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Name: __________________________________ READING & VIDEO
OUTLINE Intermediate MicroeconomicsDr. Sauer
Chapter 1: Analyzing Economic Problems
1.1 Why Study Microeconomics?
1.2 Three Key Analytical Tools
Any model must specify what variables will be
______________________________ and what variablesare
_________________________________.
exogenous variables are:
endogenous variables are:
Tool 1: Constrained OptimizationConstrained optimization is:
Its two main parts areobjective function
constraint(s)
Work through the LBD exercise 1.1 here: [screencast]
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Work through the LBD exercise 1.2 here: [screencast]
Constrained Optimization is important because the
________________ answer to an economic
question is not always correct.
This is a long example to show you why we use constrained
optimization. Slides are posted to walk
you through it.
Example: $1 million advertising budget to allocate between TV
and radio.
Table 1.1: Advertising and New Beer Sales Generated (in barrels
per year)
Total Spent Sales from TV ads Sales from Radioads
$0 0 0
$100,000 4,750 950
$200,000 9,000 1,800
$300,000 12,750 2,550
$400,000 16,000 3,200
$500,000 18,750 3,750$600,000 21,000 4,200
$700,000 22,750 4,550
$800,000 24,000 4,800
$900,000 24,750 4,950
$1,000,000 25,000 5,000
If your goal is to maximize new sales, how should you allocate
the advertising budget?
If you spent $900,000 on TV ads you would generate ___________
new sales from TV and the$100,000 you spend on radio would generate
_____________ new sales for a grand total of___________________ new
sales.
If you spent $800,000 on TV ads you would generate ___________
new sales from TV and the$200,000 you spend on radio would generate
_____________ new sales for a grand total of___________________ new
sales.
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If you spent $700,000 on TV ads you would generate ___________
new sales from TV and the$300,000 you spend on radio would generate
_____________ new sales for a grand total of___________________ new
sales.
Given the above calculations, what is the optimal way to
allocate the advertising budget?
We can arrive at the same answer using marginal analysis.
Calculate the marginal impact of an additional $100,000 of
spending.= change in sales / change in spending
Use marginal analysis to explain the optimal advertising
budget.
______________________________________________________________
end of example ________
Total Spent Sales from TV
ads
Sales from
Radio ads
Marginal
Impact of
TV ads
Marginal
Impact of
radio ads
$0 0 0
$100,000 4,750 950
$200,000 9,000 1,800
$300,000 12,750 2,550
$400,000 16,000 3,200
$500,000 18,750 3,750
$600,000 21,000 4,200$700,000 22,750 4,550
$800,000 24,000 4,800
$900,000 24,750 4,950
$1,000,000 25,000 5,000
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Tool 2: Equilibrium Analysis
Tool 3: Comparative StaticsComparative Statics refers to:
Work through LBD 1.3 on your own if you need review.
Work through the LBD exercise 1.4 here:
1.3 Positive and Normative Analysis
Positive Analysis refers to:
Normative Analysis refers to:
