Mathematical Economics Jeffrey Baldani James Bradfield Soluções PDF

Instructor’s Manual on Disk
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.
Produced in the United States
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
Remaining chapters are on subsequent disks.

2.1
From the text, the solutions to the four cases are:
and
(a)
so when decreases, all solutions except decrease.
(b)
so when decreases, and decrease while the others do not change.
2-1
Harcourt Brace & Company items and derived items copyright © 1996 by Harcourt Brace & Company.
2.2
(a) α is exogenous: its value is not determined within the model.
α is the relative weight put on the goal of income maximization as opposed to rent
maximization.
(b)
(c)
When the solution for rent maximization.
When the solution for income maximization.
2-2
2.3
with K fixed
(a)
From FOC,
(b)
2-3
2.4
(a)
For
(b)
(i) so
(ii)
2-4
2.5
(a)
which holds when
(b)
2-5
2.6
Yes, these answers are the same.
2-6
2.7
(a)
(b)
(c)
(d)
(e)
The first-order condition for choosing t to maximize T is
which is cubic in t, with no easy solution.
2-7
2.8
2-8
2.9
(a)
by symmetry
(b)
2-9
2.10
(a) Solutions from text:
equation (2.70):
equation (2.71):
equation (2.72):
(b) equilibrium n is when
so
Substituting into solutions for
2-10
Note also that
(c)
The first-order condition for choosing t to maximize T is
2-11
2.11
(a) From the text,
and
But in this example, c = 0.
(b)
which is the monopoly price.
2-12
2.12
(equation (2.84))
2-13
2.13
(a)
g > 0 is sufficient for to be positive and finite.
(b) , which is smaller than the usual multiplier,
(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.
So if the target level is greater than equilibrium GDP,
and a higher value of g will make equilibrium GDP higher.
But if the target level of GDP is lower than equilibrium GDP,
and a higher value of g will make equilibrium GDP lower.
Either way, a higher value of g will move equilibrium GDP closer to the target level.
2-14
3.1
(a)
(b) ( 1 x 3 ) row vectors are :
( 2 x 1 ) column vectors are :
3-1
3.2
(a)
(b)
(c)
3-2
3.3
(a)
(b)
(c)
3-3
3.4
(a)
(b) BA is not defined. Since A is a 4x2 matrix and B is a 2x1 vector, the vector products we
would need to calculate to multiply B by A are not defined.
3-4
3.5
In matrix form, the given system of equations is:
3-5
3.6
Similarly,
3-6
3.7
3-7
3.8
(a)
(b)
3-8
3.9
(a)
3-9
3.10
The cofactor matrix for matrix A is :
Now,
Similarly,
Now,
(b) From 3.9, | A | = -40. So,
3-10
3.11
The given system of equations can be written as :
Now, the matrix of cofactors is :
We have,
So, solution to the given system of equations is :
x = 3 / 11 , y = 2 / 11, z = - 1 / 11.
3-11
3.12
Using Cramer’s Rule :
Now,
3-12
4.1
Now,
so,
we know,
so,
(1)
We already derived in eq (4-24) that
(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),
and then taking partial derivative with respect to b1, we get,
(d)
Interpretations:
If two goods are substitutes, d12 , d21 will be positive,

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.
First, assume that they are both negative. Then,
for inequality (3) to be true.

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:
.
That is to say that when
Firm 1's average cost will lie below price.
But, when
Firm 2's average cost will lie above price.
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.
The case where:
are both positive is discussed in section 4.4.2.
We can interpret other cases when
can be positive in a similar fashion.
The conditions for
to be positive and the interpretations of those conditions

should be a mirror image of those for
.
4.3
Let’s assume we need a tax of rate t.
Then,
We can get equal quantities by substituting

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)
and we also know, (iii)

In matrix form, equations (i), (ii), and (iii) are:
To solve this system, we use Cramer’s Rule.

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)
The matrix form of these conditions is:
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,
So, from (4.65)
(i)
Similarly,
(ii)
(iii)
So,
a) Now,
So, for a unit upward shift of the inverse demand function, price will change by
Thus, if b = 1, price will go up 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
then Equation (4.66) becomes,
Thus, the system in matrix form is:
Now,
a) By Cramer’s Rule:
(1)
b) The multiplier for autonomous spending:
(2)
c) If budget is balanced,
Now, from (1)
(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, Equation (2) shows that the multiplier is larger.
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.
Similarly, we can interpet the roles of other parameters on C*.
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)
all third derivatives equal 0.
(b)
all third derivatives equal 0.
(c)
(d)
(e)
all second- and third-order cross partial derivatives equal 0

(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
OR
(d) at the
particular values of x and y that are of interest.
OR
(e) at the particular
OR
(f) both exist so

exists as long as
at the particular values of x and y that are of interest.
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
(a) Let . If y =1, then
, 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.
(b) Let . If y =1, then
, 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.
(c) Let . If y =1, then

, or
when evaluated at
.
So the slope of the level curve becomes less negative when y increases.
(d) Let . If y =1, then
, or
when evaluated at
.
(e) Let .
If y = 1, then
, or
when evaluated at
.
(f) Let .
If y = 1, then
, or
when evaluated at
.
5.8
(a)
so homogeneous of degree 2
(b)
(c)
(d)
so homogeneous of degree
(e)
not homogeneous
(f)
to accompany
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 2
( Solutions for Chapters 6 and 7 )
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
so
6.3
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
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
fixed interest rates. This is called accomodating monetary policy.

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
lead to a larger increase in the price level.
the numerator of which equals
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 the increase in AD translates to higher P and less to higher Y.

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
but why the levels of M and P should matter is not clear.

6.7
letting
be such that
dr ,
so or
as G increases, equilibrium Y will increase which should drive P up because of the
upward–sloping AS curve. Accomodating monetary policy strengthens this result.

6.8
so
From the other two equations in the system,
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
purchases increase autonomous demand dollar for dollar.

6.9 From equation (6.10),
6.10
When (the Keynesian model), equation (6.17) implies that
and from equations (6.18) - (6.20),
while
This is the IS-LM model.
When (the Classical model), equation (6.17) implies that becomes
infinitely negative. So from equations (6.18) - (6.20),
;
so when , ; and
so when , .
In the classical model, interest rates and the price level increase sufficiently to choke
off any increase in output.

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
So is larger in absolute value than it used to be, making smaller than
it used to be. As Y starts to increase (and P with it), net exports NX fall, which reduces the
multiplier effect.
: since output doesn't increase by as much, neither does the

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
But from the first-order condition in (6.26),
so
This is an example of the envelope function, discussed in Chapters 13-14.

6.14
so
Differentiating through the FOC with respect to t,
Note that the FOC implies that

6.15
Differentiating equations (6.38) with respect to c,
Using symmetry,
6.16
If
then the FOC for firm i is
Differentiating this with respect to a yields
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
so the first-order condition is
SOC: or
Differentiating through the first-order condition with respect to a,
Combining the equations for the two firms (i = 1, 2) yields

Using symmetry,
as long as
.
6.18
so the first- and second-order conditions for firm i are
Let . Then differentiating through the FOC with respect to a yields
Putting together these equations for the two firms (i = 1,2) yields
If
then
and
If
then
and
If
then
Note that if there is a parallel shift in the demand curve,
so all of those terms fall out of the expressions above.

6.19 From equation (6.51),
From equation (6.45),
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.
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.
6.21
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)
not homogeneous unless
in which case homogeneous of degree 1
(b)
not homogeneous; even if
ln x increases by a factor of , so x increases by a factor of .
(c)
homogeneous of degree 0 if
(d) homogeneous of degree 0.
(e)
homogeneous of degree 0
6.27
so
Now let
The first term in parentheses in the numerator of the expression for dK equals
by the first-order conditions.
Similarly, the third term in parentheses in the numerator of the expression for dK equals
by the first-order conditions.
So dK = 0.
6.28
and
7.1
(a)
SOC: 4 > 0 and so min
(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
7.7
From the definition, a concave function f satisfies the inequality
f(x̄) (1 )f(x̂) f( x̄ (1 )x̂ )
Let g(x)
f(x) . Then
f(x̄) (1 )f(x̂) f(x̄ (1 )x̂ )

or
g(x̄) (1 )g(x̂) g(x̄ (1 )x̂)
so g is convex.
7-19
7.8
Since the functions f and g are concave,
f(x̄) (1 )f(x̂) f( x̄ (1 )x̂ )

g(x̄) (1 )g(x̂) g( x̄ (1 )x̂ )
Adding the equations,
f(x̄) g(x̄) (1 ) f(x̂) g(x̂) f(x̄ (1 )x̂) g(x̄ (1 )x̂ )

or
h(x̄) (1 )h(x̂) h( x̄ (1 ) x̂)
so h is concave.
7-20
7.9
(a)
(b)
(c)
(d)
(e)
7.10
The first-order conditions are
(a)
(b)
(c) From equations (7.52),
to accompany
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 3
( Solutions for Chapters 8 and 9 )
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
of x with respect to y equals .
So and
So
8-1
8.2
(a)
The value of marginal product of each input equals its price.
(b)
by symmetry,
8-2
(c)
diminishing marginal returns to labor
decreasing returns to scale
(d)
8-3
(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.
(f) Since in equilibrium , we can write
8-4
8.3
Letting
since both the numerator and denominator are principal minors of H.
8-5
8.4
(a) the FOC are
For each input, the value of marginal product equals the input price.
(b) The SOC are satisfied:
8-6
(c) If dP=dw=0,
(d) From the FOC ,
Substituting into the FOC
8-7
8.5
(a) the FOC are
(b) The SOC are satisfied:
8-8
(c) Since
.
Note we could get this result by treating the FOC as implicit functions:
If dP=dw=0,
8-9
8.6
. From equations (8.40),
In perfect competition, so
so the SOC are
8-10
8.7
Since
,
If the alternative wage increases, increases by more. They will increase by the
same percentage.
8-11
8.8
.
The unit elasticity result will still be obtained from
so the SOC are
8-12
8.9
8-13
8.10
8-14
8.11
(a) For firm 1,
For firm 2,
(b) From the first-order conditions for firm 1,
so
since de > 0.
8-15
8.12
For firm x,
For firm y,
8-16
(b) Implicitly differentiating the three FOC with respect to c,
8-17
9.1
(a)
(b)
(c)
(d)
9-1
(e)
(f)
(g)
9-2
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
(c)
(d)
9-4
(e)
9-5
(f)
9-6
9.3
9-7
9-8
9-9
9-10
9-11
9-12
9-13
9-14
9.4
9-15
9-16
9-17
9.5
9-18
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
Now letting all exogenous differentials equal zero except for
,
The numerator is not a border-preserving principal minor of , so it cannot be signed.
9-20
to accompany
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 4
( Solutions for Chapter 10 )
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
(a) so
but for this production function,
the SOC of the profit-maximization problem are not satisfied since

:
10-2
(b) so
10-3
but for this production function,
the SOC of the profit-maximization problem are not satisfied since

:
10-4
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
The derivatives of the unconditional demand for labor function can be derived following the
procedure of section 10.3:
10-6
The total differentials of the FOC are
10-7
(c) so
10-8
10-9
(d) so
10-10
10-11
10.2
For the two-input cases, the derivatives of the marginal cost curve come from solving
equation (10.7) for :
10-12
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
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
The same derivatives for the three-input case are similar:
10-15
10-16
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
10-18
10.2 (b) The derivatives for each production function in problem 10.1 are as follows
10-19
10-20
The slope of the marginal cost curve depends on returns to scale.
which cannot be signed without more information about parameter values.
10-21
10.2 (c) The derivatives for each production function in problem 10.1 are as follows
(a)
(b)
but
10-22
10-23
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
(a) but for this production function, the SOC are not satisfied
since
:
(see answer to problem 10.2 (b) for this production function)
is not defined since there is no unique profit-maximizing output level.
(b) but for this production function, the SOC are not satisfied
since
:
10-24
(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
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
(c) . If the SOC are satisfied,
so
This is easiest to show for this production function by solving explicitly for Q*:
10-27
(d) . If the SOC are satisfied,
so
.
The SOC do not hold for all parameter values, though.
10-28
10.2 (g) The derivatives for each production function in problem 10.1 are as follows
(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
10.3
The Hicksian demand derivatives come from the expenditure minimization problem of
Chapter 9:
10-30
The Marshallian demand derivatives come from the utility maximization problem of
Chapter 9:
10-31
(a) so
The Marshallian derivatives in this case are most easily derived by solving explicitly for the
demand functions:
10-32
(b) so
demand functions:
10-33
(c) so
10-34
demand functions:
10-35
(d) so
10-36
10-37
10.4
The Marshallian demand derivatives come from the utility maximization problem of
Chapter 9:
10-38
(a) so
(b) so
10-39
(c) so
10-40
(d) so
10-41
10.5
10-42
10.6
Substitutability or complementarity in production depends on what happens to the demand for

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
10.7
SOC: Border-preserving principal minors of order r of have sign
10-44
10.8
10-45
10.9
10-46
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
10.11
maximize
subject to
which are identical to equations (10.42) if

.
which is the same as equation (10.43).
10-48
10.12
From equations (10.52)
10-49
10-50
10.13
From equations (10.52)
10-51
since from the FOC
so
10-52
10.14
maximize
subject to
10-53
SOC not sufficient to sign numerator
10-54
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,
has to equal 1 + r, so if the marginal utility of C2 increases then

we have to have less C1 to raise
and more C2 to lower

.
10-55
10.16
From equations (10.50),
So
Thus
and .
10-56
10.17
From equation (10.63), the substitution effect is given by . From (10.60),
From the FOC (10.59),
so the substitution effect is
(a) so
10-57
10-58
(b) so
10-59
Now let . Then
Let . Then
10-60
so
and the substitution effect is
(c) so
10-61
10-62
10.18
consumer 1:
consumer 2:
The condition for Pareto efficiency is that
From the FOC,
10-63
10.19
consumer 1:
consumer 2:
The condition for Pareto efficiency is that
From the FOC,
10-64
10.20
for each consumer s:
The condition for Pareto efficiency is that for any two individuals s and r,
. From the FOC,
10-65
to accompany
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 5
( Solutions for Chapter 11, 12, 13 and 14 )
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
so so max not min
11-4
(d)
so check
so so max not min
(e)
so check
so so max not min
11-5
(f)
so check
when
11-6
SOC:
so
(g)
z = 3/2 y = 1/2 x=1
SOC:
so
11-7
11.2
(a)
so check
so so min not max
(b)
SOC: and
(c)
so check
so so min not max
11-8
(d)
so check
when
SOC:
so
11-9
(e) ,
SOC:
so
11-10
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
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
the constraint is slack so the solution to the constrained problem is
11-12
(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
These do indeed satisfy the constraint:
so the solution to the constrained problem is the same as the solution to the unconstrained
problem:
11-13
(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
,
so
11-14
When
so the solution to the constrained problem is
(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
(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
These do indeed satisfy the constraint:
so the solution to the constrained problem is the same as the solution to the unconstrained
problem:
11-16
(f)
11-17
11-18
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
,
so
Since
,
the constraint is slack so the solution to the constrained problem is
11-19
(g)
since all four variables are positive, the solution is
11-20
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
(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
(c)
Since
,
the constraint is slack, so we could solve the problem as an unconstrained problem (see Problem
11.2c), which yields
which does indeed satisfy the constraint. Or we could try setting
and optimizing the Lagrangian

:
Since
,
the constraint is slack, so the solution to the constrained minimization problem is the solution to
the unconstrained problem,
11-23
(d)
11-24
11-25
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
(e)
So
indicating that the constraint is slack. The unconstrained minimum is achieved at
(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
11.5
(a)
so
11-28
(b)
so
11-29
(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
Evaluated at
11-31
11.6
(a)
(b)
11-32
(c)
11-33
12.1
From equation (12.3), x = 0 when
.
(a) so
This is a contradiction, so x cannot equal 0.
(b) so
(c) so and
But if x = 0, This is a contradiction, so x cannot equal 0.
12-1
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 .
Each extra calorie required increases the minimum expenditure by

cents.
12-2
12.3
(a)
(b)
so relaxing the second constraint (adding more testers) would add more to profits.
12-3
12.4
(a) & (b) If both kinds of computers are made,
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
So the firm should make only basic computers.
12-4
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
So the firm should make only upscale computers.
12-5
12.5
12-6
So and the second constraint is not binding. Thus
so B = 0.
12-7
Thus
The solution is for the firm to make only upscale computers.
12-8
12.6
12-8
So and the second constraint is not binding. Thus
12-9
so B = 0.
Thus
The solution is for the firm to make only upscale computers.
12-10
12.7
12-11
12.8
12-12
If the first constraint is not binding and
,
12-13
12.9
From the constraints, it follows that

.
12-14
12.10
The firm will hold no inventories if the first constraint is binding.
12-15
12.11
The firm wants to maximize profits, which equal

.
12-16
(a) If
then
so the first constraint is not binding and

.
If the first constraint is not binding and
,
Since
12-17
(b) The firm would choose to hold no inventories if the first constraint is binding,
that is if
This will happen if
12-18
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
(b) Yes, if the less expensive labor was sufficiently unproductive :

If
12-19
12.13
. If L = 0 then
So, when evaluated at C = I and L = 0,
, or
(a) If
,
so
(b) If
,
so
12-20
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
12-22
12.15
.
If the constraint is binding and both choice variables are positive,
If the consumer is liquidity constrained, S = 0 and

, so
Note that if
the condition for being liquidity constrained is

,
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.
12-23
12.16
so
12-23
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).
So the condition under which the consumer will be liquidity constrained is
or .
12-24
13.1
The demand function is:
The cost function is:
We assume that g < a
If the monopolist wants to maximize profit, then the objective function is:
The optimal value for Q is:
So, the value function for the monopolist is:
13-1
13.2
Here,
Objective function,
13-2
13.3
From 13.1, we have the value function,
Thus, the effect of a shift of the inverse demand function is:
(1)
The effect of a unit decrease in the fixed costs is:
(2)
Equating (1) and (2), we get the condition on parameters:
13-3
13.4
The consumer’s utility function is:
The budget constraint is:
Now,
(1)
(2)
(3)
Multiplying (1) by and (2) by we get:
(4)
13-4
Now, let
Similarly,
So, the value function is:
13-5
13.5
From 13.4, we have,
Similarly,
Now,
So, the marginal utility of income is
(1)
Similarly, (2)
The marginal effects of the prices and on utility are given by equations (1) and (2).
13-6
13.6
The consumer’s utility function is:

Now,
(1)
(2 )
(3)
Solving (1) and (2) we get:
Now substituting this value of into eq (3), we get,
13-7
13-8
(b) From equation (1), we have,
Now,
So, the marginal utility of income is 10.
Another way of looking at marginal utility of income is,
The analysis for are similar.
13-9
13.7
(a) The utility function is:
Now,
13-10
Now, from (3),
For an interior solution, we must have:
So, we have:
The second condition is already incorporated in the solution of .
13-11
For an interior solution of
we must have,
So,
We have already assumed the second condition.

Using the values,
we get from equation (2),
and from eq. (1) we get,
So, for interior solutions of we must have:
13-12
(b) If , then the value function would be:
Now,
where
13-13
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:
where is the Lagrange multiplier.
From (1) and (2) we get,
Now, substituting this value of yPy in eq. (3) , we obtain,
(a1)
Similarly, solving for y gives us:
Now, the value function, V = ax*y* + by*.

By substituting values of x* and y* from eqs. (a1) & (a2) and simplifying the expression, we
get,
14-1
From eq. (1), we get,
Now, we turn to the expenditure minimization problem. The first order conditions for this
problem are :
where µ is the Lagrange multiplier. From (4) and (5) we get,
Substituting this value of ax into eq. (6),
Similarly, solving for x gives us :
14-2
Now, let’s test the three duality conditions.
The first duality condition requires xo ( U* ) = x* ( M ) and yo ( U* ) = y* ( M ).
Here,
Similarly, we can show that yo ( U* ) = y* ( M ).
The second duality condition requires . Here,
Thus, the second duality property is satisfied.
The third duality condition requires µo = 1 / *

. Here,
Thus, all three duality properties are satisfied.
14-3
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
14.3
From definition (14.30), Roy’s identity for good x is :
From Q.1, V = ( aM + bPx )2 / 4aPxPy . So,
Now,
Similarly, for good y, Roy’s identity is:
14-5
14.4
From eq. (14.35), Shepard’s Lemma states that for the consumer in this problem :
From Q.1, we know that
Similarly, it can be shown that ( ∂E / ∂Py ) = yo and ( ∂E / ∂Uo ) = µo .
Thus, Shepard’s Lemma is demonstrated for the consumer in question 14.3.
14-6
14.5
From eq. (14.43), the Slutsky equation for the consumer in this problem is :
From Q.1, eq. (a1), we have,
From Q.1, eq. (b2), we have,
Using eqs. (2) and (3),
Now,
14-7
Substituting this value back into (4), we obtain,
Thus, the Slutsky equation has been demonstrated for the consumer in problem 14.1.
14-8
14.6
Part a.
Given is : U (x, y) = Ax x where A, , > 0.
The Lagrangian for this problem is :
The first order conditions are :
From eqs. (1) and (2), we get,
Substituting this value of y into eq. (3), we get,
14-9
From (4),
So, the consumer’s value function,
So, the optimal entree fee T* is the solution to the equation
where P* is the optimal price and M is consumer’s income.
14-10
Part b.
Given is : U (x, y) = axy + by where a, b > 0.
The Lagrangian for this problem is :
The first order conditions are :
From eqs. (1) and (2), we get,
Substituting this value of Px into (3), we get,
M - T - ((ay - bp) / a) - y = 0
aM - aT - ay - bP - ay = 0
2ay = bP + aM - aT
y* = (aM - aT + bP) / 2a
Similarly,
x* = (aM - aT - bP) / 2aP
14-11
So, the consumer’s value function is
So, the optimal entree fee T* is the solution to
where P* is the optimal price and M is the consumer's income.
14-12
to accompany
by
Jeffery Baldani
James Bradfield
Robert Turner
Disk 6
( Solutions for Chapter 15, 16, 17, 18 and Appendix )
ISBN: 0-03-011578-7
Table of Contents
Chapter 15 Chapter 17 Chapter 18

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).
15-1
15.2
(a) (T,L) and (B,R) are Nash equilibria:
L R
T 4,4 2,3
B 1,3 13,9
(b) (B,C) is a Nash equilibrium (this is the same problem as 15.1(b) ):
L C R
T 3,7 2,8 3,4
M 4,3 3,9 4,2
B 5,4 6,8 3,1
(c) (T,L), (T,C), and (B,R) are all Nash equilibria:
L C R
T 8,8 9,8 3,4
M 4,9 3,7 1,2
B 5,4 3,8 6,8
(d) (M,R) and (B,L) are Nash equilibria:
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
15.3
(a) There are two kinds of Nash equilibria: in one,
In the other,
Proof:
Given that
If
,
then
.
Let
so both players have an incentive to increase their claims.
If
then
.
Let
so both players have an incentive to reduce their claims.
(b) There are two kinds of Nash equilibria: in one, every player i has
.
In the other, the sum of all claims equals 1.

The proof is the same as for part a.
15-3
15.4
(a)
so the best response function is
except that
is required.
So
15-4
(b)
15-5
(c) Assuming interior solutions,
15-6
15.5
15-7
15.6
(a)
so
(b)
(c)
15-8
15.7
From the text, if the payoff matrix is
then the mixed-strategy Nash equilibrium is
(a) (T,L) and (B,R) are pure strategy Nash equilibria.
The mixed-strategy Nash equilibrium is
(b) (B,R) is always a pure strategy Nash equilibrium.
If
then (T,L) is also a pure strategy Nash equilibrium.
The mixed strategy Nash equilibrium is
as long as X < 5. (If X > 5 then P* is negative or > 1.)
(c) (T,R) and (B,L) are pure strategy Nash equilibria.
The mixed-strategy Nash equilibrium is
15-9
16.1
(E,S) and (S,E) are pure strategy Nash equilibria.
16-1
16.2
(a)
(b)
16-2
16.3
(This is the same as problem 8.12)
For firm x,
For firm y,
16-3
(b) Implicitly differentiating the three FOC with respect to c,
16-4
16.4
(This is the same as problem 15.5)
16-5
16.5
by symmetry,
16-6
16.6
(a)
(b)
16-7
16.7
(a)
can never be a Nash equilibrium since at least one firm could earn greater profit by
cutting price.
For any
,
firm 2 has no incentive to change,
but firm 1 always has an incentive to increase price by an additional
The (approximate) Nash equilibrium is

and
since firm 1 could at best get an infinitesimal improvement in profit.
(b) If prices are measured in pennies, the Nash equilibria are any prices for which
and .
But all prices
are weakly dominated.
So if we eliminate those, the remaining equilibrium is

and .
16-8
16.8
The solutions for prices and quantities in general are (note that < 1 and the problem is
symmetric)
(a)
16-9
(b)
(c)
16-10
16.9
A strategy consists of two simultaneous elements: an entry decision and a price.
Let demand be
Q = Q(P) where .
_
Define P
as the price such that a monopolist would break even:
_
^
Define P > P
as the price at which 2 duopolists would break even:
There are two possible equilibria:

^
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.
Thus there is no pure strategy Nash equilibrium for this game.
16-11
16.10
.
By symmetry, , so
16-12
16-13
16.11
.
To get the Nash equilibrium, solve the FOC

.
Let be the Nash equilibrium and

.
Then
.
To get the social optimum, maximize
by solving the FOC

.
^
Let X by the social optimum, so
16-14
Proof (by contradiction) that
Suppose that
.
Then
which is a contradiction.
So
.
16-15
16.12
so the Nash equilibrium comes from
: .
Note that the SOC requires a < 1.
The social optimum comes from maximizing
so
.
The Nash equilibrium only requires that
Any distribution (not necessarily symmetric) of the firms' outputs that satisfies
is a Nash equilibrium.
15-16
16.13
(a) Let be the location for seller i. For player 1 the payoff function is:
where qi depends on x1 and x2
Specifically,
The Nash equilibrium is
Proof that there is no incentive to change strategy:
15-17
(b) Let the three vendors' location choices be x1 , x2 , and x3
There are three possible forms for the Nash equilibrium:
(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
will yield a payoff
so there are no Nash equilibria of this form.
(ii) If
then
yields a higher Π1
If
then
yields a higher Π2
15-18
If
the only possible equilibrium for vendor 1 is
But if
yields a higher Π2
So there are no Nash equilibria of this form.
(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
,
but then player 2 has an incentive to change since either
So there are no Nash equilibria of this form.
15-19
16.14
Let . The demand equations are
(a)
(b) Firm x faces the constraint that
The Lagrangian for firm x is
with FOC
15-20
The FOC for firm y's unconstrained profit-maximization problem is
(c) In matrix form, the FOC are
15-21
Since
.
(d) Since dy = - dx, dn = 0.
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
16.15
(a)
so the response functions are
(b)
15-23
(c)
So .
15-24
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
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.
(ii) U,U,U U,D,U U,U,D U,D,D D,U,U D,D,U D,U,D D,D,D

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
(iii) Subgame perfection requires that player 2 choose D in response to L and U in

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
(b) (i) Strategy sets: Player 1 {L,R}

Player 2 {(U,U), (U,M), (U,D), (D,D), (D,M), (D,U), (M,M), (M,U), (M,D)}
17-2
(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).
(c) (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.
(ii) U,U,U U,D,U U,U,D U,D,D D,U,U D,D,U D,U,D D,D,D

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
17-3
(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).
(d) (i) Strategies for player 2 (responses to L and R) are
Each strategy for player 1 is an initial move followed by a set of responses to each of
player 2's strategies:
Player 1 has 32 total strategies
(ii) U,U D,U D,D U,D

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
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
There are 8 subgame perfect Nash equilibria.
17-5
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).
(d) Set up the following stages to discuss the problem:

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
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
17.4
(a) see Figure 17.6
(b) see Figure 17.7
(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)
(e) The high-demand game matrix is
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
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.
The subgame perfect Nash equilibrium is found by seeing that
is the only subgame perfect choice for player 2, so the best choice by player 1 is
.
17-9
17.6
(a) so and .
(b) the payoffs are
, so
17-10
17.7
(a) so so
17-11
(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
17.8
In the second stage,
so the second-stage solutions are
In the first stage,
17-13
17.9
In the second stage,
In the first stage,
17-14
17.10
In the second stage, if
this is a prisoners' dilemma and the subgame equilibrium is H,H with payoffs 1,1.
If
then it is no longer a prisoners' dilemma, but the equilibrium is still H,H.
If
then the equilibrium is L,L with payoffs 12,12.
In the first stage,

player 2
1,1 1,-2 1,-4

player 1 -2,1 9, 9 9, 7
-4,1 7, 9 7, 7
are both first-stage equilibria.
So the subgame-perfect Nash equilibria are
, H,H
and
, L,L.
17-15
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
17.12
From equation (17.29), the critical value of with the shorter time lag is .
With the two-period lag, we have a higher critical value of :
17-17
17.13
(a)
by symmetry,
(b)
by symmetry,
(c) the trigger strategy is
(d)
17-18
(e)
The trigger strategy is a Nash equilibrium if .
17-19
18.1
At t = 2, y accepts if
.
At t = 1, x accepts if
.
.
So the equilibrium is
18-1
18.2
At t = 1, x accepts if
.
.
So the equilibrium is
In the common discount factor case,

. Let .
Suppose that player x is less "impatient" (discounts less) than player y.
Then and .
The less impatient player earns a higher payoff.
18-2
18.3
Second-stage equilibria: if there are two firms,
if there is one firm, price equals the monopoly price
and .
First-stage equilibrium: Firm 1 enters, firm 2 stays out,
18-3
18.4
(a) . In the second stage,
18-4
(b) so
In the symmetric model, , so
There is a tariff.
18-5
18.5
From equation (18.10), with sy = 0 we get
From equation (18.12), with sy = 0 we get
with this is identical to the Stackelberg leadership solution in equation (18.25).
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
18.6
(a) and
. But in this example, c = 0.
(b)
which is the monopoly price
18-7
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
18.8
so the response function

.
Since
.
18-9
(b)
18-10
18.9
so the response function is

.
The sequential game equilibrium is the same as the simultaneous game equilibrium of
Chapter 16.
18-11
18.10
(i) Firm 2's choice: Suppose firm 2 enters. Its profit is
.
Since q1 is already chosen, the profit-maximizing q2 is derived from
Firm 2's profit, conditional on q1 is
Firm 2 will stay out if
Define
.
(ii) Firm 1's choice:
(a) If entry is to occur, firm 1's best output choice is the Stackelberg leader output (same
as the monopoly output)
.
Then, with entry,

.
Note, however, that if the fixed cost for firm 2 is large enough, then the best response
to is for firm 2 to stay out of the market. This occurs when
18-12
(b) Firm 1 can also choose to produce ^q (assuming entry would occur if q1 = q1L )
in order to keep firm 2 out of the market. Since

,
(c) Firm 1's decision (assuming entry would occur when q1 = q1L = a / 2 ):
Firm 1 will choose ^q and prevent entry by firm 2 if
(the positive root is discarded because for f that large, firm 2 would not
enter when q1 = q1L )
18-13
(iii) Equilibrium:
Case I:
firm 1 chooses
firm 2 enters with
Case II:
firm 1 chooses
firm 2 stays out
Case III:
firm 1 chooses the monopoly output
firm 2 stays out
18-14
18.11
Second Stage Solution:
In the first stage firm 1 maximizes
The first order condition yields:
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:
so that as the number of followers increases, profits decrease.
18-15
18.12
(a)
(b) The simultaneous game has a symmetric equilibrium,

,
Both firms earn higher profits in the sequential game, but the profit improvement is larger for
firm 2 (the follower)
18-16
18.13
The cooperative equilibrium is
The Nash equilibrium is
(a)
18-17
(b) so
Thus
Since
,
a low r means a high .
18-18
(c) If
If
When n reaches a critical level, firms defect to the Nash equilibrium.
18-19
18.14
(a) See problem 16.7 for explanation. Let the market demand be Q = Q (P)
Then the Nash equilibrium is
(b) The demand equation gives
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, .
The trigger strategy works for firm 2 if

.
The trigger strategy works for firm 1 if

or
18-20
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
18.15
(a) is the Nash equilibrium.

.
(b) , .
The trigger strategy works when , the number of possible defection periods, is
sufficiently low.
(Since 0 < δ < 1, δτ gets larger when is lower.)
18-22
A.1
(a)
(b)
(c)
(d)
(e)
A-1
(f)
(g)
(h)
(i)
(j)
A-2
(k)
(l)
A-3
A.2
(a)
(b)
(c)
A-4
(d)
(e)
A-5
(f)
(g)
A-6
(h)
A-7
A.3
(a)
so is convex
(b)
so is concave
(c)
so is concave
(d)
so is convex
(e)
so is convex if a > 1; and concave if a < 1
(f)
so is convex
A-8
A.4
(a)
(b)
(c)
(d)
(e)
A-9
A.5
(a)
(b)
(c)
(d)
(e)
A-10
A.6
(a)
(b)
(c)
(d)
(e)
A-11

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Instructor’s Manual on Disk

Produced in the United States

Remaining chapters are on subsequent disks.

so when decreases, all solutions except decrease.

so when decreases, and decrease while the others do not change.

(a) α is exogenous: its value is not determined within the model.

When the solution for rent maximization.

When the solution for income maximization.

which holds when

Yes, these answers are the same.

The first-order condition for choosing t to maximize T is

which is cubic in t, with no easy solution.

(b) equilibrium n is when

Substituting into solutions for

The first-order condition for choosing t to maximize T is

But in this example, c = 0.

which is the monopoly price.

g > 0 is sufficient for to be positive and finite.

(b) , which is smaller than the usual multiplier,

So if the target level is greater than equilibrium GDP,

and a higher value of g will make equilibrium GDP higher.

But if the target level of GDP is lower than equilibrium GDP,

and a higher value of g will make equilibrium GDP lower.

(b) ( 1 x 3 ) row vectors are :

( 2 x 1 ) column vectors are :

would need to calculate to multiply B by A are not defined.

(b) From 3.9, | A | = -40. So,

Now, the matrix of cofactors is :

So, solution to the given system of equations is :

We already derived in eq (4-24) that

and then taking partial derivative with respect to b1, we get,

If two goods are substitutes, d12 , d21 will be positive,

First, assume that they are both negative. Then,

for inequality (3) to be true.

That is to say that when

Firm 1's average cost will lie below price.

Firm 2's average cost will lie above price.

The case where:

are both positive is discussed in section 4.4.2.

We can interpret other cases when

can be positive in a similar fashion.

The conditions for

to be positive and the interpretations of those conditions

We can get equal quantities by substituting

and we also know, (iii)

To solve this system, we use Cramer’s Rule.

The matrix form of these conditions is:

So, from (4.65)

Thus, if b = 1, price will go up by

then Equation (4.66) becomes,

Thus, the system in matrix form is:

b) The multiplier for autonomous spending:

Now, from (1)

Similarly, Equation (2) shows that the multiplier is larger.

Similarly, we can interpet the roles of other parameters on C*.

all third derivatives equal 0.

all third derivatives equal 0.

all second- and third-order cross partial derivatives equal 0

(f) both exist so

at the particular values of x and y that are of interest.

(a) Let . If y =1, then

(b) Let . If y =1, then

(c) Let . If y =1, then

f(x̄) (1 )f(x̂) f( x̄ (1 )x̂ )

f(x̄) (1 )f(x̂) f(x̄ (1 )x̂ )

f(x̄) (1 )f(x̂) f( x̄ (1 )x̂ )

f(x̄) g(x̄) (1 ) f(x̂) g(x̂) f(x̄ (1 )x̂) g(x̄ (1 )x̂ )