REVIEW QUESTIONSCHAPTER 1
1.What is the difference between microeconomics and macroeconomics?
Micro and macroeconomics are both branches of economics, but have different objects of study. Microeconomics is concerned with the behaviour of individual economic agents(decision makers), such as consumers, workers, firms, managers, households, industries,markets, labour unions or trade associations. In doing so, it provides a framework toanalyse the impact of government actions on the economy and the role of government inthe economy.Macroeconomics, on the other hand, is concerned with how an entire economy performs.It studies other variables, of a more aggregate nature, such as the level of income andemployment, the relation between interest rates and prices, inflation and business cycles.
2.Why is economics often described as the science of constrained choice?
It is believed that human wants are unlimited: all human beings always desire more.However, the resources available to produce the desired good and services are finite –scarce –, so their supply is limited. As a result, human beings are constrained to choosebetween which wants to satisfy, and in doing so, allocate resources to satisfy demand.Since it is economics that deals with the allocation of scarce resources to satisfy unlimitedhuman wants, economics is considered the science of constrained choice.
3.How does the tool of constrained optimization help decision makers makechoices? What roles do the objective function and constraints play in a modelof constrained optimization?
The tool of constrained optimization helps decision makers make choices by taking intoaccount all possible restrictions and limitation on those choices. To do that, it has twocomponents: the constraints (restrictions and limitations) and an objective function.The objective function is the relationship the economic agent wants to either maximise of minimise. It is, in fact, what the agent cares about. So, constrained optimization points outto the relationship to be maximised or minimised, while accounting for possible limitationsand restrictions.
4.Suppose the market for wheat is competitive, with an upward-sloping supply