Besankog&gBraeutigamg– SolutionsgManual
th
gMicroeconomics,g5 gedition
Chapter 1 g
Analyzing Economic Problems
g g
SolutionsgtogReviewgQuestions
1. Whatgisgthegdifferencegbetweengmicroeconomicsgandgmacroeconomics?
Microeconomicsgstudiesgthegeconomicgbehaviorgofgindividualgeconomicgdecisiongmakers,gsuchga
sgagconsumer,gagworker,gagfirm,gorgagmanager.g Macroeconomicsgstudiesghowgangentiregnationalg
economygperforms,gexamininggsuchgtopicsgasgthegaggregateglevelsgofgincomegandgemployment,gt
heglevelsgofginterestgratesgandgprices,gthegrategofginflation,gandgthegnaturegofgbusinessgcycles.
2. Whygisgeconomicsgoftengdescribedgasgthegsciencegofgconstrainedgchoice?
Whilegourgwantsgforggoodsgandgservicesgaregunlimited,gthegresourcesgnecessarygtogproducegthose
ggoodsgandgservices,gsuchgasglabor,gmanagerialgtalent,gcapital,gandgrawgmaterials,gareg“scarce”gb
ecausegtheirgsupplygisglimited.g Thisgscarcitygimpliesgthatgwegaregconstrainedgingthegchoicesgwegc
angmakegaboutgwhichggoodsgandgservicesgtogproduce.g Thus,geconomicsgisgoftengdescribedgasgthe
gsciencegofgconstrainedgchoice.
3. Howgdoesgthegtoolgofgconstrainedgoptimizationghelpgdecisiongmakersgmakegchoices
?gWhatgrolesgdogthegobjectivegfunctiongandgconstraintsgplaygingagmodelgofgconstrainedgop
timization?
Constrainedgoptimizationgallowsgthegdecisiongmakergtogselectgthegbestg(optimal)galternativegwhil
egaccountinggforganygpossibleglimitationsgorgrestrictionsgongthegchoices.g Thegobjectivegfunctiong
representsgthegrelationshipgtogbegmaximizedgorgminimized.g Forgexample,gagfirm’sgprofitgmightgb
egthegobjectivegfunctiongandgallgchoicesgwillgbegevaluatedgingthegprofitgfunctiongtogdeterminegwhi
chgyieldsgtheghighestgprofit.g Thegconstraintsgplaceglimitationsgongthegchoicegthegdecisiongmakerg
cangselectgandgdefinesgthegsetgofgalternativesgfromgwhichgthegbestgwillgbegchosen.
4. Supposegthegmarketgforgwheatgisgcompetitive,gwithgangupward-
slopinggsupplygcurve,gagdownward-
slopinggdemandgcurve,gandgangequilibriumgpricegofg$4.00gpergbushel.gWhygwouldgaghighe
rgpriceg(e.g.,g$5.00gpergbushel)gnotgbegangequilibriumgprice?gWhygwouldgaglowergpriceg(e.g
.,g$2.50gpergbushel)gnotgbegangequilibriumgprice?
Ifgthegpricegingthegmarketgwasgabovegthegequilibriumgprice,gconsumersgwouldgbegwillinggtogpurc
hasegfewergunitsgthangsuppliersgwouldgbegwillinggtogsell,gcreatinggangexcessgsupply.g Asgsupplier
sgrealizegtheygaregnotgsellinggthegunitsgtheyghavegmadegavailable,gsellersgwillgbidgdowngthe
Copyrightg©g2014gJohngWileyg&gSons,gIn Chapterg1g-g1
c.
,Besankog&gBraeutigamg– SolutionsgManual
th
gMicroeconomics,g5 gedition
pricegtogenticegmoregconsumersgtogpurchasegtheirggoodsgorgservices.g Bygdefinition,gequilibriumgi
sgagstategthatgwillgremaingunchangedgasglonggasgexogenousgfactorsgremaingunchanged.g Sincegingt
hisgcasegsuppliersgwillglowergtheirgprice,gthisghighgpricegcannotgbegangequilibrium.
Whengthegpricegisgbelowgthegequilibriumgprice,gconsumersgwillgdemandgmoregunitsgthangsupplier
sghavegmadegavailable.g Thisgexcessgdemandgwillgenticegconsumersgtogbidgupgthegpricesgtogpurch
asegtheglimitedgunitsgavailable.g Sincegthegpricegwillgchange,gitgcannotgbegangequilibrium.
5. Whatgisgthegdifferencegbetweengangexogenousgvariablegandgangendogenousgvariabl
egingangeconomicgmodel?gWouldgitgevergbegusefulgtogconstructgagmodelgthatgcontainedgon
lygexogenousgvariablesg(andgnogendogenousgvariables)?
Exogenousgvariablesgaregtakengasggivengingangeconomicgmodel,gi.e.,gtheygaregdeterminedgbygsom
egprocessgoutsidegthegmodel,gwhilegendogenousgvariablesgaregdeterminedgwithingthegeconomicg
modelgbeinggstudied.
Angeconomicgmodelgthatgcontainedgnogendogenousgvariablesgwouldgnotgbegveryginteresting.g Wit
hgnogendogenousgvariables,gnothinggwouldgbegdeterminedgbygthegmodelgsogitgwouldgnotgservegm
uchgpurpose.
6. Whygdogeconomistsgdogcomparativegstaticsganalysis?gWhatgrolegdogendogenou
sgvariablesgandgexogenousgvariablesgplaygingcomparativegstaticsganalysis?
Comparativegstaticsganalysesgaregperformedgtogdetermineghowgtheglevelsgofgendogenousgvariable
sgchangegasgsomegexogenousgvariablegisgchanged.g Thisgtypegofganalysisgisgverygimportantgsinceg
ingthegrealgworldgthegexogenousgvariables,gsuchgasgweather,gpolicygtools,getc.garegalwaysgchangi
nggandgitgisgusefulgtogknowghowgchangesgingthesegvariablesgaffectgtheglevelsgofgother,gendogenou
s,gvariables.g Angexamplegofgcomparativegstaticsganalysisgwouldgbegaskinggthegquestion:gIfgextra
ordinarilyglowgrainfallg(angexogenousgvariable)gcausesgag30gpercentgreductiongingcorngsupply,gbyg
howgmuchgwillgthegmarketgpricegforgcorng(angendogenousgvariable)gincrease?
7. Whatgisgthegdifferencegbetweengpositivegandgnormativeganalysis?gWhichgofgth
egfollowinggquestionsgwouldgentailgpositiveganalysis,gandgwhichgnormativeganalysis?
a) WhatgeffectgwillgInternetgauctiongcompaniesghavegongthegprofitsgofglocalgautomobil
egdealerships?
b) Shouldgtheggovernmentgimposegspecialgtaxesgongsalesgofgmerchandisegmadegovergth
egInternet?
Positiveganalysisgattemptsgtogexplainghowgangeconomicgsystemgworksgorgtogpredictghowgitgwillgc
hangegovergtimegbygaskinggexplanatorygorgpredictivegquestions.g Normativeganalysisgfocusesgong
whatgshouldgbegdonegbygaskinggprescriptivegquestions.
Copyrightg©g2014gJohngWileyg&gSons,gIn Chapterg1g-g2
c.
,Besankog&gBraeutigamg– SolutionsgManual
th
gMicroeconomics,g5 gedition
a) Becausegthisgquestiongasksgwhethergdealershipgprofitsgwillggogupgorgdowng(andgb
yghowgmuch)g–
gbutgrefrainsgfromginquiringgasgtogwhethergthisgwouldgbegaggoodgthingg–
gitgisgangexamplegofgpositiveganalysis.
b) Ongthegotherghand,gthisgquestiongasksgwhethergitgisgdesirablegtogimposegtaxesgo
ngInternetgsales,gsogitgisgnormativeganalysis.g Notably,gthisgquestiongdoesgnotga
skgwhatgthegeffectgofgsuchgtaxesgwouldgbe.
SolutionsgtogProblems
1.1 Discussgthegfollowinggstatement:g“Sincegsupplygandgdemandgcurvesgaregalway
sgshifting,gmarketsgnevergactuallygreachgangequilibrium.gTherefore,gthegconceptgofge
quilibriumgisguseless.”
Whilegthegclaimgthatgmarketsgnevergreachgangequilibriumgisgprobablygdebatable,gevengifgmarkets
gdognotgevergreachgequilibrium,gthegconceptgisgstillgofgcentralgimportance.g Thegconceptgofgequili
briumgisgimportantgbecausegitgprovidesgagsimplegwaygtogpredictghowgmarketgpricesgandgquantitie
sgwillgchangegasgexogenousgvariablesgchange.g Thus,gwhilegwegmaygnevergreachgagparticulargequi
libriumgprice,gsaygbecausegagsupplygorgdemandgschedulegshiftsgasgthegmarketgmovesgtowardgequil
ibrium,gwegcangpredictgwithgrelativegease,gforgexample,gwhethergpricesgwillgbegrisinggorgfallingg
whengexogenousgmarketgfactorsgchangegasgwegmovegtowardgequilibrium.g Asgexogenousgvariabl
esgcontinuegtogchange,gwegcangcontinuegtogpredictgthegdirectiongofgchangegforgthegendogenousgv
ariables,gandgthisgisgnotg“useless.”
1.2 Ingangarticlegentitled,g“CorngPricesgSurgegongExportgDemand,gCropgData,”gThegWa
llgStreetgJournalgidentifiedgseveralgexogenousgshocksgthatgpushedgU.S.gcorngpricesgsharplyg
higher.(SeegthegarticlegbygAarongLucchetti,gAugustg22,g1997,gp.gC17.gongnationalgincome.)gSupposegthegU.
S.gmarketgforgcorngisgcompetitive,gwithgangupward-slopinggsupplygcurvegandgagdownward-
gslopinggdemandgcurve.gForgeachgofgthegfollowinggscenarios,gillustrateggraphicallyghowgthe
gexogenousgeventgdescribedgwillgcontributegtogaghighergpricegofgcorngingthegU.S.gmarket.
a) ThegU.S.gDepartmentgofgAgriculturegannouncesgthatgexportsgofgcorngtogTaiwangan
dgJapangwereg“surprisinglygbullish,”garoundg30gpercentghighergthanghadgbeengexpect
ed.
b) SomeganalystsgprojectgthatgthegsizegofgthegU.S.gcorngcropgwillghitgagsix-
yearglowgbecausegofgdrygweather.
c) ThegstrengtheninggofgElgNiño,gthegmeteorologicalgtrendgthatgbringsgwarmergweathergt
ogthegwesterngcoastgofgSouthgAmerica,greducesgcorngproductiongoutsidegthegUnitedgStat
es,gtherebygincreasinggforeigngcountries’gdependencegongthegU.S.gcorngcrop.
Copyrightg©g2014gJohngWileyg&gSons,gIn Chapterg1g-g3
c.
, Besankog&gBraeutigamg– SolutionsgManual
th
gMicroeconomics,g5 gedition
a) Surprisinglyghighgexportgsalesgmeangthatgthegdemandgforgcorngwasghighergtha
ngexpected,gatgD2g rathergthangD1.
P
S
P2
g
P1
D2
D1
Q
b) Drygweathergwouldgreducegthegsupplygofgcorn,gtogS2g rathergthangS1.
S2
P
S1
P2
P1
D
Q
c) AssuminggthegU.S.gdoesgnotgimportgcorn,greducedgproductiongoutsidegthegU.S.g
wouldgnotgimpactgU.S.gcorngmarketgsupply.g ElgNinogwould,ghowever,gcausegde
mandgforgU.S.gcorngtogshiftgout,gthegfiguregbeinggthegsamegasgingpartg(a)gabove.
1.3 Ingearlyg2008,gthegpricegofgoilgongthegworldgmarketgincreased,ghittinggagpeakgofgabout
$140gpergbarrelgingJuly,g2008.gIngthegsecondghalfgofg2008,gthegpricegofgoilgdeclined,gendinggt
hegyeargatgjustgoverg$40gpergbarrel.gSupposegthatgthegglobalgmarketgforgoilgcangbegdescribe
dgbygangupward-slopinggsupplygcurvegandgagdownward-
slopinggdemandgcurve.gForgeachgofgthegfollowinggscenarios,gillustrateggraphicallyghowgtheg
exogenousgeventgcontributedgtogagrisegorgagdeclinegingthegpricegofgoilging2008:
Copyrightg©g2014gJohngWileyg&gSons,gIn Chapterg1g-g4
c.
th
gMicroeconomics,g5 gedition
Chapter 1 g
Analyzing Economic Problems
g g
SolutionsgtogReviewgQuestions
1. Whatgisgthegdifferencegbetweengmicroeconomicsgandgmacroeconomics?
Microeconomicsgstudiesgthegeconomicgbehaviorgofgindividualgeconomicgdecisiongmakers,gsuchga
sgagconsumer,gagworker,gagfirm,gorgagmanager.g Macroeconomicsgstudiesghowgangentiregnationalg
economygperforms,gexamininggsuchgtopicsgasgthegaggregateglevelsgofgincomegandgemployment,gt
heglevelsgofginterestgratesgandgprices,gthegrategofginflation,gandgthegnaturegofgbusinessgcycles.
2. Whygisgeconomicsgoftengdescribedgasgthegsciencegofgconstrainedgchoice?
Whilegourgwantsgforggoodsgandgservicesgaregunlimited,gthegresourcesgnecessarygtogproducegthose
ggoodsgandgservices,gsuchgasglabor,gmanagerialgtalent,gcapital,gandgrawgmaterials,gareg“scarce”gb
ecausegtheirgsupplygisglimited.g Thisgscarcitygimpliesgthatgwegaregconstrainedgingthegchoicesgwegc
angmakegaboutgwhichggoodsgandgservicesgtogproduce.g Thus,geconomicsgisgoftengdescribedgasgthe
gsciencegofgconstrainedgchoice.
3. Howgdoesgthegtoolgofgconstrainedgoptimizationghelpgdecisiongmakersgmakegchoices
?gWhatgrolesgdogthegobjectivegfunctiongandgconstraintsgplaygingagmodelgofgconstrainedgop
timization?
Constrainedgoptimizationgallowsgthegdecisiongmakergtogselectgthegbestg(optimal)galternativegwhil
egaccountinggforganygpossibleglimitationsgorgrestrictionsgongthegchoices.g Thegobjectivegfunctiong
representsgthegrelationshipgtogbegmaximizedgorgminimized.g Forgexample,gagfirm’sgprofitgmightgb
egthegobjectivegfunctiongandgallgchoicesgwillgbegevaluatedgingthegprofitgfunctiongtogdeterminegwhi
chgyieldsgtheghighestgprofit.g Thegconstraintsgplaceglimitationsgongthegchoicegthegdecisiongmakerg
cangselectgandgdefinesgthegsetgofgalternativesgfromgwhichgthegbestgwillgbegchosen.
4. Supposegthegmarketgforgwheatgisgcompetitive,gwithgangupward-
slopinggsupplygcurve,gagdownward-
slopinggdemandgcurve,gandgangequilibriumgpricegofg$4.00gpergbushel.gWhygwouldgaghighe
rgpriceg(e.g.,g$5.00gpergbushel)gnotgbegangequilibriumgprice?gWhygwouldgaglowergpriceg(e.g
.,g$2.50gpergbushel)gnotgbegangequilibriumgprice?
Ifgthegpricegingthegmarketgwasgabovegthegequilibriumgprice,gconsumersgwouldgbegwillinggtogpurc
hasegfewergunitsgthangsuppliersgwouldgbegwillinggtogsell,gcreatinggangexcessgsupply.g Asgsupplier
sgrealizegtheygaregnotgsellinggthegunitsgtheyghavegmadegavailable,gsellersgwillgbidgdowngthe
Copyrightg©g2014gJohngWileyg&gSons,gIn Chapterg1g-g1
c.
,Besankog&gBraeutigamg– SolutionsgManual
th
gMicroeconomics,g5 gedition
pricegtogenticegmoregconsumersgtogpurchasegtheirggoodsgorgservices.g Bygdefinition,gequilibriumgi
sgagstategthatgwillgremaingunchangedgasglonggasgexogenousgfactorsgremaingunchanged.g Sincegingt
hisgcasegsuppliersgwillglowergtheirgprice,gthisghighgpricegcannotgbegangequilibrium.
Whengthegpricegisgbelowgthegequilibriumgprice,gconsumersgwillgdemandgmoregunitsgthangsupplier
sghavegmadegavailable.g Thisgexcessgdemandgwillgenticegconsumersgtogbidgupgthegpricesgtogpurch
asegtheglimitedgunitsgavailable.g Sincegthegpricegwillgchange,gitgcannotgbegangequilibrium.
5. Whatgisgthegdifferencegbetweengangexogenousgvariablegandgangendogenousgvariabl
egingangeconomicgmodel?gWouldgitgevergbegusefulgtogconstructgagmodelgthatgcontainedgon
lygexogenousgvariablesg(andgnogendogenousgvariables)?
Exogenousgvariablesgaregtakengasggivengingangeconomicgmodel,gi.e.,gtheygaregdeterminedgbygsom
egprocessgoutsidegthegmodel,gwhilegendogenousgvariablesgaregdeterminedgwithingthegeconomicg
modelgbeinggstudied.
Angeconomicgmodelgthatgcontainedgnogendogenousgvariablesgwouldgnotgbegveryginteresting.g Wit
hgnogendogenousgvariables,gnothinggwouldgbegdeterminedgbygthegmodelgsogitgwouldgnotgservegm
uchgpurpose.
6. Whygdogeconomistsgdogcomparativegstaticsganalysis?gWhatgrolegdogendogenou
sgvariablesgandgexogenousgvariablesgplaygingcomparativegstaticsganalysis?
Comparativegstaticsganalysesgaregperformedgtogdetermineghowgtheglevelsgofgendogenousgvariable
sgchangegasgsomegexogenousgvariablegisgchanged.g Thisgtypegofganalysisgisgverygimportantgsinceg
ingthegrealgworldgthegexogenousgvariables,gsuchgasgweather,gpolicygtools,getc.garegalwaysgchangi
nggandgitgisgusefulgtogknowghowgchangesgingthesegvariablesgaffectgtheglevelsgofgother,gendogenou
s,gvariables.g Angexamplegofgcomparativegstaticsganalysisgwouldgbegaskinggthegquestion:gIfgextra
ordinarilyglowgrainfallg(angexogenousgvariable)gcausesgag30gpercentgreductiongingcorngsupply,gbyg
howgmuchgwillgthegmarketgpricegforgcorng(angendogenousgvariable)gincrease?
7. Whatgisgthegdifferencegbetweengpositivegandgnormativeganalysis?gWhichgofgth
egfollowinggquestionsgwouldgentailgpositiveganalysis,gandgwhichgnormativeganalysis?
a) WhatgeffectgwillgInternetgauctiongcompaniesghavegongthegprofitsgofglocalgautomobil
egdealerships?
b) Shouldgtheggovernmentgimposegspecialgtaxesgongsalesgofgmerchandisegmadegovergth
egInternet?
Positiveganalysisgattemptsgtogexplainghowgangeconomicgsystemgworksgorgtogpredictghowgitgwillgc
hangegovergtimegbygaskinggexplanatorygorgpredictivegquestions.g Normativeganalysisgfocusesgong
whatgshouldgbegdonegbygaskinggprescriptivegquestions.
Copyrightg©g2014gJohngWileyg&gSons,gIn Chapterg1g-g2
c.
,Besankog&gBraeutigamg– SolutionsgManual
th
gMicroeconomics,g5 gedition
a) Becausegthisgquestiongasksgwhethergdealershipgprofitsgwillggogupgorgdowng(andgb
yghowgmuch)g–
gbutgrefrainsgfromginquiringgasgtogwhethergthisgwouldgbegaggoodgthingg–
gitgisgangexamplegofgpositiveganalysis.
b) Ongthegotherghand,gthisgquestiongasksgwhethergitgisgdesirablegtogimposegtaxesgo
ngInternetgsales,gsogitgisgnormativeganalysis.g Notably,gthisgquestiongdoesgnotga
skgwhatgthegeffectgofgsuchgtaxesgwouldgbe.
SolutionsgtogProblems
1.1 Discussgthegfollowinggstatement:g“Sincegsupplygandgdemandgcurvesgaregalway
sgshifting,gmarketsgnevergactuallygreachgangequilibrium.gTherefore,gthegconceptgofge
quilibriumgisguseless.”
Whilegthegclaimgthatgmarketsgnevergreachgangequilibriumgisgprobablygdebatable,gevengifgmarkets
gdognotgevergreachgequilibrium,gthegconceptgisgstillgofgcentralgimportance.g Thegconceptgofgequili
briumgisgimportantgbecausegitgprovidesgagsimplegwaygtogpredictghowgmarketgpricesgandgquantitie
sgwillgchangegasgexogenousgvariablesgchange.g Thus,gwhilegwegmaygnevergreachgagparticulargequi
libriumgprice,gsaygbecausegagsupplygorgdemandgschedulegshiftsgasgthegmarketgmovesgtowardgequil
ibrium,gwegcangpredictgwithgrelativegease,gforgexample,gwhethergpricesgwillgbegrisinggorgfallingg
whengexogenousgmarketgfactorsgchangegasgwegmovegtowardgequilibrium.g Asgexogenousgvariabl
esgcontinuegtogchange,gwegcangcontinuegtogpredictgthegdirectiongofgchangegforgthegendogenousgv
ariables,gandgthisgisgnotg“useless.”
1.2 Ingangarticlegentitled,g“CorngPricesgSurgegongExportgDemand,gCropgData,”gThegWa
llgStreetgJournalgidentifiedgseveralgexogenousgshocksgthatgpushedgU.S.gcorngpricesgsharplyg
higher.(SeegthegarticlegbygAarongLucchetti,gAugustg22,g1997,gp.gC17.gongnationalgincome.)gSupposegthegU.
S.gmarketgforgcorngisgcompetitive,gwithgangupward-slopinggsupplygcurvegandgagdownward-
gslopinggdemandgcurve.gForgeachgofgthegfollowinggscenarios,gillustrateggraphicallyghowgthe
gexogenousgeventgdescribedgwillgcontributegtogaghighergpricegofgcorngingthegU.S.gmarket.
a) ThegU.S.gDepartmentgofgAgriculturegannouncesgthatgexportsgofgcorngtogTaiwangan
dgJapangwereg“surprisinglygbullish,”garoundg30gpercentghighergthanghadgbeengexpect
ed.
b) SomeganalystsgprojectgthatgthegsizegofgthegU.S.gcorngcropgwillghitgagsix-
yearglowgbecausegofgdrygweather.
c) ThegstrengtheninggofgElgNiño,gthegmeteorologicalgtrendgthatgbringsgwarmergweathergt
ogthegwesterngcoastgofgSouthgAmerica,greducesgcorngproductiongoutsidegthegUnitedgStat
es,gtherebygincreasinggforeigngcountries’gdependencegongthegU.S.gcorngcrop.
Copyrightg©g2014gJohngWileyg&gSons,gIn Chapterg1g-g3
c.
, Besankog&gBraeutigamg– SolutionsgManual
th
gMicroeconomics,g5 gedition
a) Surprisinglyghighgexportgsalesgmeangthatgthegdemandgforgcorngwasghighergtha
ngexpected,gatgD2g rathergthangD1.
P
S
P2
g
P1
D2
D1
Q
b) Drygweathergwouldgreducegthegsupplygofgcorn,gtogS2g rathergthangS1.
S2
P
S1
P2
P1
D
Q
c) AssuminggthegU.S.gdoesgnotgimportgcorn,greducedgproductiongoutsidegthegU.S.g
wouldgnotgimpactgU.S.gcorngmarketgsupply.g ElgNinogwould,ghowever,gcausegde
mandgforgU.S.gcorngtogshiftgout,gthegfiguregbeinggthegsamegasgingpartg(a)gabove.
1.3 Ingearlyg2008,gthegpricegofgoilgongthegworldgmarketgincreased,ghittinggagpeakgofgabout
$140gpergbarrelgingJuly,g2008.gIngthegsecondghalfgofg2008,gthegpricegofgoilgdeclined,gendinggt
hegyeargatgjustgoverg$40gpergbarrel.gSupposegthatgthegglobalgmarketgforgoilgcangbegdescribe
dgbygangupward-slopinggsupplygcurvegandgagdownward-
slopinggdemandgcurve.gForgeachgofgthegfollowinggscenarios,gillustrateggraphicallyghowgtheg
exogenousgeventgcontributedgtogagrisegorgagdeclinegingthegpricegofgoilging2008:
Copyrightg©g2014gJohngWileyg&gSons,gIn Chapterg1g-g4
c.
