# Microeconomics_4__Besanko

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```Optimization
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D
L E A R N I N G - B Y- D O I N G E X E R C I S E 1 . 4
\ufffdF be reflected by changes in the endogenous variables
\ufffdL and \ufffdW ?
Solution Since the optimal configuration of the
pen is a square, we know that the length and width of
the pen will each be one-fourth of the perimeter, so L \ufffd
F 4 and W \ufffd F 4. Therefore, \ufffdL \ufffd \ufffdF 4 and \ufffdW \ufffd
\ufffdF 4. This comparative statics result tells us, for exam-
ple, that if the farmer is given an extra 4 feet of fence,
the length and the width of the pen will each be in-
creased by one foot.
Similar Problem: 1.20
\ufffd
\ufffd\ufffd\ufffd
c01analyzingeconomicproblems 6/14/10 1:38 PM Page 18
1.3 POSITIVE AND NORMATIVE ANALYSIS 19
families housing vouchers that they can use on the open housing market or by implement-
ing rent controls that prevent landlords from charging any renter more than an amount
controlled by law. Or, if government finds it desirable to reduce pollution, should it intro-
duce taxes on emissions or strictly limit the emissions from factories and automobiles?
These examples illustrate that it is important to do positive analysis before nor-
mative analysis. A policy maker may want to ask the normative question, \u201cShould we im-
plement a program of rent controls or a program of housing vouchers?\u201d To understand
the options fully, the policy maker will first need to do positive analysis to understand
what will happen if rent controls are imposed and to learn about the consequences of
housing vouchers. Positive analysis will tell us who is affected by each policy, and how.
Microeconomics can help policy makers understand and compare the impacts of
alternative policies on consumers and producers. It can therefore help sharpen debates
and lead to more enlightened public policy.
Card and Krueger found that the increase in New
Jersey\u2019s minimum wage did not decrease employ-
ment. Though provocative\u2014Card and Krueger\u2019s
study presents a finding that is at odds with the
implications of the analysis of the minimum wage
usually presented in microeconomics textbooks13\u2014it
is nevertheless an example of a positive analysis. Its
purpose was to answer an explanatory question:
What happened to employment when the minimum
wage in a state increased?
By contrast, consider a piece written in 2004 by
the economist Steven Landsburg that makes a force-
ful case against the minimum wage:14
In fact, the minimum wage is very good for unskilled
workers. It transfers income to them. And therein
lies the right argument against the minimum wage.
Ordinarily, when we decide to transfer income to
some group or another\u2014whether it be the working
poor, the unemployed, the victims of a flood, or the
stockholders of American Airlines\u2014we pay for the
transfer out of general tax revenue. That has two
advantages: It spreads the burden across all taxpay-
ers, and it makes politicians accountable for their
actions. It\u2019s easy to look up exactly how much the
government gave American, and it\u2019s easy to look up
exactly which senators voted for it.
Over 100 countries around the world, including the
United States, set a minimum wage. (In 2009, the U.S.
minimum wage was \$7.25 per hour.) The minimum
wage has been extensively studied and debated by
economists, and economists differ in their views about
it. For example, a 2006 survey by Robert Whaples of
210 economists belonging to the American Economic
Association found that nearly 47 percent of the econ-
omists surveyed believed that the federal minimum
wage in the United States should be eliminated, while
nearly 38 percent believed that the minimum wage
should be increased.11
Perhaps not surprisingly, one can find examples
of both positive analyses and normative analyses of
the minimum wage. Consider, for example, David
Card and Alan Krueger\u2019s study of the impact on em-
ployment resulting from an increase in New Jersey\u2019s
minimum wage in the early 1990s.12 Contrasting
changes in employment in fast-food restaurants in
New Jersey with changes in employment in fast-food
restaurants in an adjacent state (Pennsylvania) in
which there was no increase in the minimum wage,
A P P L I C A T I O N 1.3
Positive and Normative Analyses
of the Minimum Wage
11Robert Whaples, \u201cDo Economists Agree on Anything? Yes!\u201d Economist\u2019s Voice 3, no. 9 (November 2006),
http://www.bepress.com/ev/vol3/iss9/art1 (accessed September 1, 2009).
12David Card and Alan Krueger, \u201cMiniumum Wages and Employment: A Case Study of the Fast Food
Industry in New Jersey and Pennsylvania, American Economic Review, 84, no. 4 (September 1994): 772\u2013793.
13Including this one! See Section 10.6.
14Steven Landsburg, \u201cThe Sin of Wages: The Real Reason to Oppose the Minimum Wage,\u201d Slate ( July
9, 2004), http://slate.msn.com/id/2103486/ (accessed September 1, 2009).
c01analyzingeconomicproblems 6/14/10 1:38 PM Page 19
20 CHAPTER 1 ANALYZING ECONOMIC PROBLEMS
come to low-wage workers? Note that Landsburg\u2019s
piece involves two important value judgments: First,
it is generally better for the burden of income redis-
tribution to be borne by a larger group of the citi-
zenry than by a smaller group. Second, more trans-
parent policies for redistributing income (like the
Earned Income Tax Credit) are better than policies
that are less transparent (like the minimum wage)
because it is easier to hold politicians accountable for
more transparent policies.
Examples of both positive analyses and norma-
tive analyses of economic issues abound, though one
generally finds them in different places. Positive
analyses tend to be found in professional academic
journals such as the American Economic Review
(where the Card and Krueger study was published),
Journal of Political Economy, or Econometrica.
Normative analyses are often presented in op-ed
pieces or columns (Landsburg\u2019s article appeared in
the \u201cEveryday Economics\u201d column in Slate), policy-
oriented outlets, such as the Economists\u2019 Voice, or (in-
creasingly these days) blogs, such as the ones written
by economists Paul Krugman, Greg Mankiw, Brad
DeLong, or Gary Becker and Richard Posner.
By contrast, the minimum wage places the en-
tire burden on one small group: the employers of
low-wage workers and, to some extent, their cus-
tomers. Suppose you\u2019re a small entrepreneur with,
say, 10 full-time minimum-wage workers. Then a 50
cent increase in the minimum wage is going to cost
you about \$10,000 a year. That\u2019s no different from a
\$10,000 tax increase. But the politicians who im-
posed the burden get to claim they never raised any-
body\u2019s taxes.
If you want to transfer income to the working
poor, there are fairer and more honest ways to do it.
The Earned Income Tax Credit, for example, accom-
plishes pretty much the same goals as the minimum
wage but without concentrating the burden on a tiny
minority. For that matter, the EITC also does a better
job of helping the people you\u2019d really want to help, as
opposed to, say, middle-class teenagers working sum-
mer jobs. It\u2019s pretty hard to argue that a minimum-
wage increase beats an EITC increase by any criterion.
Landsburg\u2019s article is an example of a normative
analysis. It addresses a prescriptive question: Should
the minimum wage be replaced by other policies
(such as the earned income tax credit) that transfer in-
C H A P T E R S U M M A R Y
\u2022 Economics is the study of the allocation of limited
resources to satisfy unlimited human wants. It is often
described as the science of constrained choice.
\u2022 Microeconomics examines the economic behavior of
individual economic decision units, such as a consumer
or a firm, as well as groups of economic agents, such as
households or industries.
\u2022 Economic studies are often conducted by construct-
ing and analyzing models of a particular problem.
Because the real world is complex, an economic model
represents an abstraction from reality.
\u2022 In analyzing any model, one```