Besanko ii& iiBraeutigam ii– iiMicroeconomics, ii5th Solutions
iiManual
ii
edition
Chapter 1 ii
Analyzing Economic Problems i i
Solutions to Review Questions
ii ii ii
1. What iiis iithe iidifference iibetween iimicroeconomics iiand iimacroeconomics?
Microeconomics iistudies iithe iieconomic iibehavior iiof iiindividual iieconomic iidecision
iimakers, ii such iias i i a iiconsumer, ii a iiworker, iia ii firm, ii or iia iimanager. ii ii Macroeconomics
iistudies ii how iian iientire iinational i i economy iiperforms, ii examining iisuch iitopics iias ii the
iiaggregate iilevels ii of iiincome iiand iiemployment, i i the iilevels iiof iiinterest ii rates iiand
iiprices, ii the iirate iiof iiinflation, ii and iithe iinature iiof iibusiness iicycles.
2. Why iiis iieconomics iioften iidescribed iias iithe iiscience iiof iiconstrained iichoice?
While iiour iiwants iifor iigoods iiand iiservices iiare iiunlimited, iithe iiresources iinecessary iito
iiproduce iithose i i goods iiand iiservices, ii such iias ii labor, ii managerial iitalent, ii capital, iiand
iiraw ii materials, iiare ii“scarce” i i because iitheir iisupply iiis ii limited. ii ii This iiscarcity
iiimplies iithat ii we iiare iiconstrained ii in iithe iichoices iiwe i i can iimake iiabout iiwhich iigoods
iiand iiservices iito iiproduce. ii iiThus, iieconomics ii is iioften iidescribed iias ii the i i science ii of
iiconstrained iichoice.
3. How iidoes iithe iitool iiof iiconstrained iioptimization iihelp iidecision iimakers
ii make iichoices? i i What ii roles iido iithe iiobjective iifunction iiand iiconstraints iiplay iiin
ii a iimodel iiof iiconstrained i i optimization?
Constrained iioptimization iiallows iithe iidecision iimaker iito ii select iithe iibest ii(optimal)
ii alternative iiwhile i i accounting ii for ii any iipossible ii limitations iior iirestrictions iion iithe
iichoices. ii ii The iiobjective ii function i i represents iithe iirelationship ii to ii be iimaximized ii or
ii minimized. ii ii For iiexample, ii a iifirm’s iiprofit ii might ii be i i the iiobjective ii function iiand
iiall iichoices iiwill iibe iievaluated iiin iithe iiprofit i i function iito ii determine iiwhich i i yields
iithe iihighest ii profit. ii iiThe iiconstraints iiplace ii limitations iion iithe iichoice iithe iidecision
iimaker ii can i i select ii and iidefines iithe iiset ii of iialternatives ii from iiwhich iithe iibest ii will
iibe iichosen.
4. Suppose iithe iimarket iifor iiwheat iiis iicompetitive, iiwith iian iiupward-sloping
iisupply iicurve, i i a iidownward-sloping iidemand iicurve, ii and iian iiequilibrium iiprice
iiof ii$4.00 iiper iibushel. ii Why i i would iia iihigher iiprice ii(e.g., ii $5.00 iiper iibushel) iinot
Copyright ii© ii2014 iiJohn iiWiley ii& iiSons, Chapter ii1 ii- ii
ii Inc. 1
,Besanko ii& iiBraeutigam ii– iiMicroeconomics, ii5th Solutions
ii be iian iiequilibrium iiprice? iiWhy iiwould iia lower iiprice ii(e.g., ii$2.50 iiperiiiiManual
bushel)
ii
edition i i
ii not iibe iian iiequilibrium iiprice?
If iithe iiprice iiin iithe iimarket iiwas iiabove iithe iiequilibrium iiprice, iiconsumers iiwould iibe
iiwilling ii to i i purchase ii fewer ii units iithan iisuppliers iiwould iibe iiwilling iito ii sell, ii creating
iian iiexcess iisupply. ii ii As i i suppliers iirealize iithey iiare ii not iiselling iithe ii units iithey iihave
ii made iiavailable, ii sellers iiwill ii bid iidown iithe
Copyright ii© ii2014 iiJohn iiWiley ii& iiSons, Chapter ii1 ii- ii
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,Besanko ii& iiBraeutigam ii– iiMicroeconomics, ii5th Solutions
iiManual
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edition
price iito iientice iimore iiconsumers iito iipurchase iitheir iigoods iior iiservices. ii iiBy iidefinition,
ii equilibrium iiis i i a ii state iithat iiwill iiremain iiunchanged iias ii long iias iiexogenous ii factors
iiremain iiunchanged. ii Since ii in iithis i i case iisuppliers iiwill iilower ii their iiprice, ii this ii high
iiprice ii cannot iibe iian iiequilibrium.
When iithe iiprice iiis iibelow iithe iiequilibrium iiprice, iiconsumers iiwill iidemand iimore
iiunits iithan iisuppliers i i have ii made iiavailable. ii This iiexcess iidemand iiwill iientice
iiconsumers iito iibid ii up iithe iiprices ii to iipurchase i i the iilimited iiunits iiavailable. ii ii Since
iithe iiprice iiwill iichange, ii it ii cannot iibe iian iiequilibrium.
5. What iiis iithe iidifference iibetween iian iiexogenous iivariable iiand iian
iiendogenous iivariable i i in ii an iieconomic iimodel? iiWould iiit ii ever iibe iiuseful iito
iiconstruct ii a iimodel iithat ii contained iionly i i exogenous iivariables ii(and iino
iiendogenous iivariables)?
Exogenous iivariables iiare iitaken iias iigiven iiin iian iieconomic iimodel, ii i.e., iithey iiare
iidetermined ii by iisome i i process iioutside iithe ii model, ii while iiendogenous iivariables
iiare iidetermined iiwithin iithe iieconomic i i model iibeing iistudied.
An iieconomic iimodel iithat iicontained iino iiendogenous iivariables iiwould iinot iibe iivery
iiinteresting. ii With i i no ii endogenous iivariables, ii nothing iiwould ii be iidetermined ii by iithe
ii model iiso ii it ii would ii not iiserve ii much i i purpose.
6. Why iido iieconomists iido iicomparative iistatics iianalysis? iiWhat iirole iido
iiendogenous i i variables iiand iiexogenous iivariables iiplay iiin ii comparative
iistatics iianalysis?
Comparative iistatics iianalyses iiare iiperformed iito iidetermine iihow ii the iilevels iiof
iiendogenous iivariables i i change iias iisome iiexogenous iivariable ii is iichanged. ii ii This iitype
iiof iianalysis ii is ii very iiimportant iisince ii in i i the iireal iiworld iithe iiexogenous iivariables,
ii such iias iiweather, ii policy iitools, ii etc. ii are iialways iichanging i i and ii it i i is iiuseful iito
ii know iihow iichanges ii in iithese iivariables iiaffect i i the ii levels iiof iiother, ii endogenous,
i i variables. ii ii An iiexample ii of iicomparative iistatics iianalysis iiwould ii be iiasking iithe
iiquestion: ii If i i extraordinarily iilow iirainfall ii(an iiexogenous iivariable) ii causes iia ii30
iipercent ii reduction iiin iicorn iisupply, i i by iihow ii much iiwill iithe ii market ii price ii for ii corn
ii(an iiendogenous iivariable) ii increase?
7. What iiis iithe iidifference iibetween iipositive iiand iinormative iianalysis?
iiWhich iiof iithe i i following iiquestions iiwould iientail iipositive iianalysis, ii and
iiwhich iinormative iianalysis?
a) What iieffect iiwill iiInternet iiauction iicompanies iihave iion iithe iiprofits iiof iilocal
Copyright ii© ii2014 iiJohn iiWiley ii& iiSons, Chapter ii1 ii- ii
ii Inc. 3
, Besanko ii& iiBraeutigam ii– iiMicroeconomics, ii5th Solutions
iiautomobile i i dealerships? iiManual
ii
edition
b) Should iithe iigovernment iiimpose iispecial iitaxes iion iisales iiof iimerchandise
iimade iiover iithe i i Internet?
Positive iianalysis iiattempts iito iiexplain iihow iian iieconomic iisystem iiworks iior iito iipredict
ii how iiit ii will i i change iiover iitime ii by iiasking ii explanatory iior ii predictive iiquestions. ii
ii Normative iianalysis ii focuses iion i i what ii should iibe iidone iiby iiasking iiprescriptive
iiquestions.
Copyright ii© ii2014 iiJohn iiWiley ii& iiSons, Chapter ii1 ii- ii
ii Inc. 4
iiManual
ii
edition
Chapter 1 ii
Analyzing Economic Problems i i
Solutions to Review Questions
ii ii ii
1. What iiis iithe iidifference iibetween iimicroeconomics iiand iimacroeconomics?
Microeconomics iistudies iithe iieconomic iibehavior iiof iiindividual iieconomic iidecision
iimakers, ii such iias i i a iiconsumer, ii a iiworker, iia ii firm, ii or iia iimanager. ii ii Macroeconomics
iistudies ii how iian iientire iinational i i economy iiperforms, ii examining iisuch iitopics iias ii the
iiaggregate iilevels ii of iiincome iiand iiemployment, i i the iilevels iiof iiinterest ii rates iiand
iiprices, ii the iirate iiof iiinflation, ii and iithe iinature iiof iibusiness iicycles.
2. Why iiis iieconomics iioften iidescribed iias iithe iiscience iiof iiconstrained iichoice?
While iiour iiwants iifor iigoods iiand iiservices iiare iiunlimited, iithe iiresources iinecessary iito
iiproduce iithose i i goods iiand iiservices, ii such iias ii labor, ii managerial iitalent, ii capital, iiand
iiraw ii materials, iiare ii“scarce” i i because iitheir iisupply iiis ii limited. ii ii This iiscarcity
iiimplies iithat ii we iiare iiconstrained ii in iithe iichoices iiwe i i can iimake iiabout iiwhich iigoods
iiand iiservices iito iiproduce. ii iiThus, iieconomics ii is iioften iidescribed iias ii the i i science ii of
iiconstrained iichoice.
3. How iidoes iithe iitool iiof iiconstrained iioptimization iihelp iidecision iimakers
ii make iichoices? i i What ii roles iido iithe iiobjective iifunction iiand iiconstraints iiplay iiin
ii a iimodel iiof iiconstrained i i optimization?
Constrained iioptimization iiallows iithe iidecision iimaker iito ii select iithe iibest ii(optimal)
ii alternative iiwhile i i accounting ii for ii any iipossible ii limitations iior iirestrictions iion iithe
iichoices. ii ii The iiobjective ii function i i represents iithe iirelationship ii to ii be iimaximized ii or
ii minimized. ii ii For iiexample, ii a iifirm’s iiprofit ii might ii be i i the iiobjective ii function iiand
iiall iichoices iiwill iibe iievaluated iiin iithe iiprofit i i function iito ii determine iiwhich i i yields
iithe iihighest ii profit. ii iiThe iiconstraints iiplace ii limitations iion iithe iichoice iithe iidecision
iimaker ii can i i select ii and iidefines iithe iiset ii of iialternatives ii from iiwhich iithe iibest ii will
iibe iichosen.
4. Suppose iithe iimarket iifor iiwheat iiis iicompetitive, iiwith iian iiupward-sloping
iisupply iicurve, i i a iidownward-sloping iidemand iicurve, ii and iian iiequilibrium iiprice
iiof ii$4.00 iiper iibushel. ii Why i i would iia iihigher iiprice ii(e.g., ii $5.00 iiper iibushel) iinot
Copyright ii© ii2014 iiJohn iiWiley ii& iiSons, Chapter ii1 ii- ii
ii Inc. 1
,Besanko ii& iiBraeutigam ii– iiMicroeconomics, ii5th Solutions
ii be iian iiequilibrium iiprice? iiWhy iiwould iia lower iiprice ii(e.g., ii$2.50 iiperiiiiManual
bushel)
ii
edition i i
ii not iibe iian iiequilibrium iiprice?
If iithe iiprice iiin iithe iimarket iiwas iiabove iithe iiequilibrium iiprice, iiconsumers iiwould iibe
iiwilling ii to i i purchase ii fewer ii units iithan iisuppliers iiwould iibe iiwilling iito ii sell, ii creating
iian iiexcess iisupply. ii ii As i i suppliers iirealize iithey iiare ii not iiselling iithe ii units iithey iihave
ii made iiavailable, ii sellers iiwill ii bid iidown iithe
Copyright ii© ii2014 iiJohn iiWiley ii& iiSons, Chapter ii1 ii- ii
ii Inc. 2
,Besanko ii& iiBraeutigam ii– iiMicroeconomics, ii5th Solutions
iiManual
ii
edition
price iito iientice iimore iiconsumers iito iipurchase iitheir iigoods iior iiservices. ii iiBy iidefinition,
ii equilibrium iiis i i a ii state iithat iiwill iiremain iiunchanged iias ii long iias iiexogenous ii factors
iiremain iiunchanged. ii Since ii in iithis i i case iisuppliers iiwill iilower ii their iiprice, ii this ii high
iiprice ii cannot iibe iian iiequilibrium.
When iithe iiprice iiis iibelow iithe iiequilibrium iiprice, iiconsumers iiwill iidemand iimore
iiunits iithan iisuppliers i i have ii made iiavailable. ii This iiexcess iidemand iiwill iientice
iiconsumers iito iibid ii up iithe iiprices ii to iipurchase i i the iilimited iiunits iiavailable. ii ii Since
iithe iiprice iiwill iichange, ii it ii cannot iibe iian iiequilibrium.
5. What iiis iithe iidifference iibetween iian iiexogenous iivariable iiand iian
iiendogenous iivariable i i in ii an iieconomic iimodel? iiWould iiit ii ever iibe iiuseful iito
iiconstruct ii a iimodel iithat ii contained iionly i i exogenous iivariables ii(and iino
iiendogenous iivariables)?
Exogenous iivariables iiare iitaken iias iigiven iiin iian iieconomic iimodel, ii i.e., iithey iiare
iidetermined ii by iisome i i process iioutside iithe ii model, ii while iiendogenous iivariables
iiare iidetermined iiwithin iithe iieconomic i i model iibeing iistudied.
An iieconomic iimodel iithat iicontained iino iiendogenous iivariables iiwould iinot iibe iivery
iiinteresting. ii With i i no ii endogenous iivariables, ii nothing iiwould ii be iidetermined ii by iithe
ii model iiso ii it ii would ii not iiserve ii much i i purpose.
6. Why iido iieconomists iido iicomparative iistatics iianalysis? iiWhat iirole iido
iiendogenous i i variables iiand iiexogenous iivariables iiplay iiin ii comparative
iistatics iianalysis?
Comparative iistatics iianalyses iiare iiperformed iito iidetermine iihow ii the iilevels iiof
iiendogenous iivariables i i change iias iisome iiexogenous iivariable ii is iichanged. ii ii This iitype
iiof iianalysis ii is ii very iiimportant iisince ii in i i the iireal iiworld iithe iiexogenous iivariables,
ii such iias iiweather, ii policy iitools, ii etc. ii are iialways iichanging i i and ii it i i is iiuseful iito
ii know iihow iichanges ii in iithese iivariables iiaffect i i the ii levels iiof iiother, ii endogenous,
i i variables. ii ii An iiexample ii of iicomparative iistatics iianalysis iiwould ii be iiasking iithe
iiquestion: ii If i i extraordinarily iilow iirainfall ii(an iiexogenous iivariable) ii causes iia ii30
iipercent ii reduction iiin iicorn iisupply, i i by iihow ii much iiwill iithe ii market ii price ii for ii corn
ii(an iiendogenous iivariable) ii increase?
7. What iiis iithe iidifference iibetween iipositive iiand iinormative iianalysis?
iiWhich iiof iithe i i following iiquestions iiwould iientail iipositive iianalysis, ii and
iiwhich iinormative iianalysis?
a) What iieffect iiwill iiInternet iiauction iicompanies iihave iion iithe iiprofits iiof iilocal
Copyright ii© ii2014 iiJohn iiWiley ii& iiSons, Chapter ii1 ii- ii
ii Inc. 3
, Besanko ii& iiBraeutigam ii– iiMicroeconomics, ii5th Solutions
iiautomobile i i dealerships? iiManual
ii
edition
b) Should iithe iigovernment iiimpose iispecial iitaxes iion iisales iiof iimerchandise
iimade iiover iithe i i Internet?
Positive iianalysis iiattempts iito iiexplain iihow iian iieconomic iisystem iiworks iior iito iipredict
ii how iiit ii will i i change iiover iitime ii by iiasking ii explanatory iior ii predictive iiquestions. ii
ii Normative iianalysis ii focuses iion i i what ii should iibe iidone iiby iiasking iiprescriptive
iiquestions.
Copyright ii© ii2014 iiJohn iiWiley ii& iiSons, Chapter ii1 ii- ii
ii Inc. 4
