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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

2.1

From the text, the solutions to the four cases are:

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:

and s12 , s21 will be positive,

and d11 , d22 always negative,

and s11 , s22 always positive.

Thus,

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.

One way of (3) being true is to have:

.

But if:

,

then price is less than both marginal and average cost. In that case, the firm will stop operating.

Therefore, such a case is unlikely.

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.

should be a mirror image of those for

.

4.3

Let’s assume we need a tax of rate t.

Then,

in 4.36.

Thus,

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)

In matrix form, equations (i), (ii), and (iii) are:

Now, let’s assume, k = 0.5 Then,

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)

(f)

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

exists as long as

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.

, or

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

6.1

Equation (6.2) gives

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

6.6

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

Since the denominator is positive, an algebraically larger (smaller in absolute value) sensitivity

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

6.7

letting

be such that

dr ,

so or

as G increases, equilibrium Y will increase which should drive P up because of the

6.8

so

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

6.9 From equation (6.10),

6.10

When (the Keynesian model), equation (6.17) implies that

while

;

so when , ; and

so when , .

In the classical model, interest rates and the price level increase sufficiently to choke

6.11

Replacing G with M as the argument of the functions in equations (6.11) and differentiating with

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.

demand for money, so interest rates don't rise as much.

:

since aggregate demand doesn't increase by as much, neither does the price level.

6.13

(equation 6.25) so

so

6.14

so

6.15

Differentiating equations (6.38) with respect to c,

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

Using symmetry,

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

6.19 From equation (6.51),

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

or

g(x̄) (1 )g(x̂) g(x̄ (1 )x̂)

so g is convex.

7-19

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7.8

Since the functions f and g are concave,

g(x̄) (1 )g(x̂) g( x̄ (1 )x̂ )

or

h(x̄) (1 )h(x̂) h( x̄ (1 ) x̂)

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

8.1

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.

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.

purposes only, provided a proper copyright notice appears on the last page of each print-out.

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

10.1

For parts (a) and (b),

the derivatives of the conditional demand for labor are given by equations (10.9) and (10.10):

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

one input when the price of another input changes. These effects are symmetric: if an

increase in the price of input j causes an increase in the demand for input i, then an increase

in the price of input i causes an increase in the demand for input j. This symmetry holds for

both conditional and unconditional input demands. (But it is possible for two inputs to be

substitutes as defined by the effects on conditional input demands and complements as

defined by the effects on unconditional demands.)

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,

we have to have less C1 to raise

.

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.

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.

purposes only, provided a proper copyright notice appears on the last page of each print-out.

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

11.1

(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

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Evaluated at

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11.6

(a)

(b)

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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 .

cents.

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12.3

(a)

(b)

so relaxing the second constraint (adding more testers) would add more to profits.

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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

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12.5

12-6

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So and the second constraint is not binding. Thus

so B = 0.

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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

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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

,

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12.9

.

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12.10

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12.11

.

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(a) If

then

.

If the first constraint is not binding and

,

Since

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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

If

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12.13

. If L = 0 then

, or

(a) If

,

so

(b) If

,

so

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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:

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12-22

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12.15

.

, so

Note that if

,

just as in the text. The higher is , the less likely it is that the consumer will be liquidity

constrained. This makes sense since a higher value of means that the consumer values

second-period consumption more, so would be less likely to borrow from second-period

income in order to finance more first-period consumption.

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12.16

From equation (12.26),

so

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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 .

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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:

Now,

(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,

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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,

Using the values,

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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)

By substituting values of x* and y* from eqs. (a1) & (a2) and simplifying the expression, we

get,

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,

. 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,

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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,

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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.

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14.6

Part a.

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From (4),

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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,

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So, the consumer’s value function is

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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.

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.

purposes only, provided a proper copyright notice appears on the last page of each print-out.

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

15.1 4 17.1 37 18.1 56

15.2 5 17.2 38 – 41 18.2 57

15.3 6 17.3 42 & 43 18.3 58

15.4 7–9 17.4 44 18.4 59 & 60

15.5 10 17.5 45 18.5 61

15.6 11 17.6 46 18.6 62

15.7 12 17.7 47 & 48 18.7 63

17.8 49 18.8 64 & 65

Chapter 16 17.9 50 18.9 66

16.1 13 17.10 51 18.10 67 – 69

16.2 14 17.11 52 18.11 70

16.3 15 & 16 17.12 53 18.12 71

16.4 17 17.13 54 & 55 18.3 72 – 74

16.5 18 18.14 75 & 76

16.6 19 18.15 77

16.7 20

16.8 21 & 22 Appendix

16.9 23 A-1 78 – 80

16.10 24 & 25 A-2 81 – 84

16.11 26 & 27 A-3 85

16.12 28 A-4 86

16.13 29 – 31 A-5 87

16.14 32 – 34 A-6 88

16.15 35 & 36

15.1

(a) Eliminate B, since it is dominated by T, then eliminate L, since it is dominated by R.

The equilibrium is (T,R) and the payoffs are (2,6).

(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).

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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

.

The proof is the same as for part a.

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15.4

(a)

except that

is required.

So

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(b)

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(c) Assuming interior solutions,

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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

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16.1

16-1

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16.2

(a)

(b)

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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,

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16.6

(a)

(b)

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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

,

and

(b) If prices are measured in pennies, the Nash equilibria are any prices for which

and .

and .

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16.8

The solutions for prices and quantities in general are (note that < 1 and the problem is

symmetric)

(a)

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(b)

(c)

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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

^

1. Both enter: This can only be an equilibrium if the equilibrium price P* ≥ P yet if this

were true either firm would have an incentive to change strategy since by cutting price it

could capture the entire market and earn higher profit. Thus there is no equilibrium when

both enter.

_

2. Only one firm enters: (a) If the entering firm charges P > P this isn't a Nash

equilibrium since the other firm would want to enter, charge a slightly lower price, and

_

earn positive profit; (b) If the entering firm charges P the other firm will not enter; but

given that the other firm doesn't enter, the firm that does enter must have an equilibrium

_

price equal to the monopoly price, which is greater than P . This is a contradiction, so

_

P = P is not a Nash equilibrium.

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16.10

.

By symmetry, , so

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16-13

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16.11

.

.

.

Then

.

.

^

Let X by the social optimum, so

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Proof (by contradiction) that

Suppose that

.

Then

which is a contradiction.

So

.

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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.

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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

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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

,

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16.14

Let . The demand equations are

(a)

with FOC

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The FOC for firm y's unconstrained profit-maximization problem is

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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.

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16.15

(a)

(b)

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(c)

So .

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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.

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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.

L 10,4 10,4 10,4 10,4 2,6 2,6 2,6 2,6

C 3,10 3,10 3,10 3,10 3,10 3,10 3,10 3,10

R 10,4 10,4 2,3 2,3 10,4 10,4 2,3 2,3

Nash equilibrium strategies:

C D,U,D

C D,D,D

R U,U,U

R U,D,U

R D,U,U

R D,D,U

response to R. Thus, subgame perfect strategies for player 2 take the form

(D,?,U). The subgame perfect Nash equilibria are

R D,U,U

R D,D,U

Player 2 {(U,U), (U,M), (U,D), (D,D), (D,M), (D,U), (M,M), (M,U), (M,D)}

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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).

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.

L 4,6 4,6 4,6 4,6 4,2 4,2 4,2 4,2

C 0,6 8,5 0,6 8,5 0,6 8,5 0,6 8,5

R 4,3 4,3 5,4 5,4 4,3 4,3 5,4 5,4

Nash equilibrium strategies:

L U,U,U

R U,U,D

R D,U,D

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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:

8,6 6,6 6,6 8,6

8,6 6,6 6,6 3,5

3,5 6,6 6,6 8,6

3,5 6,6 6,6 3,5

9,6 9,6 3,7 3,7

9,6 8,5 3,7 3,7

8,5 9,6 3,7 3,7

8,5 8,5 3,7 3,7

where X stands for (payoff-irrelevant) responses to D moves

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).

Stage 1: player 1 chooses L or R

Stage 2a: player 2 chooses U or D

Stage 2b: player 3 chooses M or S

Stage 3a: player 3 chooses M or S

Stage 3b: player 2 chooses U or D

Stage 4: player 1 chooses

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

player 2

player 1 -2,1 9, 9 9, 7

-4,1 7, 9 7, 7

, 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

. Let .

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

.

Since

.

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, .

.

or

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

Harcourt Brace & Company items and derived items copyright © 1996 by Harcourt Brace & Company.

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