Besanko & Braeutigam – Microeconomics, 5th edition
hj hj hj hj hj hj Solutions Manual
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Copyright © 2014 John Wiley & Sons, Inc.
hj hj hj hj hj hj hj Chapter 1 - 1
hj hj hj
,Besanko & Braeutigam – Microeconomics, 5th edition
hj hj hj hj hj hj Solutions Manual hj
Chapter 1 hj
Analyzing Economic Problems hj hj
Solutions to Review Questions hj hj hj
1. What is the difference between microeconomics and macroeconomics?
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Microeconomics studies the economic behavior of individual economic decision makers, such a hj hj hj hj hj hj hj hj hj hj hj
s a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire nationa
hj hj hj hj hj hj hj hj hj h j hj hj hj hj hj
l economy performs, examining such topics as the aggregate levels of income and employmen
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t, the levels of interest rates and prices, the rate of inflation, 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 produce tho
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
se goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
” because their supply is limited. This scarcity implies that we are constrained in the choices
hj hj hj hj hj h j hj hj hj hj hj hj hj hj hj hj
we can make about which goods and services to produce. Thus, economics is often described
hj hj hj hj hj hj hj hj hj h j hj hj hj hj hj
as the science of constrained choice.
hj hj hj hj hj
3. How does the tool of constrained optimization help decision makers make choices?
hj hj hj hj hj hj hj hj hj hj hj hj
What roles do the objective function and constraints play in a model of constrained optimi
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
zation?
Constrained optimization allows the decision maker to select the best (optimal) alternative whil
hj hj hj hj hj hj hj hj hj hj hj hj
e accounting for any possible limitations or restrictions on the choices. The objective function
hj hj hj hj hj hj hj hj hj hj h j hj hj h
represents the relationship to be maximized or minimized. For example, a firm’s profit might b
j hj hj hj hj hj hj hj h j hj hj hj hj hj hj
e the objective function and all choices will be evaluated in the profit function to determine w
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
hich yields the highest profit. The constraints place limitations on the choice the decision mak
hj hj hj hj h j hj hj hj hj hj hj hj hj hj
er can select and defines the set of alternatives from which the best will be chosen.
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
4. Suppose the market for wheat is competitive, with an upward- hj hj hj hj hj hj hj hj hj
sloping supply curve, a downward- hj hj hj hj
sloping demand curve, and an equilibrium price of $4.00 per bushel. Why would a higher pr
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
ice (e.g., $5.00 per bushel) not be an equilibrium price? Why would a lower price (e.g., $2.5
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
0 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 purc
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
hase fewer units than suppliers would be willing to sell, creating an excess supply. As supplier
hj hj hj hj hj hj hj hj hj hj hj hj hj h j hj
Copyright © 2014 John Wiley & Sons, Inc. hj hj hj hj hj hj hj Chapter 1 - 2 hj hj hj
,Besanko & Braeutigam – Microeconomics, 5th edition
hj hj hj hj hj hj Solutions Manual
hj
s realize they are not selling the units they have made available, sellers will bid down the
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
Copyright © 2014 John Wiley & Sons, Inc.
hj hj hj hj hj hj hj Chapter 1 - 3
hj hj hj
, Besanko & Braeutigam – Microeconomics, 5th edition
hj hj hj hj hj hj Solutions Manual hj
price to entice more consumers to purchase their goods or services. By definition, equilibrium
hj hj hj hj hj hj hj hj hj hj h j hj hj hj
is a state that will remain unchanged as long as exogenous factors remain unchanged. Since in
hj hj hj hj hj hj hj hj hj hj hj hj hj h j hj
this case suppliers will lower their price, this high price cannot be an equilibrium.
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
When the price is below the equilibrium price, consumers will demand more units than supplie
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
rs have made available. This excess demand will entice consumers to bid up the prices to purc
hj hj hj h j hj hj hj hj hj hj hj hj hj hj hj hj
hase the limited units available. Since the price will change, it cannot be an equilibrium.
hj hj hj hj h j hj hj hj hj hj hj hj hj hj
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
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
exogenous variables (and no endogenous variables)? hj hj hj hj hj
Exogenous variables are taken as given in an economic model, i.e., they are determined by som
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
e process outside the model, while endogenous variables are determined within the economic
hj hj hj hj hj hj hj hj hj hj hj hj
model being studied.
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An economic model that contained no endogenous variables would not be very interesting. Wi
hj hj hj hj hj hj hj hj hj hj hj hj h j
th no endogenous variables, nothing would be determined by the model so it would not serve
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much purpose. hj
6. Why do economists do comparative statics analysis? What role do endogenous
hj hj hj hj hj hj hj hj hj hj hj
variables and exogenous variables play in comparative statics analysis?
hj hj hj hj hj hj hj hj
Comparative statics analyses are performed to determine how the levels of endogenous variab
hj hj hj hj hj hj hj hj hj hj hj hj
les change as some exogenous variable is changed. This type of analysis is very important sinc
hj hj hj hj hj hj hj h j hj hj hj hj hj hj hj
e in the real world the exogenous variables, such as weather, policy tools, etc. are always chan
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
ging and it is useful to know how changes in these variables affect the levels of other, endoge
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
nous, variables. An example of comparative statics analysis would be asking the question: If e
hj h j hj hj hj hj hj hj hj hj hj hj hj hj
xtraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn supply,
hj hj hj hj hj hj hj hj hj hj hj hj hj h
by how much will the market price for corn (an endogenous variable) increase?
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7. What is the difference between positive and normative analysis? Which of thehj hj hj hj hj hj hj hj hj hj hj hj
following questions would entail positive analysis, and which normative analysis?
hj hj hj hj hj hj hj hj hj
a) What effect will Internet auction companies have on the profits of local automobile
hj hj hj hj hj hj hj hj hj hj hj hj hj
dealerships?
b) Should the government impose special taxes on sales of merchandise made over the
hj hj hj hj hj hj hj hj hj hj hj hj hj
Internet?
Positive analysis attempts to explain how an economic system works or to predict how it will c
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
hange over time by asking explanatory or predictive questions. Normative analysis focuses on
hj hj hj hj hj hj hj hj h j hj hj hj hj
what should be done by asking prescriptive questions.
hj hj hj hj hj hj hj
Copyright © 2014 John Wiley & Sons, Inc. hj hj hj hj hj hj hj Chapter 1 - 4 hj hj hj
hj hj hj hj hj hj Solutions Manual
hj
Copyright © 2014 John Wiley & Sons, Inc.
hj hj hj hj hj hj hj Chapter 1 - 1
hj hj hj
,Besanko & Braeutigam – Microeconomics, 5th edition
hj hj hj hj hj hj Solutions Manual hj
Chapter 1 hj
Analyzing Economic Problems hj hj
Solutions to Review Questions hj hj hj
1. What is the difference between microeconomics and macroeconomics?
hj hj hj hj hj hj hj
Microeconomics studies the economic behavior of individual economic decision makers, such a hj hj hj hj hj hj hj hj hj hj hj
s a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire nationa
hj hj hj hj hj hj hj hj hj h j hj hj hj hj hj
l economy performs, examining such topics as the aggregate levels of income and employmen
hj hj hj hj hj hj hj hj hj hj hj hj hj
t, the levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
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 tho
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
se goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
” because their supply is limited. This scarcity implies that we are constrained in the choices
hj hj hj hj hj h j hj hj hj hj hj hj hj hj hj hj
we can make about which goods and services to produce. Thus, economics is often described
hj hj hj hj hj hj hj hj hj h j hj hj hj hj hj
as the science of constrained choice.
hj hj hj hj hj
3. How does the tool of constrained optimization help decision makers make choices?
hj hj hj hj hj hj hj hj hj hj hj hj
What roles do the objective function and constraints play in a model of constrained optimi
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
zation?
Constrained optimization allows the decision maker to select the best (optimal) alternative whil
hj hj hj hj hj hj hj hj hj hj hj hj
e accounting for any possible limitations or restrictions on the choices. The objective function
hj hj hj hj hj hj hj hj hj hj h j hj hj h
represents the relationship to be maximized or minimized. For example, a firm’s profit might b
j hj hj hj hj hj hj hj h j hj hj hj hj hj hj
e the objective function and all choices will be evaluated in the profit function to determine w
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
hich yields the highest profit. The constraints place limitations on the choice the decision mak
hj hj hj hj h j hj hj hj hj hj hj hj hj hj
er can select and defines the set of alternatives from which the best will be chosen.
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
4. Suppose the market for wheat is competitive, with an upward- hj hj hj hj hj hj hj hj hj
sloping supply curve, a downward- hj hj hj hj
sloping demand curve, and an equilibrium price of $4.00 per bushel. Why would a higher pr
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
ice (e.g., $5.00 per bushel) not be an equilibrium price? Why would a lower price (e.g., $2.5
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
0 per bushel) not be an equilibrium price?
hj hj hj hj hj hj hj
If the price in the market was above the equilibrium price, consumers would be willing to purc
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
hase fewer units than suppliers would be willing to sell, creating an excess supply. As supplier
hj hj hj hj hj hj hj hj hj hj hj hj hj h j hj
Copyright © 2014 John Wiley & Sons, Inc. hj hj hj hj hj hj hj Chapter 1 - 2 hj hj hj
,Besanko & Braeutigam – Microeconomics, 5th edition
hj hj hj hj hj hj Solutions Manual
hj
s realize they are not selling the units they have made available, sellers will bid down the
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
Copyright © 2014 John Wiley & Sons, Inc.
hj hj hj hj hj hj hj Chapter 1 - 3
hj hj hj
, Besanko & Braeutigam – Microeconomics, 5th edition
hj hj hj hj hj hj Solutions Manual hj
price to entice more consumers to purchase their goods or services. By definition, equilibrium
hj hj hj hj hj hj hj hj hj hj h j hj hj hj
is a state that will remain unchanged as long as exogenous factors remain unchanged. Since in
hj hj hj hj hj hj hj hj hj hj hj hj hj h j hj
this case suppliers will lower their price, this high price cannot be an equilibrium.
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
When the price is below the equilibrium price, consumers will demand more units than supplie
hj hj hj hj hj hj hj hj hj hj hj hj hj hj
rs have made available. This excess demand will entice consumers to bid up the prices to purc
hj hj hj h j hj hj hj hj hj hj hj hj hj hj hj hj
hase the limited units available. Since the price will change, it cannot be an equilibrium.
hj hj hj hj h j hj hj hj hj hj hj hj hj hj
5. What is the difference between an exogenous variable and an endogenous variable
hj hj hj hj hj hj hj hj hj hj hj hj
in an economic model? Would it ever be useful to construct a model that contained only
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
exogenous variables (and no endogenous variables)? hj hj hj hj hj
Exogenous variables are taken as given in an economic model, i.e., they are determined by som
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
e process outside the model, while endogenous variables are determined within the economic
hj hj hj hj hj hj hj hj hj hj hj hj
model being studied.
hj hj hj
An economic model that contained no endogenous variables would not be very interesting. Wi
hj hj hj hj hj hj hj hj hj hj hj hj h j
th no endogenous variables, nothing would be determined by the model so it would not serve
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
much purpose. hj
6. Why do economists do comparative statics analysis? What role do endogenous
hj hj hj hj hj hj hj hj hj hj hj
variables and exogenous variables play in comparative statics analysis?
hj hj hj hj hj hj hj hj
Comparative statics analyses are performed to determine how the levels of endogenous variab
hj hj hj hj hj hj hj hj hj hj hj hj
les change as some exogenous variable is changed. This type of analysis is very important sinc
hj hj hj hj hj hj hj h j hj hj hj hj hj hj hj
e in the real world the exogenous variables, such as weather, policy tools, etc. are always chan
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
ging and it is useful to know how changes in these variables affect the levels of other, endoge
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
nous, variables. An example of comparative statics analysis would be asking the question: If e
hj h j hj hj hj hj hj hj hj hj hj hj hj hj
xtraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn supply,
hj hj hj hj hj hj hj hj hj hj hj hj hj h
by how much will the market price for corn (an endogenous variable) increase?
j hj hj hj hj hj hj hj hj hj hj hj hj
7. What is the difference between positive and normative analysis? Which of thehj hj hj hj hj hj hj hj hj hj hj hj
following questions would entail positive analysis, and which normative analysis?
hj hj hj hj hj hj hj hj hj
a) What effect will Internet auction companies have on the profits of local automobile
hj hj hj hj hj hj hj hj hj hj hj hj hj
dealerships?
b) Should the government impose special taxes on sales of merchandise made over the
hj hj hj hj hj hj hj hj hj hj hj hj hj
Internet?
Positive analysis attempts to explain how an economic system works or to predict how it will c
hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj hj
hange over time by asking explanatory or predictive questions. Normative analysis focuses on
hj hj hj hj hj hj hj hj h j hj hj hj hj
what should be done by asking prescriptive questions.
hj hj hj hj hj hj hj
Copyright © 2014 John Wiley & Sons, Inc. hj hj hj hj hj hj hj Chapter 1 - 4 hj hj hj
