chooses L and player 1 will choose B if Nature chooses R. The subgame perfect Nash
equilibrium is (T,B), (D,D).
Backwards induction for the game that includes stages 1, 2a, and 3a:
In stage 3a, player 3 chooses S; in stage 2a, player 2 chooses U; in stage 1, player 1
chooses L. The resulting sequence of plays is L,U,S and the payoffs are (1,2,4).
17-6
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Backwards induction for the game that includes stages 1, 2b, 3b, and 4:
In stage 4, player 1 chooses ; in stage 3b, player 2 chooses U; in stage 2b, player 3
chooses M; in stage 1, player 1 chooses R. The resulting sequence of plays is R,M
and the payoffs are (2,1,2).
Thus the subgame perfect Nash equilibrium is for player 1 to play R and player 3 to
play M, resulting in payoffs of (2,1,2).
(e) In the information set for player 3, M is a dominant choice. On the right side, player
2 is indifferent between U and D. On the left side, player 2 picks U. If player 1
picks L, then player 2 picks U, with payoffs (2,6,8). If player 1 picks R, player 2
might pick U, followed by player 3 choosing M, resulting in payoffs (7,5,2), or player
2 might pick D, followed by player 3 choosing M, resulting in payoffs (7,5,3).
So the subgame perfect Nash equilibria are
R,U,M, giving payoffs (7,5,2)
and R,D,M, giving payoffs (7,5,3).
17-7
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17.4
(a) see Figure 17.6
(c) like Figure 17.10 with an information set connecting firm 1's decision nodes
(d) An initial move by Nature with one branch followed by the tree for game (b) and the
other branch followed by the tree for game (c)
Each firm has a dominant strategy: PL is best with either a high or low demand. This is a
prisoners' dilemma and the equilibrium is (PL , PL ) for all of the game sequences in parts
(a) through (d).
17-8
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17.5
The strategy for player 1 is a choice s1 and the strategy for player 2 is a response function
. The Nash equilibrium is any s*1 such that
and
such that
Explanation: This ensures that player 1 has no incentive to change s1 away from the
equilibrium value s*1 . Player 2's response function is optimal given the actual choice of s*1.
is the only subgame perfect choice for player 2, so the best choice by player 1 is
.
17-9
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17.6
(a) so and .
, so
17-10
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17.7
(a) so so
17-11
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(b) Note that R2 ( x1 ) and R3 ( x1, x2 ) do not depend directly on c1.
Thus changes in do not have any effect on the strategies of players 2 and 3.
17-12
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17.8
In the second stage,
17-13
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17.9
In the second stage,
17-14
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17.10
In the second stage, if
this is a prisoners' dilemma and the subgame equilibrium is H,H with payoffs 1,1.
If
If
, H,H
and
, L,L.
17-15
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17.11
(a) (S,E) and (E,S) are pure strategy equilibria.
(b) Player 1 observes both player 1's and player 2's first-round decisions.
Player 1's second-round decision can be contingent on both first-round decisions.
A strategy for player 1 is a first-round decision followed by a contingent second-round
decision:
Player 2's first-round choice
first-round E S
Player 1's E E E
strategies E S E
E E S
E S S
S E E
S S E
S E S
S S S
Strategy combinations that are subgame perfect and yield positive payoffs for both players
are those in which one player enters in the first round and stays out in the second round,
while the other player stays out in the first round and enters in the second round. Some
examples (there are others) are
Player 1 Player 2
E S S S E E
E E S S E E
E E S S E S
17-16
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17.12
From equation (17.29), the critical value of with the shorter time lag is .
17-17
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17.13
(a)
by symmetry,
(b)
by symmetry,
(d)
17-18
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(e)
17-19
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18.1
At t = 2, y accepts if
.
At t = 1, x accepts if
.
At t = 0, y accepts if
.
So the equilibrium is
18-1
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18.2
At t = 1, x accepts if
.
At t = 0, y accepts if
.
So the equilibrium is
Then and .
18-2
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18.3
Second-stage equilibria: if there are two firms,
and .
18-3
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18.4
(a) . In the second stage,
18-4
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(b) so
There is a tariff.
18-5
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18.5
From equation (18.10), with sy = 0 we get
The government of x sets the subsidy to manipulate to values that maximize x's profit.
Thus it plays the role of a leader that is the same as the Stackelberg leadership role.
18-6
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18.6
(a) and
(b)
18-7
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18.7
(a)
(b)
(c)
The tariff hurts consumers but transfers money from foreign profits to domestic government
revenue. As n increases the market becomes more competitive, foreign firms earn less profit,
and there is less of an incentive (given the harm to consumers) to tax imports.
18-8
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18.8
18-9
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(b)
18-10
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18.9
The sequential game equilibrium is the same as the simultaneous game equilibrium of
Chapter 16.
18-11
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18.10
(i) Firm 2's choice: Suppose firm 2 enters. Its profit is
.
Define
.
(a) If entry is to occur, firm 1's best output choice is the Stackelberg leader output (same
as the monopoly output)
.
Note, however, that if the fixed cost for firm 2 is large enough, then the best response
18-12
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(b) Firm 1 can also choose to produce ^q (assuming entry would occur if q1 = q1L )
(c) Firm 1's decision (assuming entry would occur when q1 = q1L = a / 2 ):
(the positive root is discarded because for f that large, firm 2 would not
18-13
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(iii) Equilibrium:
Case I:
firm 1 chooses
Case II:
firm 1 chooses
Case III:
18-14
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18.11
Second Stage Solution:
so that the leader firm’s output does not depend on the number of followers
Substituting the output solution into the leader’s profit function gives:
18-15
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18.12
(a)
Both firms earn higher profits in the sequential game, but the profit improvement is larger for
firm 2 (the follower)
18-16
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18.13
The cooperative equilibrium is
(a)
18-17
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(b) so
Thus
Since
,
18-18
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(c) If
If
18-19
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18.14
(a) See problem 16.7 for explanation. Let the market demand be Q = Q (P)
so and .
The trigger strategy requires both firms to cooperate; the defection strategy for each firm
is to charge and sell the entire market quantity, .
18-20
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So the trigger strategy works for
This range exists for some but not all values of and demand and cost functions.
If the range exists then the upper limit is unaffected by changes in c, but the lower limit
increases with c, since
.
The level of s needed to satisfy the requirement that firm 1 cooperates is increasing in c.
This is because when c increases, the Nash equilibrium is more profitable for firm 1.
18-21
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18.15
(b) , .
The trigger strategy works when , the number of possible defection periods, is
sufficiently low.
18-22
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A.1
(a)
(b)
(c)
(d)
(e)
A-1
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(f)
(g)
(h)
(i)
(j)
A-2
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(k)
(l)
A-3
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A.2
(a)
(b)
(c)
A-4
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(d)
(e)
A-5
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(f)
(g)
A-6
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(h)
A-7
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A.3
(a)
so is convex
(b)
so is concave
(c)
so is concave
(d)
so is convex
(e)
(f)
so is convex
A-8
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A.4
(a)
(b)
(c)
(d)
(e)
A-9
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A.5
(a)
(b)
(c)
(d)
(e)
A-10
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A.6
(a)
(b)
(c)
(d)
(e)
A-11
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