Solution Manual for Analyzing Economic Problems (PDF) | 2026 Economics Solutions | Economics Study Guide

Besanko & Braeutigam – Microeconomics, 5th edition
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Copyright © 2014 John Wiley & Sons,
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Inc.

,Besanko & Braeutigam – Microeconomics, 5th edition
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Chapter 1 uu




Analyzing Economic Problems uu uu




Solutions to Review Questions uu uu uu




1. What is the difference between microeconomics and macroeconomics?
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Microeconomics studies the economic behavior of individual economic decision makers, suchuu uu uu uu uu uu uu uu uu uu




as a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire
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national economy performs, examining such topics as the aggregate levels of income and
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employment, the levels of interest rates and prices, the rate of inflation, and the nature of
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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 produce
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those goods and services, such as labor, managerial talent, capital, and raw materials, are
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“scarce” because their supply is limited. This scarcity implies that we are constrained in
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the choices we can make about which goods and services to produce. Thus, economics is
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often described as the science of constrained choice.
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3. How does the tool of constrained optimization help decision makers make choices?
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What roles do the objective function and constraints play in a model of constrained
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optimization?
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Constrained optimization allows the decision maker to select the best (optimal) alternative
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while accounting for any possible limitations or restrictions on the choices. The objective
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function represents the relationship to be maximized or minimized. For example, a firm’s
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profit might be the objective function and all choices will be evaluated in the profit function
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to determine which yields the highest profit. The constraints place limitations on the
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choice the decision maker can select and defines the set of alternatives from which the
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best will be chosen.
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4. Suppose the market for wheat is competitive, with an upward-sloping supply curve,
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a downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why
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would a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a
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lower price (e.g., $2.50 per bushel) not be an equilibrium price?
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If the price in the market was above the equilibrium price, consumers would be willing to
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Copyright © 2014 John Wiley & Sons, uu uu uu uu uu uu Chapter 1 - 2 uu uu uu


Inc.

,Besanko & Braeutigam – Microeconomics, 5th edition
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purchase fewer units than suppliers would be willing to sell, creating an excess supply. As
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suppliers realize they are not selling the units they have made available, sellers will bid down
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the
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Copyright © 2014 John Wiley & Sons,
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Inc.

, Besanko & Braeutigam – Microeconomics, 5th edition
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price to entice more consumers to purchase their goods or services. By definition,
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equilibrium is a state that will remain unchanged as long as exogenous factors remain
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unchanged. Since in this case suppliers will lower their price, this high price cannot be an
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equilibrium.
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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
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prices to purchase the limited units available. Since the price will change, it cannot be an
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equilibrium.
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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
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contained only exogenous variables (and no endogenous variables)?
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Exogenous variables are taken as given in an economic model, i.e., they are determined by
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some process outside the model, while endogenous variables are determined within the
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economic model being studied.
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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 not
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serve much purpose.
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6. Why do economists do comparative statics analysis? What role do endogenous
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variables and exogenous variables play in comparative statics analysis?
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Comparative statics analyses are performed to determine how the levels of endogenous
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variables change as some exogenous variable is changed. This type of analysis is very
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important since in the real world the exogenous variables, such as weather, policy tools,
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etc. are always changing and it is useful to know how changes in these variables affect the
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levels of other, endogenous, variables. An example of comparative statics analysis would
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be asking the question: If extraordinarily low rainfall (an exogenous variable) causes a 30
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percent reduction in corn supply, by how much will the market price for corn (an
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endogenous variable) increase?
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7. What is the difference between positive and normative analysis? Which of the
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following questions would entail positive analysis, and which normative analysis?
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a) What effect will Internet auction companies have on the profits of local automobile
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dealerships?
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b) Should the government impose special taxes on sales of merchandise made over
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the Internet?
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Copyright © 2014 John Wiley & Sons,
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Inc.