Solution manual for microeconomics 6th edition by david esanko ronald raeutigam

Besanko & Braeutigam – Microeconomics, 5th edition
E E E E E E Solutions Manual
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Chapter1 E




AnalyzingEconomicProblems E E




Solutions to Review Questions
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E E E E E E E Chapter 1 - 1
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,Besanko & Braeutigam – Microeconomics, 5th edition
E E E E E E Solutions Manual E




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 a E E E E E E E E E E E E




consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
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economy performs, examining such topics as the aggregate levels of income and employment, the
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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 those
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goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce”
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because their supply is limited. This scarcity implies that we are constrained in the choices we
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can make about which goods and services to produce. Thus, economics is often described as the
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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
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optimization?
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Constrained optimization allows the decision maker to select the best (optimal) alternative while
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accounting for any possible limitations or restrictions on the choices. The objective function
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represents the relationship to be maximized or minimized. For example, a firm‟s profit might be the
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objective function and all choices will be evaluated in the profit function to determine which yields
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the highest profit. The constraints place limitations on the choice the decision maker can select
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and defines the set of alternatives from which the best will be chosen.
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4. Suppose the market for wheat is competitive, with an upward-sloping supply curve, a E E E E E E E E E E E E




downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why
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would a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a
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lower price (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 purchase
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fewer units than suppliers would be willing to sell, creating an excess supply. As suppliers realize
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they are not selling the units they have made available, sellers will bid down the
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Copyright © 2014 John Wiley & Sons, Inc. E E E E E E E Chapter 1 - 2 E E E

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




price to entice more consumers to purchase their goods or services. By definition, equilibrium is a
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state that will remain unchanged as long as exogenous factors remain unchanged. Since in this
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case suppliers will lower their price, this high price cannot be an equilibrium.
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When the price is below the equilibrium price, consumers will demand more units than suppliers
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have made available. This excess demand will entice consumers to bid up the prices to purchase
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the limited units available. Since the price will change, it cannot be an equilibrium.
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5. What is the difference between an exogenous variable and an endogenous variable in E E E E E E E E E E E E




an economic model? Would it ever be useful to construct a model that contained only
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exogenous variables (and no endogenous variables)?
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Exogenous variables are taken as given in an economic model, i.e., they are determined by some
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process outside the model, while endogenous variables are determined within the economic model
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being studied.
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An economic model that contained no endogenous variables would not be very interesting. With no
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endogenous variables, nothing would be determined by the model so it would not serve much
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purpose.
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6. Why do economists do comparative statics analysis? What role do endogenous E E E E E E E E E E




variables and exogenous variables play in comparative statics analysis?
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Comparative statics analyses are performed to determine how the levels of endogenous variables
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change as some exogenous variable is changed. This type of analysis is very important since in
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the real world the exogenous variables, such as weather, policy tools, etc. are always changing and
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it is useful to know how changes in these variables affect the levels of other, endogenous,
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variables. An example of comparative statics analysis would be asking the question: If
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extraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn supply, by
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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 the E E E E E E E E E E E




following questions would entail positive analysis, and which normative analysis?
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a) What effect will Internet auction companies have on the profits of local automobile
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dealerships?
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b) Should the government impose special taxes on sales of merchandise made over the
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Internet?
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Positive analysis attempts to explain how an economic system works or to predict how it will
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change over time by asking explanatory or predictive questions. Normative analysis focuses on
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what should be done by asking prescriptive questions.
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Copyright © 2014 John Wiley & Sons, Inc. E E E E E E E Chapter 1 - 3 E E E

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




a) Because this question asks whether dealership profits will go up or down (and by
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how much) – but refrains from inquiring as to whether this would be a good thing – it
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is an example of positive analysis.
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b) On the other hand, this question asks whether it is desirable to impose taxes on
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Internet sales, so it is normative analysis. Notably, this question does not ask
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what the effect of such taxes would be.
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Solutions to Problems E E




1.1 Discuss the following statement: ―Since supply and demand curves are always E E E E E E E E E E




shifting, markets never actually reach an equilibrium. Therefore, the concept of
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equilibrium is useless.‖
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While the claim that markets never reach an equilibrium is probably debatable, even if markets do
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not ever reach equilibrium, the concept is still of central importance. The concept of equilibrium
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is important because it provides a simple way to predict how market prices and quantities will
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change as exogenous variables change. Thus, while we may never reach a particular equilibrium
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price, say because a supply or demand schedule shifts as the market moves toward equilibrium, we
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can predict with relative ease, for example, whether prices will be rising or falling when exogenous
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market factors change as we move toward equilibrium. As exogenous variables continue to
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change, we can continue to predict the direction of change for the endogenous variables, and this is
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not “useless.”
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1.2 In an article entitled, ―Corn Prices Surge on Export Demand, Crop Data,‖ The Wall
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Street Journal identified several exogenous shocks that pushed U.S. corn prices sharply
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higher.(See the article by Aaron Lucchetti, August 22, 1997, p. C17. on national income.) Suppose the U.S.
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market for corn is competitive, with an upward-sloping supply curve and a downward-
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sloping demand curve. For each of the following scenarios, illustrate graphically how the
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exogenous event described will contribute to a higher price of corn in the U.S. market.
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a) The U.S. Department of Agriculture announces that exports of corn to Taiwan and
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Japan were ―surprisingly bullish,‖ around 30 percent higher than had been expected.
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b) Some analysts project that the size of the U.S. corn crop will hit a six-year low because of
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dry weather.
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c) The strengthening of El Niño, the meteorological trend that brings warmer weather to
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the western coast of South America, reduces corn production outside the United States,
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thereby increasing foreign countries’ dependence on the U.S. corn crop.
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