Besanko & Braeutigam – Microeconomics, 5th edition
q q q q q q Solutions Manual
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Copyright © 2014 John Wiley & Sons, Inc.
q q q q q q q Chapter 1 - 1
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,Besanko & Braeutigam – Microeconomics, 5th edition
q q q q q q Solutions Manual q
Chapter 1 q
Analyzing Economic Problems q q
Solutions to Review Questions q q q
1. What is the difference between microeconomics and macroeconomics?
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Microeconomics studies the economic behavior of individual economic decision makers, such as
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a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
q q q q q q q q q q q q q q q
economy performs, examining such topics as the aggregate levels of income and employment,
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the levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
q q q q q q q q q q q q q q q q q
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 the
q q q q q q q q q q q q q q q
choices we can make about which goods and services to produce. Thus, economics is often
q q q q q q q q q q q q q q q
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
q q q q q q q q q q q q q q
optimization?
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Constrained optimization allows the decision maker to select the best (optimal) alternative
q q q q q q q q q q q
while accounting for any possible limitations or restrictions on the choices. The objective
q q q q q q q q q q q q q
function represents the relationship to be maximized or minimized. For example, a firm’s
q q q q q q q q q q q q q
profit might be the objective function and all choices will be evaluated in the profit function to
q q q q q q q q q q q q q q q q q
determine which yields the highest profit. The constraints place limitations on the choice the
q q q q q q q q q q q q q q
decision maker can select and defines the set of alternatives from which the best will be
q q q q q q q q q q q q q q q q
chosen.
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4. Suppose the market for wheat is competitive, with an upward-sloping supply curve, a
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downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why would
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a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a lower price
q q q q q q q q q q q q q q q q q
(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
q q q q q q q q q q q q q q q
qpurchase fewer units than suppliers would be willing to sell, creating an excess supply. As
q q q q q q q q q q q q q q
Copyright © 2014 John Wiley & Sons, Inc.
q q q q q q q Chapter 1 - 2 q q q
,Besanko & Braeutigam – Microeconomics, 5th edition
q q q q q q Solutions Manual
q
suppliers realize they are not selling the units they have made available, sellers will bid down
q q q q q q q q q q q q q q q q
the
q
Copyright © 2014 John Wiley & Sons, Inc.
q q q q q q q Chapter 1 - 3
q q q
, Besanko & Braeutigam – Microeconomics, 5th edition
q q q q q q Solutions Manual q
price to entice more consumers to purchase their goods or services. By definition, equilibrium
q q q q q q q q q q q q q
is a state that will remain unchanged as long as exogenous factors remain unchanged. Since
q q q q q q q q q q q q q q q
in this case suppliers will lower their price, this high price cannot be an equilibrium.
q q q q q q q q q q q q q q q
When the price is below the equilibrium price, consumers will demand more units than
q q q q q q q q q q q q q
suppliers have made available. This excess demand will entice consumers to bid up the prices
q q q q q q q q q q q q q q q
to purchase the limited units available. Since the price will change, it cannot be an
q q q q q q q q q q q q q q q
equilibrium.
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5. What is the difference between an exogenous variable and an endogenous variable
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in an economic model? Would it ever be useful to construct a model that contained only
q q q q q q q q q q q q q q q q
exogenous variables (and no endogenous variables)?
q q q q q q
Exogenous variables are taken as given in an economic model, i.e., they are determined by
q q q q q q q q q q q q q q
some process outside the model, while endogenous variables are determined within the
q q q q q q q q q q q q
economic model being studied.
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An economic model that contained no endogenous variables would not be very interesting.
q q q q q q q q q q q q
qWith no endogenous variables, nothing would be determined by the model so it would not
q q q q q q q q q q q q q q
serve much purpose.
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6. Why do economists do comparative statics analysis? What role do endogenous
q q q q q q q q q q
variables and exogenous variables play in comparative statics analysis?
q q q q q q q q q
Comparative statics analyses are performed to determine how the levels of endogenous
q q q q q q q q q q q
variables change as some exogenous variable is changed. This type of analysis is very
q q q q q q q q q q q q q q
important since in the real world the exogenous variables, such as weather, policy tools, etc.
q q q q q q q q q q q q q q q
are always changing and it is useful to know how changes in these variables affect the levels
q q q q q q q q q q q q q q q q q
of other, endogenous, variables. An example of comparative statics analysis would be asking
q q q q q q q q q q q q q
the question: If extraordinarily low rainfall (an exogenous variable) causes a 30 percent
q q q q q q q q q q q q q
reduction in corn supply, by how much will the market price for corn (an endogenous variable)
q q q q q q q q q q q q q q q q
increase?
q
7. What is the difference between positive and normative analysis? Which of the
q q q q q q q q q q q
following questions would entail positive analysis, and which normative analysis?
q q q q q q q q q q
a) What effect will Internet auction companies have on the profits of local automobile
q q q q q q q q q q q q
dealerships?
q
b) Should the government impose special taxes on sales of merchandise made over the
q q q q q q q q q q q q
Internet?
q
Positive analysis attempts to explain how an economic system works or to predict how it will
q q q q q q q q q q q q q q q
Copyright © 2014 John Wiley & Sons, Inc.
q q q q q q q Chapter 1 - 4 q q q
q q q q q q Solutions Manual
q
Copyright © 2014 John Wiley & Sons, Inc.
q q q q q q q Chapter 1 - 1
q q q
,Besanko & Braeutigam – Microeconomics, 5th edition
q q q q q q Solutions Manual q
Chapter 1 q
Analyzing Economic Problems q q
Solutions to Review Questions q q q
1. What is the difference between microeconomics and macroeconomics?
q q q q q q q
Microeconomics studies the economic behavior of individual economic decision makers, such as
q q q q q q q q q q q
a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
q q q q q q q q q q q q q q q
economy performs, examining such topics as the aggregate levels of income and employment,
q q q q q q q q q q q q q
the levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
q q q q q q q q q q q q q q q q q
2. Why is economics often described as the science of constrained choice?
q q q q q q q q q q
While our wants for goods and services are unlimited, the resources necessary to produce
q q q q q q q q q q q q q
those goods and services, such as labor, managerial talent, capital, and raw materials, are
q q q q q q q q q q q q q q
“scarce” because their supply is limited. This scarcity implies that we are constrained in the
q q q q q q q q q q q q q q q
choices we can make about which goods and services to produce. Thus, economics is often
q q q q q q q q q q q q q q q
described as the science of constrained choice.
q q q q q q q
3. How does the tool of constrained optimization help decision makers make choices?
q q q q q q q q q q q
What roles do the objective function and constraints play in a model of constrained
q q q q q q q q q q q q q q
optimization?
q
Constrained optimization allows the decision maker to select the best (optimal) alternative
q q q q q q q q q q q
while accounting for any possible limitations or restrictions on the choices. The objective
q q q q q q q q q q q q q
function represents the relationship to be maximized or minimized. For example, a firm’s
q q q q q q q q q q q q q
profit might be the objective function and all choices will be evaluated in the profit function to
q q q q q q q q q q q q q q q q q
determine which yields the highest profit. The constraints place limitations on the choice the
q q q q q q q q q q q q q q
decision maker can select and defines the set of alternatives from which the best will be
q q q q q q q q q q q q q q q q
chosen.
q
4. Suppose the market for wheat is competitive, with an upward-sloping supply curve, a
q q q q q q q q q q q q
downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why would
q q q q q q q q q q q q q
a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a lower price
q q q q q q q q q q q q q q q q q
(e.g., $2.50 per bushel) not be an equilibrium price?
q q q q q q q q q
If the price in the market was above the equilibrium price, consumers would be willing to
q q q q q q q q q q q q q q q
qpurchase fewer units than suppliers would be willing to sell, creating an excess supply. As
q q q q q q q q q q q q q q
Copyright © 2014 John Wiley & Sons, Inc.
q q q q q q q Chapter 1 - 2 q q q
,Besanko & Braeutigam – Microeconomics, 5th edition
q q q q q q Solutions Manual
q
suppliers realize they are not selling the units they have made available, sellers will bid down
q q q q q q q q q q q q q q q q
the
q
Copyright © 2014 John Wiley & Sons, Inc.
q q q q q q q Chapter 1 - 3
q q q
, Besanko & Braeutigam – Microeconomics, 5th edition
q q q q q q Solutions Manual q
price to entice more consumers to purchase their goods or services. By definition, equilibrium
q q q q q q q q q q q q q
is a state that will remain unchanged as long as exogenous factors remain unchanged. Since
q q q q q q q q q q q q q q q
in this case suppliers will lower their price, this high price cannot be an equilibrium.
q q q q q q q q q q q q q q q
When the price is below the equilibrium price, consumers will demand more units than
q q q q q q q q q q q q q
suppliers have made available. This excess demand will entice consumers to bid up the prices
q q q q q q q q q q q q q q q
to purchase the limited units available. Since the price will change, it cannot be an
q q q q q q q q q q q q q q q
equilibrium.
q
5. What is the difference between an exogenous variable and an endogenous variable
q q q q q q q q q q q
in an economic model? Would it ever be useful to construct a model that contained only
q q q q q q q q q q q q q q q q
exogenous variables (and no endogenous variables)?
q q q q q q
Exogenous variables are taken as given in an economic model, i.e., they are determined by
q q q q q q q q q q q q q q
some process outside the model, while endogenous variables are determined within the
q q q q q q q q q q q q
economic model being studied.
q q q q
An economic model that contained no endogenous variables would not be very interesting.
q q q q q q q q q q q q
qWith no endogenous variables, nothing would be determined by the model so it would not
q q q q q q q q q q q q q q
serve much purpose.
q q q
6. Why do economists do comparative statics analysis? What role do endogenous
q q q q q q q q q q
variables and exogenous variables play in comparative statics analysis?
q q q q q q q q q
Comparative statics analyses are performed to determine how the levels of endogenous
q q q q q q q q q q q
variables change as some exogenous variable is changed. This type of analysis is very
q q q q q q q q q q q q q q
important since in the real world the exogenous variables, such as weather, policy tools, etc.
q q q q q q q q q q q q q q q
are always changing and it is useful to know how changes in these variables affect the levels
q q q q q q q q q q q q q q q q q
of other, endogenous, variables. An example of comparative statics analysis would be asking
q q q q q q q q q q q q q
the question: If extraordinarily low rainfall (an exogenous variable) causes a 30 percent
q q q q q q q q q q q q q
reduction in corn supply, by how much will the market price for corn (an endogenous variable)
q q q q q q q q q q q q q q q q
increase?
q
7. What is the difference between positive and normative analysis? Which of the
q q q q q q q q q q q
following questions would entail positive analysis, and which normative analysis?
q q q q q q q q q q
a) What effect will Internet auction companies have on the profits of local automobile
q q q q q q q q q q q q
dealerships?
q
b) Should the government impose special taxes on sales of merchandise made over the
q q q q q q q q q q q q
Internet?
q
Positive analysis attempts to explain how an economic system works or to predict how it will
q q q q q q q q q q q q q q q
Copyright © 2014 John Wiley & Sons, Inc.
q q q q q q q Chapter 1 - 4 q q q
