SOLUTIONS MANUAL
Intermediate Microeconomics with Calculus: A Modern Approach: Media Update
HAL R VARIAN
First Edition
, Chapter 1 1
Chapter 1
The Market
This chapter was written so I would have something to talk about on
the first day of class. I wanted to give students an idea of what
economics was all about, and what my lectures would be like, and yet
not have anything that was really critical for the course. (At Michigan,
students are still shopping around on the first day, and a good
number of them won’t necessarily be at the lecture.)
I chose to discuss a housing market since it gives a way to describe a
number of economic ideas in very simple language and gives a good
guide to what lies ahead. In this chapter I was deliberately looking for
surprising results—analytic insights that wouldn’t arise from “just
thinking” about a problem. The two most surprising results that I
presented are the condominium example and the tax example in
Section 1.6. It is worth emphasizing in class just why these results are
true, and how they illustrate the power of economic modeling.
It also makes sense to describe their limitations. Suppose that every
con- dominium conversion involved knocking out the walls and creating
two apart- ments. Then what would happen to the price of apartments?
Suppose that the condominiums attracted suburbanites who wouldn’t
otherwise consider renting an apartment. In each of these cases, the
price of remaining apartments would rise when condominium
conversion took place.
The point of a simple economic model of the sort considered here is
to focus our thoughts on what the relevant effects are, not to come
to a once-and-for-all conclusion about the urban housing market.
The real insight that is offered by these examples is that you have to
consider both the supply and the demand side of the apartment
market when you analyze the impact of this particular policy.
The only concept that the students seem to have trouble with in
this chapter is the idea of Pareto efficiency. I usually talk about the
idea a little more than is in the book and rephrase it a few times.
But then I tell them not to worry about it too much, since we’ll look
at it in great detail later in the course.
The workbook problems here are pretty straightforward. The biggest
problem is getting the students to draw the true (discontinuous)
demand curve, as in Figure 1.1, rather than just to sketch in a
downward-sloping curve as in Figure
1.2. This is a good time to emphasize to the students that when they
are given numbers describing a curve, they have to use the numbers—
they can’t just sketch in any old shape.
,2 Chapter Highlights
The Market
A. Example of an economic model — the market for apartments
1. models are simplifications of reality
2. for example, assume all apartments are identical
3. some are close to the university, others are far away
4. price of outer-ring apartments is exogenous — determined
outside the model
5. price of inner-ring apartments is endogenous — determined
within the model
B. Two principles of economics
1. optimization principle — people choose actions that are in their interest
2. equilibrium principle — people’s actions must eventually be
consistent with each other
C. Constructing the demand curve
1. line up the people by willingness-to-pay. See Figure 1.1.
2. for large numbers of people, this is essentially a smooth curve as
in Figure 1.2.
D. Supply curve
1. depends on time frame
2. but we’ll look at the short run — when supply of apartments is fixed.
E. Equilibrium
1. when demand equals supply
2. price that clears the market
F. Comparative statics
1. how does equilibrium adjust when economic conditions change?
2. “comparative” — compare two equilibria
3. “statics” — only look at equilibria, not at adjustment
4. example — increase in supply lowers price; see Figure 1.5.
5. example — create condos which are purchased by renters; no
effect on price; see Figure 1.6.
G. Other ways to allocate apartments
1. discriminating monopolist
2. ordinary monopolist
3. rent control
H. Comparing different institutions
1. need a criterion to compare how efficient these different allocation
methods are.
2. an allocation is Pareto efficient if there is no way to make some
group of people better off without making someone else worse off.
3. if something is not Pareto efficient, then there is some way to make some
people better off without making someone else worse off.
4. if something is not Pareto efficient, then there is some kind of
“waste” in the system.
I. Checking efficiency of different methods
1. free market — efficient
2. discriminating monopolist — efficient
3. ordinary monopolist — not efficient
4. rent control — not efficient
J. Equilibrium in long run
1. supply will change
2. can examine efficiency in this context as well
, Chapter 1 3
Chapter 2
Budget Constraint
Most of the material here is pretty straightforward. Drive home
the formula for the slope of the budget line, emphasizing the
derivation on page 23. Try some different notation to make sure
that they see the idea of the budget line, and don’t just memorize
the formulas. In the workbook, we use a number of different choices
of notation for precisely this reason. It is also worth pointing out
that the slope of a line depends on the (arbitrary) choice of which
variable is plotted on the vertical axis. It is surprising how often
confusion arises on this point.
Students sometimes have problems with the idea of a numeraire
good. They understand the algebra, but they don’t understand when it
would be used. One nice example is in foreign currency exchange. If
you have English pounds and American dollars, then you can measure
the total wealth that you have in either dollars or pounds by choosing
one or the other of the two goods as numeraire.
In the workbook, students sometimes get thrown in exercises
where one of the goods has a negative price, so the budget line has a
positive slope. This comes from trying to memorize formulas and
figures rather than thinking about the problem. This is a good exercise
to go over in order to warn students about the dangers of rote learning!
Budget Constraint
A. Consumer theory: consumers choose the best bundles of goods
they can afford.
1. this is virtually the entire theory in a nutshell
2. but this theory has many surprising consequences
B. Two parts to theory
1. “can afford” — budget constraint
2. “best” — according to consumers’ preferences
Intermediate Microeconomics with Calculus: A Modern Approach: Media Update
HAL R VARIAN
First Edition
, Chapter 1 1
Chapter 1
The Market
This chapter was written so I would have something to talk about on
the first day of class. I wanted to give students an idea of what
economics was all about, and what my lectures would be like, and yet
not have anything that was really critical for the course. (At Michigan,
students are still shopping around on the first day, and a good
number of them won’t necessarily be at the lecture.)
I chose to discuss a housing market since it gives a way to describe a
number of economic ideas in very simple language and gives a good
guide to what lies ahead. In this chapter I was deliberately looking for
surprising results—analytic insights that wouldn’t arise from “just
thinking” about a problem. The two most surprising results that I
presented are the condominium example and the tax example in
Section 1.6. It is worth emphasizing in class just why these results are
true, and how they illustrate the power of economic modeling.
It also makes sense to describe their limitations. Suppose that every
con- dominium conversion involved knocking out the walls and creating
two apart- ments. Then what would happen to the price of apartments?
Suppose that the condominiums attracted suburbanites who wouldn’t
otherwise consider renting an apartment. In each of these cases, the
price of remaining apartments would rise when condominium
conversion took place.
The point of a simple economic model of the sort considered here is
to focus our thoughts on what the relevant effects are, not to come
to a once-and-for-all conclusion about the urban housing market.
The real insight that is offered by these examples is that you have to
consider both the supply and the demand side of the apartment
market when you analyze the impact of this particular policy.
The only concept that the students seem to have trouble with in
this chapter is the idea of Pareto efficiency. I usually talk about the
idea a little more than is in the book and rephrase it a few times.
But then I tell them not to worry about it too much, since we’ll look
at it in great detail later in the course.
The workbook problems here are pretty straightforward. The biggest
problem is getting the students to draw the true (discontinuous)
demand curve, as in Figure 1.1, rather than just to sketch in a
downward-sloping curve as in Figure
1.2. This is a good time to emphasize to the students that when they
are given numbers describing a curve, they have to use the numbers—
they can’t just sketch in any old shape.
,2 Chapter Highlights
The Market
A. Example of an economic model — the market for apartments
1. models are simplifications of reality
2. for example, assume all apartments are identical
3. some are close to the university, others are far away
4. price of outer-ring apartments is exogenous — determined
outside the model
5. price of inner-ring apartments is endogenous — determined
within the model
B. Two principles of economics
1. optimization principle — people choose actions that are in their interest
2. equilibrium principle — people’s actions must eventually be
consistent with each other
C. Constructing the demand curve
1. line up the people by willingness-to-pay. See Figure 1.1.
2. for large numbers of people, this is essentially a smooth curve as
in Figure 1.2.
D. Supply curve
1. depends on time frame
2. but we’ll look at the short run — when supply of apartments is fixed.
E. Equilibrium
1. when demand equals supply
2. price that clears the market
F. Comparative statics
1. how does equilibrium adjust when economic conditions change?
2. “comparative” — compare two equilibria
3. “statics” — only look at equilibria, not at adjustment
4. example — increase in supply lowers price; see Figure 1.5.
5. example — create condos which are purchased by renters; no
effect on price; see Figure 1.6.
G. Other ways to allocate apartments
1. discriminating monopolist
2. ordinary monopolist
3. rent control
H. Comparing different institutions
1. need a criterion to compare how efficient these different allocation
methods are.
2. an allocation is Pareto efficient if there is no way to make some
group of people better off without making someone else worse off.
3. if something is not Pareto efficient, then there is some way to make some
people better off without making someone else worse off.
4. if something is not Pareto efficient, then there is some kind of
“waste” in the system.
I. Checking efficiency of different methods
1. free market — efficient
2. discriminating monopolist — efficient
3. ordinary monopolist — not efficient
4. rent control — not efficient
J. Equilibrium in long run
1. supply will change
2. can examine efficiency in this context as well
, Chapter 1 3
Chapter 2
Budget Constraint
Most of the material here is pretty straightforward. Drive home
the formula for the slope of the budget line, emphasizing the
derivation on page 23. Try some different notation to make sure
that they see the idea of the budget line, and don’t just memorize
the formulas. In the workbook, we use a number of different choices
of notation for precisely this reason. It is also worth pointing out
that the slope of a line depends on the (arbitrary) choice of which
variable is plotted on the vertical axis. It is surprising how often
confusion arises on this point.
Students sometimes have problems with the idea of a numeraire
good. They understand the algebra, but they don’t understand when it
would be used. One nice example is in foreign currency exchange. If
you have English pounds and American dollars, then you can measure
the total wealth that you have in either dollars or pounds by choosing
one or the other of the two goods as numeraire.
In the workbook, students sometimes get thrown in exercises
where one of the goods has a negative price, so the budget line has a
positive slope. This comes from trying to memorize formulas and
figures rather than thinking about the problem. This is a good exercise
to go over in order to warn students about the dangers of rote learning!
Budget Constraint
A. Consumer theory: consumers choose the best bundles of goods
they can afford.
1. this is virtually the entire theory in a nutshell
2. but this theory has many surprising consequences
B. Two parts to theory
1. “can afford” — budget constraint
2. “best” — according to consumers’ preferences
