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# Name: __________________________________

## 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 variables are _________________________________. exogenous variables are: endogenous variables are:

constraint(s)

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## Work through the LBD exercise 1.2 here:

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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 \$0 \$100,000 \$200,000 \$300,000 \$400,000 \$500,000 \$600,000 \$700,000 \$800,000 \$900,000 \$1,000,000 Sales from TV ads 0 4,750 9,000 12,750 16,000 18,750 21,000 22,750 24,000 24,750 25,000 Sales from Radio ads 0 950 1,800 2,550 3,200 3,750 4,200 4,550 4,800 4,950 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.

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

Total Spent \$0 \$100,000 \$200,000 \$300,000 \$400,000 \$500,000 \$600,000 \$700,000 \$800,000 \$900,000 \$1,000,000

Sales from TV ads 0 4,750 9,000 12,750 16,000 18,750 21,000 22,750 24,000 24,750 25,000

Sales from Radio ads 0 950 1,800 2,550 3,200 3,750 4,200 4,550 4,800 4,950 5,000

## Work through the LBD exercise 1.4 here:

1.3 Positive and Normative Analysis Positive Analysis refers to: Normative Analysis refers to: