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