Solution Manual For Intermediate Microeconomics and Its Application 13e Walter Nicholson, Christophe by digitaldownload87

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

Solution Manual For Intermediate Microeconomics and Its Application 13e Walter Nicholson, Christopher Snyder Chapter 1-18

Chapter 1: Two Basic Economic Models Purpose and Organization of the Chapter This chapter provides an introduction to the book by showing why economists use simplified models. The chapter begins with a few definitions of economics and then turns to a discussion of such models. Development of Marshall's analysis of supply and demand is the main example used here, and this provides a review for students of what they learned in introductory economics. The notion of how shifts in supply or demand curves affect equilibrium prices is highlighted. The chapter also reminds students of the production possibility frontier concept and shows how it illustrates opportunity costs. The chapter concludes with a discussion of how economic models might be verified. A brief description of the distinction between positive and normative analysis is also presented.

Lecture and Discussion Suggestions We have found that a useful way to start the course is with one (or perhaps two) lectures on the historical development of microeconomics together with some current examples. For example, many students find economic applications to the natural world fascinating and some of the economics behind Application 1.1, might be examined. Application 1.6: Economic Confusion provides normative distinction and to tell a few economic jokes (if your supply of such jokes is running low – see Additional Resources). In terms of explicit content, some time should be spent on reminding students about how supply and demand curves work since these concepts underlie most of microeconomics. Especially important is to make sure that students understand that these curves show firms’ and consumers’ reactions to all possible prices. That is, the independent variable is on the vertical axis. Far more on the problems raised by this approach is provided in Chapter 2.

Cengage Supplements The following product-level supplements provide additional information that may help you in preparing your course. They are available in the Instructor Resource Center.  

Test Bank PowerPoint slides

Chapter Objectives The following objectives are addressed in this chapter:

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

01.01 Develop and analyze two basic economic models: 

The Production Possibility Frontier (PPF)



The Supply-Demand Model

01.02 Explain how to use the PPF to break down six basic economic principles. 01.03 Understand how you can apply microeconomics to analyze all types of problems. 01.04 Explain how the interaction of buyers and sellers determines a good’s price. 01.05 Explain different ways in which economists verify theoretical models.

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What's New in This Chapter The following elements are improvements in this chapter from the previous edition: 

Chapter 1 is now a standalone chapter. The mathematical material from what was previously an appendix to the chapter, now forms the basis for Chapter 2.



An extended Application 1.3 examines video streaming and cord-cutting, suggesting the importance of dynamism in the economy.



A new Application 1.4 shows how a simple supply and demand model can explain pricing of eggs during the COVID-19 lockdowns.



A revised set of Review Questions focus more explicitly on the basic two models introduced in the chapter.

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Additional Resources

The most accessible introduction to the history of economics remains Robert Heilbroner’s The Worldly Philosophers (Seventh Edition) Touchstone, 1999. This one-minute video does a nice job of introducing most elements of supply and demand analysis in a cartoon format: https://www.youtube.com/watch?v=720uyg0Dd_M There are many websites featuring economic jokes. A good one is https://upjoke.com/economist-jokes. [return to top]

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

Solutions to End of Chapter Problems Chapter 1 has no end of chapter problems. Problems involving both the production possibility frontier and simple supply and demand curves can be found at the end of Chapter 2.

Chapter 2: Some Useful Math Purpose and Organization of the Chapter Chapter 2 is new to this edition. It draws together the material that was previously in the appendix to chapter 1 and adds a considerable amount of new material to fill out a complete chapter. Many of the concepts here are drawn from a course in algebra. These include concepts of the slope and intercept of a linear graph and some details on the solving of simultaneous equations. Topics that are specifically oriented toward the use of algebra in microeconomics include the importance of defining units for specific economic relationships and how functions with two independent variables can be represented by their contour lines. The chapter concludes with a very brief introduction to some of the statistical problems encountered in estimating microeconomic models using real world data.

Lecture and Discussion Suggestions Lecturing on this material is a good way to turn off most students. Hence, we believe the chapter should be used primarily as a reference, urging students with poorer math preparation to use it as needed. It is likely, however, that all students could benefit from a reminder about how units of measurement affect linear equations and some of the material on contour lines (since these will be encountered in the next chapter. Whether mathematics should play a prominent role in microeconomics is a good topic for discussion. As shown by this text (and by our more advanced one) we are firmly in the camp of stressing the value of mathematics to the subject. But there are a variety of contrary views that might be brought up. Whether economics should be viewed as a ―science‖ or as philosophy is a good place to start. Two videos on the topic are listed below.

Cengage Supplements The following product-level supplements provide additional information that may help you in preparing your course. They are available in the Instructor Resource Center.  

Test Bank PowerPoint Slides

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

Chapter Objectives The following objectives are addressed in this chapter: 02.01 Write and graph an equation of a function of one variable. 02.02

Write and graph an equation of a function of two or more variables.

02.03

Solve systems of simultaneous equations.

02.04

Understand the basics of testing economic models with real world data.

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What's New in This Chapter The most important new material in this chapter includes the following. 

An extended discussion of ―Marshall’s Trap‖ mitigates the confusion caused by Alfred Marshall’s decision to put an independent variable (price) on the vertical axis in graphs.



An update of the text’s simple model of the world oil market incorporates the effects of COVID-19 (Application 2.3). Somewhat surprisingly, the model continues to perform fairly well.



A new Application 2.4 introduces the ―identification problem‖ as it relates to using actual data to derive supply and demand curves. The proposed solution of Working in 1927 remains the key insight.



An entire series of new review questions stresses a variety of algebraic topics.

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Additional Resources Videos from Kahn Academy provide extensive review material on all topics related to algebra and the representation of functions with graphs. Students with poor math preparation should be directed to this excellent source. The Foundation for Economic Education has a nice essay on the possible overuse of mathematics in economics : https://fee.org/articles/the-overuse-of-mathematics-ineconomics/. Several years ago, Dani Rodrik’s website had a very nice discussion of why math is important to economics: https://rodrik.typepad.com/dani_rodriks_weblog/2007/09/why-weuse-math.html. [return to top]

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

Solutions to End of Chapter Problems Students have access to solutions for the odd-numbered problems as well as video problem walkthroughs for problems 3 and 7.

2.1

Yes, the points seem to be on straight lines. For the demand curve: P = 1 Q = –100

Q 100 at P  1, Q  700, so a  8 and Q P 8 or Q  800  100 P 100 Pa

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

For the supply curve, the points also seem to be on a straight line: P 1  Q 200 If P  a  bQ  a 

Q 200

at P = 2, Q = 300, 2 = – a + 1.5, or a = 0.5. Hence the equation is P  0.5  c,d

Q or Q  200 P  100 200

For supply Q = 200P – 100 If P = 0, Q = –100 = 0 (since negative supply is impossible). If P = 6, Q = 1100. For demand Q=800 ‒ 100P When P = 0, Q = 800. When P = 6, Q = 200. Excess Demand at P = 0 is 800. Excess supply at P = 6 is 1,100 – 200 = 900.

2.2

Supply: Q = 200P – 100 Demand: Q = –100P + 800 Supply = Demand: 200P – 100 = –100P + 800 300P = 900 or P = 3 When P = 3, Q = 500.

At P = 2, Demand = 600 and Supply = 300. At P = 4, Demand = 400 and Supply = 700.

New demand is Q = –100P + 1100.

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

Supply = Demand: 200P – 100 = –100P + 1100. 300 P = 1200 P = 4, Q = 700.

Supply is now Q = 200P – 400.

Supply = Demand when QS  QD 200P – 400 = –100P + 800 300P = 1200 P = 4, Q = 400

At P = 3, QS  200, QD  500 ; this is not an equilibrium price. Participants would know this is not an equilibrium price because there would be a shortage of orange juice.

2.3

a. Excess Demand is the following at the various prices

P  1 ED  700  100  600 P  2 ED  600  300  300 P  3 ED  500  500  0 P  4 ED  400  700  300 P  5 ED  300  900  600 The auctioneer found the equilibrium price where ED = 0. b. Here is the information the auctioneer gathers from calling quantities:

Q  300 PS  2 PD  5 Q  500 PS  3 PD  3 Q  700 PS  4 PD  1 So, the auctioneer knows that Q = 500 is an equilibrium.

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

c. Many callout auctions operate this way – though usually quantity supplied is a fixed amount. Many financial markets operate with ―bid‖ and ―asked‖ prices which approximate the procedure in part b. 2.4

The complaint is essentially correct – in many economic models price is the independent variable and quantity is the dependent variable. Marshall originally chose this approach because he found it easier to draw cost curves (an essential element of supply theory) with quantity on the horizontal axis. In that case, quantity can legitimately be treated as the independent variable. a. The restrictions on P are necessary with linear functions to ensure that quantities do not turn negative. b. The following graph has P on the vertical axis. Equilibrium P is found by  P  10  P  2  2 P  12  P  6, Q  4 .

c. The following figure graphs the demand and supply curves with P on the horizontal axis. Solution proceeds as in Part b.

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

Graphed either way, the equations yield the same intersection point.

Both graphs yield the same solution

Reasons for preferring one over the other are not readily apparent in these drawings. As we shall see, however, developing demand and supply curves from their underlying theoretical foundations does provide some rationale for Marshall’s choice.

2.5

The algebraic solution proceeds as follows: a.

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

QD  2 P  20 QS  2 P  4 QD  QS  4 P  24 P  6, QD  QS  8 b.

QD  2 P  24 QD  QS  4 P  28 P  7, QD  QS  10.

2.6

P = 8, Q = 8 (see graph)

T = .01 I

2 2

I = 10, T = 0.01(10) = 1 2

I = 30, T = 0.01(30) = 9

Taxes = $1,000 Taxes = $9,000

I = 50, T = 0.01(50) = 25 Taxes = $25,000 I = 100, T = 100. b.

Average Rate

Marginal Rate

I = 10,000

10%

20%

I = 30,000

30%

60%

I = 50,000

50%

100%

Marginal Tax Rate

10,000

1,000

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

2.7

2.8

10,001

1,000.20

30,000

9,000

30,001

9,000.60

50,000

25,000

50,001

25,001

0.20 0.60 1.00

Both these points lie below the frontier.

This point lies beyond the frontier.

Opportunity cost of 1Y is 2X independent of production levels.

If Y = 0, X = 10 If X = 0, Y = 5

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

X2 Y2   1 is a quarter of an ellipse since both X and Y are positive. 100 25 c.

The opportunity cost depends on the levels of output because the slope of a frontier is not constant.

The opportunity cost of X is the change in Y when one more unit of X is produced. Example: X0 = 3, X1 = 4 When X0 = 3, Y0 =

9½

When X1 = 4, Y1 =

[Y1 – Y0] = 0.187. 0.187 units of Y are "given up" to produce one more unit of X at X = 3. 2.9

X + 4Y = 100 2

If X = Y, then 5X = 100 and X = 20 and Y =

20 .

X = 10, can consume where any X, Y combination such that X + Y = 10.

Since prefers X = Y, will choose X = Y = 5.

The cost of forgone trade is 5 –

20 = 5 – 2

5 = 1.52 units of both X and Y.

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

2.10

This problem provides practice with contour lines. a.

If Y  X  Z the Y = 4 is the same line as ―Y = 2‖ in Figure 1A.5.

If X  8  4Z , Y  X  Z  8Z  4Z 2  4. This has a solution of Z = 1, X = 4.

None of the other points on the Y = 4 contour line obey the linear equation. This is so because the contour line is convex and hits the straight line at only a single tangency.

If X  10  4Z , Y  10Z  4Z 2  4 or 4Z 2  10 Z  4  0 . Using the quadratic formula yields Z  (10  100  64) / 8 or Z  2, 0.5 . Hence the line intersects the contour in two places. These points of intersection are Z = 2, X = 2, and Z = 0.5, X = 8.

Yes, many points on the line X  4Z  10 provide a higher value for Y (any points between the two identified in part d do). The largest value for Y is at the point X = 5, Z = 5/4. In this case Y = 25/4 = 6.25.

As we shall see in Chapter 3, this problem is formally equivalent to utility maximization in which utility is given by U ( X , Z )  X  Z , the price of good X is 1, the price of good Z is 4, and income is either 8 or 10.

Chapter 3: Utility and Choice Purpose and Organization of the Chapter Since this chapter introduces the student to many new concepts, it is one of the more difficult chapters in the text. The central concept of the chapter is the indifference curve and its slope, the Marginal Rate of Substitution (MRS). The MRS formalizes the notion of trade-off and is (in principle) measurable. For those reasons it is superior to an approach to consumer theory involving ―marginal utility.‖ The definition provided for the MRS in this chapter needs to be approached carefully. Here the concept is defined as the Marginal Rate of Substitution of ―X for Y,‖ by which is meant X is being substituted for Y. In graphic terms the individual is moving counterclockwise along an indifference curve and the MRS measures how much Y will be willingly given up if one more X becomes available. The pedagogic convention of always using counterclockwise movements along an indifference curve is helpful because the MRS does indeed diminish for movements in that direction. Students’ primary difficulty with the material in this chapter tends to be confusing the MRS (a slope concept) with the ratio of the amounts of two goods. Unfortunately, that confusion is

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

increased by some examples based on the Cobb-Douglas utility function, which make it appear that the two concepts are interchangeable. To avoid this confusion, some instructors may wish to give further emphasis to the marginal utility definition of MRS, which is presented in footnote 2 of the chapter. This might be followed by greater use of the utility maximization principle (the ―equi-marginal principle‖) from footnote 5. The soft drink-hamburger example that runs throughout the chapter is intended to provide an easy, mildly amusing introduction to the subject for students. In general, the example seems to work well and is, we believe, definitely superior to introducing the concepts through general goods X and Y. Note also that this chapter includes analyses of four specific kinds of goods (useless goods, economic bads, perfect substitutes, and perfect complements). Examining the utility maximizing conditions in these cases (Figures 3.5 and 3.9) should help students to visualize what the conditions mean in cases where the results should be obvious.

Lecture and Discussion Suggestions The challenge in lecturing on this chapter is to avoid mere repetition of the text. One way to do that is to offer a somewhat more mathematical treatment. The use of calculus involved in such a treatment may, however, prove too difficult for students to grasp, especially if it involves introducing the Lagrangian technique. An alternative approach would be to start from one point in the X-Y plane and ask how an indifference curve might look. Proceeding from one point to the next in this way reinforces the concept of the trade-off and (on a more sophisticated level) demonstrates Samuelson’s integrability problems. Once a single indifference curve has been traced out, a second can be constructed to the northeast of the first by using the ―more is better‖ assumption and proceeding with an identical construction. Utility maximization can be approached in the same way by starting at the Y-intercept on the budget constraint and inquiring whether the individual would make various trades along the constraint. Discussions of the chapter material might focus on real world illustrations of both economic and non-economic choices that people make. To approach these, students might be asked to theorize what budget constraint faces people in unusual situations (e.g., what is the cost of shopping for bargains or for wearing seat belts). The instructor can then ask whether there is evidence that individuals respond to changes in the relative costs associated with such activities (that is, do they search more for bargains in high priced items, or are certain types of people less likely to wear seat belts). Application 3.6 Loyalty Programs also offers a number of discussion possibilities that would help to illustrate the actual shape of budget constraints.

Cengage Supplements The following product-level supplements provide additional information that may help you in preparing your course. They are available in the Instructor Resource Center.  

Test Bank PowerPoint Slides

Chapter Objectives The following objectives are addressed in this chapter: 03.01 Develop a theory of choice. How do people make choices or decision?

Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

03.02

Explain how to represent a consumer’s preferences.

03.03

Understand how income and prices constrain a consumer’s choices.

03.04

Determine how consumers maximize utility given their budget constraint and preferences.

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What's New in This Chapter There are relatively few new elements to this chapter. The most important changes from the previous edition are the following. 

More material has been included on neuroscience and economics including a discussion of how findings in this area are used to develop consumer regulations.



An increased set of numerical examples shows how utility-maximization problems are solved.



An explicit color convention is maintained for graphs with indifference curve maps being shown in red and budget constraints in blue. In Chapter 4, the red color continues to be used for demand curves (which are related since they are derived from indifference curve maps).

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Additional Resources The text focuses on the Marginal Rate of Substitution in its discussion of utility maximization. The notion of ―equal marginal utility per dollar spent may be more intuitive for some students. The Kahn Academy video provides an excellent discussion of this approach: https://www.khanacademy.org/economics-finance-domain/apmicroeconomics/basic-economic-concepts/16/v/equalizing-marginal-utility-perdollar-spent. The famous paper by Gary Becker and George Stigler ―De Gustibus Non Est Disputandum‖ (American Economic Review, March 1977) contains a wide-ranging and fascinating discussion of the origins of ―tastes‖ and the relationship of this to utility theory. The Wikipedia entry on the court case of Hamer v. Sidway, https://en.wikipedia.org/wiki/Hamer_v._Sidway , offers a great deal more historical information about this case from Application 3.5.

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Instructor Manual: Nicholson/Snyder, Intermediate Microeconomics, 13e

Solutions to End of Chapter Problems Students have access to solutions for the odd-numbered problems as well as video problem walkthroughs for problems 3 and 7.

3.1

$8.00 = 20 apples can be bought. $0.40/apple

$8.00 = 80 bananas can be bought. $0.10/banana

10 apples cost: 10 apples × $0.40/apple = $4.00, so there is $8.00 – $4.00 = $4.00 left to spend on bananas which means

$4.00 = 40 bananas can be bought. $0.10/banana d.

One less apple frees $0.40 to be spent on bananas, so

$0.40 = 4 more bananas can be bought. $0.10/banana

3.2

$8.00 = $0.40  number of apples + $0.10  number of bananas = 0.40A + 0.10B.

U = 20 = 10B so 400 = 10 B, implying

A B =

5  80 =

400 = 20.

40 = B. c.

U = 20 =

20 B , so 400 = 20 B, implying 20 = B.