Besanko & Braeutigam – Microeconomics, 5th edition

Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual



Chapter 1
Analyzing Economic Problems

Solutions to Review Questions
1. What is the difference between microeconomics and macroeconomics?

MicroeconomicsAstudiesAtheAeconomicAbehaviorAofAindividualAeconomicAdecisionAmakers,AsuchAa
sAaAconsumer,AaAworker,AaAfirm,AorAaAmanager.A MacroeconomicsAstudiesAhowAanAentireAnationalA
economyAperforms,AexaminingAsuchAtopicsAasAtheAaggregateAlevelsAofAincomeAandAemployment,A
theAlevelsAofAinterestAratesAandAprices,AtheArateAofAinflation,AandAtheAnatureAofAbusinessAcycles.

2. WhyAisAeconomicsAoftenAdescribedAasAtheAscienceAofAconstrainedAchoice?

WhileAourAwantsAforAgoodsAandAservicesAareAunlimited,AtheAresourcesAnecessaryAtoAproduceAthos
eAgoodsAandAservices,AsuchAasAlabor,AmanagerialAtalent,Acapital,AandArawAmaterials,AareA“scarce”A
becauseAtheirAsupplyAisAlimited.A ThisAscarcityAimpliesAthatAweAareAconstrainedAinAtheAchoicesAwe
AcanAmakeAaboutAwhichAgoodsAandAservicesAtoAproduce.A Thus,AeconomicsAisAoftenAdescribedAasAt


heAscienceAofAconstrainedAchoice.

3. HowAdoesAtheAtoolAofAconstrainedAoptimizationAhelpAdecisionAmakersAmakeAchoices
?AWhatArolesAdoAtheAobjectiveAfunctionAandAconstraintsAplayAinAaAmodelAofAconstrainedAo
ptimization?

ConstrainedAoptimizationAallowsAtheAdecisionAmakerAtoAselectAtheAbestA(optimal)AalternativeAwhil
eAaccountingAforAanyApossibleAlimitationsAorArestrictionsAonAtheAchoices.A TheAobjectiveAfunctionA
representsAtheArelationshipAtoAbeAmaximizedAorAminimized.A ForAexample,AaAfirm’sAprofitAmightAb
eAtheAobjectiveAfunctionAandAallAchoicesAwillAbeAevaluatedAinAtheAprofitAfunctionAtoAdetermineAwh
ichAyieldsAtheAhighestAprofit.A TheAconstraintsAplaceAlimitationsAonAtheAchoiceAtheAdecisionAmaker
AcanAselectAandAdefinesAtheAsetAofAalternativesAfromAwhichAtheAbestAwillAbeAchosen.




4. SupposeAtheAmarketAforAwheatAisAcompetitive,AwithAanAupward-
slopingAsupplyAcurve,AaAdownward-
slopingAdemandAcurve,AandAanAequilibriumApriceAofA$4.00AperAbushel.AWhyAwouldAaAhighe
rApriceA(e.g.,A$5.00AperAbushel)AnotAbeAanAequilibriumAprice?AWhyAwouldAaAlowerApriceA(e.
g.,A$2.50AperAbushel)AnotAbeAanAequilibriumAprice?

IfAtheApriceAinAtheAmarketAwasAaboveAtheAequilibriumAprice,AconsumersAwouldAbeAwillingAtoApurc
haseAfewerAunitsAthanAsuppliersAwouldAbeAwillingAtoAsell,AcreatingAanAexcessAsupply.A AsAsupplie
rsArealizeAtheyAareAnotAsellingAtheAunitsAtheyAhaveAmadeAavailable,AsellersAwillAbidAdownAthe

Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 1

,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual


priceAtoAenticeAmoreAconsumersAtoApurchaseAtheirAgoodsAorAservices.A ByAdefinition,AequilibriumA
isAaAstateAthatAwillAremainAunchangedAasAlongAasAexogenousAfactorsAremainAunchanged.A SinceAin
AthisAcaseAsuppliersAwillAlowerAtheirAprice,AthisAhighApriceAcannotAbeAanAequilibrium.




WhenAtheApriceAisAbelowAtheAequilibriumAprice,AconsumersAwillAdemandAmoreAunitsAthanAsupplie
rsAhaveAmadeAavailable.A ThisAexcessAdemandAwillAenticeAconsumersAtoAbidAupAtheApricesAtoApurc
haseAtheAlimitedAunitsAavailable.A SinceAtheApriceAwillAchange,AitAcannotAbeAanAequilibrium.

5. WhatAaisAatheAadifferenceAabetweenAaanAaexogenousAavariableAaandAaanAaendogenous
AavariableAainAaanAaeconomicAamodel?AaWouldAaitAaeverAabeAausefulAatoAaconstructAaaAamo


delAathatAacontainedAaonlyAaexogenousAavariablesAa(andAanoAaendogenousAavariables)?

ExogenousAavariablesAaareAatakenAaasAagivenAainAaanAaeconomicAamodel,Aai.e.,AatheyaareAadeterminedAab
yAasomeAaprocessAaoutsideAatheAamodel,AawhileAaendogenousAavariablesAaareAadeterminedAawithinAat
heAaeconomicAamodelAabeingAastudied.
AnAaeconomicA amodelAathatA acontainedA anoA aendogenousA avariablesA awouldA anotAabeAaveryAainteresting
.AaAWithAanoAaendogenousAavariables,AanothingAawouldAabeAadeterminedAabyAatheAamodelAasoAaitAawo
uldAanotAaserveAamuchAapurpose.

6. WhyAadoAaeconomistsAadoAacomparativeAastaticsAaanalysis?AaWhatAaroleAad
oAaendogenousAavariablesAaandAaexogenousAavariablesAaplayAainAacomparativeAastat
icsAaanalysis?

ComparativeAastaticsAaanalysesAaareAaperformedAatoAadetermineAahowAatheAalevelsAaofAaendogenousA
avariablesAachangeAaasAasomeAaexogenousAavariableAaisAachanged.A aAThisAatypeAaofAaanalysisAaisAaver
yAaimportantAasinceAainAatheAarealAaworldAatheAaexogenousAavariables,AasuchAaasAaweather,AapolicyAatoo
ls,Aaetc.AaareAaalwaysAachangingAaandAaitAaisAausefulAatoAaknowAahowAachangesAainAatheseAavariablesAaaf
fectAatheAalevelsAaofAaother,Aaendogenous,Aavariables.A aAAnAaexampleAaofAacomparativeAastaticsAaana
lysisAawouldAabeAaaskingAatheAaquestion:AaIfAaextraordinarilyAalowAarainfallAa(anAaexogenousAavariabl
e)AacausesAaaAa30AapercentAareductionAainAacornAasupply,AabyAahowAamuchAawillAatheAamarketAapriceAaf
orAacornAa(anAaendogenousAavariable)Aaincrease?

7. WhatAaisAatheAadifferenceAabetweenAapositiveAaandAanormativeAaanalysis?AaWhic
hAaofAatheAafollowingAaquestionsAawouldAaentailAapositiveAaanalysis,AaandAawhichAanormat
iveAaanalysis?
a) WhatAaeffectAawillAaInternetAaauctionAacompaniesahaveAaonAatheAaprofitsAaofAaloc
alAaautomobileAadealerships?
b) ShouldAatheAagovernmentAaimposeAaspecialAataxesAaonAasalesAaofAamerchandiseAamad
eAaoverAatheAaInternet?

PositiveAaanalysisAaattemptsAatoAaexplainAahowAaanAaeconomicAasystemAaworksAaorAatoAapredictAahowAa
itAawillAachangeAaoverAatimeAabyaaskingAaexplanatoryaorAapredictiveAaquestions.A aANormativeAaanaly

Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 2

,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual

sis




Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 3

, Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual


afocusesAaonA awhatA ashouldA abeA adoneAabyAaaskingAaprescriptiveA aquestions.




Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 4