Besanko & Braeutigam – Microeconomics, 5th
gb gb gb gb gb Solutions
edition Manual
Chapter 1 - 1
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,Besanko & Braeutigam – Microeconomics, 5th
gb gb gb gb gb Solutions
edition Manual
Chapter 1 gb
Analyzing Economic Problems gb gb
Solutions to Review Questions gb gb gb
1. What is the difference between microeconomics and macroeconomics?
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Microeconomics studies the economic behavior of individual economic decision makers,
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such as a consumer, a worker, a firm, or a manager. Macroeconomics studies how an
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entire national economy performs, examining such topics as the aggregate levels of
gb gb gb gb gb gb gb gb gb gb gb gb
income and employment, the levels of interest rates and prices, the rate of inflation,
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
and the nature of business cycles.
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2. Why is economics often described as the science of constrained choice?
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While our wants for goods and services are unlimited, the resources necessary to
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produce those goods and services, such as labor, managerial talent, capital, and raw
gb gb gb gb gb gb gb gb gb gb gb gb gb
materials, are “scarce” because their supply is limited. This scarcity implies that we are
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constrained in the choices we can make about which goods and services to produce.
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Thus, economics is often described as the science of constrained choice.
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3. How does the tool of constrained optimization help decision makers make
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choices? What roles do the objective function and constraints play in a model of
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
constrained optimization?
gb gb
Constrained optimization allows the decision maker to select the best (optimal) alternative
gb gb gb gb gb gb gb gb gb gb gb
while accounting for any possible limitations or restrictions on the choices. The
gb gb gb gb gb gb gb gb gb gb gb g b
objective function represents the relationship to be maximized or minimized. For
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example, a firm’s profit might be the objective function and all choices will be evaluated
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
in the profit function to determine which yields the highest profit. The constraints place
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limitations on the choice the decision maker can select and defines the set of
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alternatives from which the best will be chosen.
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4. Suppose the market for wheat is competitive, with an upward-sloping supply
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curve, a downward-sloping demand curve, and an equilibrium price of $4.00 per
gb gb gb gb gb gb gb gb gb gb gb gb
bushel. Why would a higher price (e.g., $5.00 per bushel) not be an equilibrium price?
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
Why would a lower price (e.g., $2.50 per bushel) not be an equilibrium price?
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
If the price in the market was above the equilibrium price, consumers would be willing
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
Chapter 1 - 2 gb gb gb
,Besanko & Braeutigam – Microeconomics, 5th
gb gb gb gb gb Solutions
edition Manual
to purchase fewer units than suppliers would be willing to sell, creating an excess
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
supply. As suppliers realize they are not selling the units they have made available,
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sellers will bid down the
gb gb gb gb gb
Chapter 1 - 3
gb gb gb
, Besanko & Braeutigam – Microeconomics, 5th
gb gb gb gb gb Solutions
edition Manual
price to entice more consumers to purchase their goods or services. By definition,
gb gb gb gb gb gb gb gb gb gb g b gb
equilibrium is a state that will remain unchanged as long as exogenous factors remain
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
unchanged. Since in this case suppliers will lower their price, this high price cannot be
gb g b gb gb gb gb gb gb gb gb gb gb gb gb gb
an equilibrium.
gb gb
When the price is below the equilibrium price, consumers will demand more units than
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suppliers have made available. This excess demand will entice consumers to bid up the
gb gb gb gb g b gb gb gb gb gb gb gb gb gb
prices to purchase the limited units available. Since the price will change, it cannot be
gb gb gb gb gb gb gb g b gb gb gb gb gb gb gb
an equilibrium.
gb gb
5. What is the difference between an exogenous variable and an endogenous
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variable in an economic model? Would it ever be useful to construct a model that
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
contained only exogenous variables (and no endogenous variables)?
gb gb gb gb gb gb gb gb
Exogenous variables are taken as given in an economic model, i.e., they are determined by
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
some process outside the model, while endogenous variables are determined within the
gb gb gb gb gb gb gb gb gb gb gb gb
economic model being studied.
gb gb gb gb
An economic model that contained no endogenous variables would not be very interesting.
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With no endogenous variables, nothing would be determined by the model so it would
g b gb gb gb gb gb gb gb gb gb gb gb gb gb
not serve much purpose.
gb gb gb gb
6. Why do economists do comparative statics analysis? What role do
gb gb gb gb gb gb gb gb gb
endogenous variables and exogenous variables play in comparative statics
gb gb gb gb gb gb gb gb gb
analysis?
gb
Comparative statics analyses are performed to determine how the levels of endogenous
gb gb gb gb gb gb gb gb gb gb gb
variables change as some exogenous variable is changed. This type of analysis is very
gb gb gb gb gb gb gb gb g b gb gb gb gb gb
important since in the real world the exogenous variables, such as weather, policy tools,
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
etc. are always changing and it is useful to know how changes in these variables affect
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
the levels of other, endogenous, variables. An example of comparative statics analysis
gb gb gb gb gb gb g b gb gb gb gb gb
would be asking the question: If extraordinarily low rainfall (an exogenous variable)
gb gb gb gb gb gb gb gb gb gb gb gb
causes a 30 percent reduction in corn supply, by how much will the market price for
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
corn (an endogenous variable) increase?
gb gb gb gb gb
7. What is the difference between positive and normative analysis? Which of
gb gb gb gb gb gb gb gb gb gb
the following questions would entail positive analysis, and which normative
gb gb gb gb gb gb gb gb gb gb
analysis?
gb
a) What effect will Internet auction companies have on the profits of local
gb gb gb gb gb gb gb gb gb gb gb
automobile dealerships?
gb gb
b) Should the government impose special taxes on sales of merchandise made over
gb gb gb gb gb gb gb gb gb gb gb
Chapter 1 - 4 gb gb gb
gb gb gb gb gb Solutions
edition Manual
Chapter 1 - 1
gb gb gb
,Besanko & Braeutigam – Microeconomics, 5th
gb gb gb gb gb Solutions
edition Manual
Chapter 1 gb
Analyzing Economic Problems gb gb
Solutions to Review Questions gb gb gb
1. What is the difference between microeconomics and macroeconomics?
gb gb gb gb gb gb gb
Microeconomics studies the economic behavior of individual economic decision makers,
gb gb gb gb gb gb gb gb gb
such as a consumer, a worker, a firm, or a manager. Macroeconomics studies how an
gb gb gb gb gb gb gb gb gb gb gb g b gb gb gb
entire national economy performs, examining such topics as the aggregate levels of
gb gb gb gb gb gb gb gb gb gb gb gb
income and employment, the levels of interest rates and prices, the rate of inflation,
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
and the nature of business cycles.
gb gb gb gb gb gb
2. Why is economics often described as the science of constrained choice?
gb gb gb gb gb gb gb gb gb gb
While our wants for goods and services are unlimited, the resources necessary to
gb gb gb gb gb gb gb gb gb gb gb gb
produce those goods and services, such as labor, managerial talent, capital, and raw
gb gb gb gb gb gb gb gb gb gb gb gb gb
materials, are “scarce” because their supply is limited. This scarcity implies that we are
gb gb gb gb gb gb gb gb g b gb gb gb gb gb
constrained in the choices we can make about which goods and services to produce.
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
Thus, economics is often described as the science of constrained choice.
g b gb gb gb gb gb gb gb gb gb gb
3. How does the tool of constrained optimization help decision makers make
gb gb gb gb gb gb gb gb gb gb
choices? What roles do the objective function and constraints play in a model of
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
constrained optimization?
gb gb
Constrained optimization allows the decision maker to select the best (optimal) alternative
gb gb gb gb gb gb gb gb gb gb gb
while accounting for any possible limitations or restrictions on the choices. The
gb gb gb gb gb gb gb gb gb gb gb g b
objective function represents the relationship to be maximized or minimized. For
gb gb gb gb gb gb gb gb gb gb g b
example, a firm’s profit might be the objective function and all choices will be evaluated
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
in the profit function to determine which yields the highest profit. The constraints place
gb gb gb gb gb gb gb gb gb gb gb g b gb gb
limitations on the choice the decision maker can select and defines the set of
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
alternatives from which the best will be chosen.
gb gb gb gb gb gb gb gb
4. Suppose the market for wheat is competitive, with an upward-sloping supply
gb gb gb gb gb gb gb gb gb gb
curve, a downward-sloping demand curve, and an equilibrium price of $4.00 per
gb gb gb gb gb gb gb gb gb gb gb gb
bushel. Why would a higher price (e.g., $5.00 per bushel) not be an equilibrium price?
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
Why would a lower price (e.g., $2.50 per bushel) not be an equilibrium price?
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
If the price in the market was above the equilibrium price, consumers would be willing
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
Chapter 1 - 2 gb gb gb
,Besanko & Braeutigam – Microeconomics, 5th
gb gb gb gb gb Solutions
edition Manual
to purchase fewer units than suppliers would be willing to sell, creating an excess
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
supply. As suppliers realize they are not selling the units they have made available,
gb g b gb gb gb gb gb gb gb gb gb gb gb gb
sellers will bid down the
gb gb gb gb gb
Chapter 1 - 3
gb gb gb
, Besanko & Braeutigam – Microeconomics, 5th
gb gb gb gb gb Solutions
edition Manual
price to entice more consumers to purchase their goods or services. By definition,
gb gb gb gb gb gb gb gb gb gb g b gb
equilibrium is a state that will remain unchanged as long as exogenous factors remain
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
unchanged. Since in this case suppliers will lower their price, this high price cannot be
gb g b gb gb gb gb gb gb gb gb gb gb gb gb gb
an equilibrium.
gb gb
When the price is below the equilibrium price, consumers will demand more units than
gb gb gb gb gb gb gb gb gb gb gb gb gb
suppliers have made available. This excess demand will entice consumers to bid up the
gb gb gb gb g b gb gb gb gb gb gb gb gb gb
prices to purchase the limited units available. Since the price will change, it cannot be
gb gb gb gb gb gb gb g b gb gb gb gb gb gb gb
an equilibrium.
gb gb
5. What is the difference between an exogenous variable and an endogenous
gb gb gb gb gb gb gb gb gb gb
variable in an economic model? Would it ever be useful to construct a model that
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
contained only exogenous variables (and no endogenous variables)?
gb gb gb gb gb gb gb gb
Exogenous variables are taken as given in an economic model, i.e., they are determined by
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
some process outside the model, while endogenous variables are determined within the
gb gb gb gb gb gb gb gb gb gb gb gb
economic model being studied.
gb gb gb gb
An economic model that contained no endogenous variables would not be very interesting.
gb gb gb gb gb gb gb gb gb gb gb gb
With no endogenous variables, nothing would be determined by the model so it would
g b gb gb gb gb gb gb gb gb gb gb gb gb gb
not serve much purpose.
gb gb gb gb
6. Why do economists do comparative statics analysis? What role do
gb gb gb gb gb gb gb gb gb
endogenous variables and exogenous variables play in comparative statics
gb gb gb gb gb gb gb gb gb
analysis?
gb
Comparative statics analyses are performed to determine how the levels of endogenous
gb gb gb gb gb gb gb gb gb gb gb
variables change as some exogenous variable is changed. This type of analysis is very
gb gb gb gb gb gb gb gb g b gb gb gb gb gb
important since in the real world the exogenous variables, such as weather, policy tools,
gb gb gb gb gb gb gb gb gb gb gb gb gb gb
etc. are always changing and it is useful to know how changes in these variables affect
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
the levels of other, endogenous, variables. An example of comparative statics analysis
gb gb gb gb gb gb g b gb gb gb gb gb
would be asking the question: If extraordinarily low rainfall (an exogenous variable)
gb gb gb gb gb gb gb gb gb gb gb gb
causes a 30 percent reduction in corn supply, by how much will the market price for
gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb gb
corn (an endogenous variable) increase?
gb gb gb gb gb
7. What is the difference between positive and normative analysis? Which of
gb gb gb gb gb gb gb gb gb gb
the following questions would entail positive analysis, and which normative
gb gb gb gb gb gb gb gb gb gb
analysis?
gb
a) What effect will Internet auction companies have on the profits of local
gb gb gb gb gb gb gb gb gb gb gb
automobile dealerships?
gb gb
b) Should the government impose special taxes on sales of merchandise made over
gb gb gb gb gb gb gb gb gb gb gb
Chapter 1 - 4 gb gb gb
