Besanko & Braeutigam – Microeconomics, 5th edition
ss ss ss ss ss ss Solutions Manual
ss
Copyright © 2014 John Wiley & Sons, Inc.
ss ss ss ss ss ss ss Chapter 1 - 1
ss ss ss
,Besanko & Braeutigam – Microeconomics, 5th edition
ss ss ss ss ss ss Solutions Manual ss
Chapter 1 ss
Analyzing Economic Problems ss ss
Solutions to Review Questions ss ss ss
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 ss ss ss ss ss ss ss ss ss ss ss
a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
ss ss ss ss ss ss ss ss ss s s ss ss ss ss ss
economy performs, examining such topics as the aggregate levels of income and employment,
ss ss ss ss ss ss ss ss ss ss ss ss ss
the levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
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
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 the
ss ss ss ss ss ss s s ss ss ss ss ss ss ss ss
choices we can make about which goods and services to produce. Thus, economics is often
ss ss ss ss ss ss ss ss ss ss ss s s ss ss ss
described as the science of constrained choice.
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3. How does the tool of constrained optimization help decision makers make choices?
ss ss ss ss ss ss ss ss ss ss ss
What roles do the objective function and constraints play in a model of constrained
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
optimization?
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 to
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
determine which yields the highest profit. The constraints place limitations on the choice the
ss ss ss ss ss ss s s ss ss ss ss ss ss ss
decision maker can select and defines the set of alternatives from which the best will be
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
chosen.
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4. Suppose the market for wheat is competitive, with an upward-sloping supply curve, a ss ss ss ss ss ss ss ss ss ss ss ss
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
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
price (e.g., $2.50 per bushel) not be an equilibrium price?
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
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
Copyright © 2014 John Wiley & Sons, Inc.
ss ss ss ss ss ss ss Chapter 1 - 2 ss ss ss
,Besanko & Braeutigam – Microeconomics, 5th edition
ss ss ss ss ss ss Solutions Manual
ss
suppliers realize they are not selling the units they have made available, sellers will bid down
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
the
ss
Copyright © 2014 John Wiley & Sons, Inc.
ss ss ss ss ss ss ss Chapter 1 - 3
ss ss ss
, Besanko & Braeutigam – Microeconomics, 5th edition
ss ss ss ss ss ss Solutions Manual ss
price to entice more consumers to purchase their goods or services. By definition, equilibrium
ss ss ss ss ss ss ss ss ss ss s s ss ss
is a state that will remain unchanged as long as exogenous factors remain unchanged. Since
ss ss ss ss ss ss ss ss ss ss ss ss ss ss s s
in this case suppliers will lower their price, this high price cannot be an equilibrium.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss 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 prices
ss ss ss ss s s ss ss ss ss ss ss ss ss ss ss
to purchase the limited units available. Since the price will change, it cannot be an
ss ss ss ss ss ss s s ss ss ss ss ss ss ss ss
equilibrium.
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5. What is the difference between an exogenous variable and an endogenous variable ss ss ss ss ss ss ss ss ss ss ss
in an economic model? Would it ever be useful to construct a model that contained only
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
exogenous variables (and no endogenous variables)?
ss ss ss ss ss ss
Exogenous variables are taken as given in an economic model, i.e., they are determined by some
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
process outside the model, while endogenous variables are determined within the economic
ss ss ss ss ss ss ss ss ss ss ss ss
model being studied.
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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 endogenousss ss ss ss ss ss ss ss ss ss
variables and exogenous variables play in comparative statics analysis?
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, etc.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
are always changing and it is useful to know how changes in these variables affect the levels
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
of other, endogenous, variables. An example of comparative statics analysis would be asking
ss ss ss ss s s ss ss ss ss ss ss ss ss
the question: If extraordinarily low rainfall (an exogenous variable) causes a 30 percent
ss ss ss ss ss ss ss ss ss ss ss ss ss
reduction in corn supply, by how much will the market price for corn (an endogenous variable)
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
increase?
ss
7. What is the difference between positive and normative analysis? Which of the ss ss ss ss ss ss ss ss ss ss ss
following questions would entail positive analysis, and which normative analysis?
ss ss ss ss ss ss ss ss ss ss
a) What effect will Internet auction companies have on the profits of local automobile
ss ss ss ss ss ss ss ss ss ss ss ss
dealerships?
ss
b) Should the government impose special taxes on sales of merchandise made over the
ss ss ss ss ss ss ss ss ss ss ss ss
Internet?
ss
Positive analysis attempts to explain how an economic system works or to predict how it will
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
Copyright © 2014 John Wiley & Sons, Inc. ss ss ss ss ss ss ss Chapter 1 - 4 ss ss ss
ss ss ss ss ss ss Solutions Manual
ss
Copyright © 2014 John Wiley & Sons, Inc.
ss ss ss ss ss ss ss Chapter 1 - 1
ss ss ss
,Besanko & Braeutigam – Microeconomics, 5th edition
ss ss ss ss ss ss Solutions Manual ss
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, such as ss ss ss ss ss ss ss ss ss ss ss
a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
ss ss ss ss ss ss ss ss ss s s ss ss ss ss ss
economy performs, examining such topics as the aggregate levels of income and employment,
ss ss ss ss ss ss ss ss ss ss ss ss ss
the levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss 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 the
ss ss ss ss ss ss s s ss ss ss ss ss ss ss ss
choices we can make about which goods and services to produce. Thus, economics is often
ss ss ss ss ss ss ss ss ss ss ss s s ss ss ss
described as the science of constrained choice.
ss ss ss ss ss ss ss
3. How does the tool of constrained optimization help decision makers make choices?
ss ss ss ss ss ss ss ss ss ss ss
What roles do the objective function and constraints play in a model of constrained
ss ss ss ss ss ss ss ss ss ss ss ss ss ss
optimization?
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 to
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
determine which yields the highest profit. The constraints place limitations on the choice the
ss ss ss ss ss ss s s ss ss ss ss ss ss ss
decision maker can select and defines the set of alternatives from which the best will be
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
chosen.
ss
4. Suppose the market for wheat is competitive, with an upward-sloping supply curve, a ss ss ss ss ss ss ss ss ss ss ss ss
downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why would
ss ss ss ss ss ss ss ss ss ss ss ss ss
a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a lower
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
price (e.g., $2.50 per bushel) not be an equilibrium price?
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
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
Copyright © 2014 John Wiley & Sons, Inc.
ss ss ss ss ss ss ss Chapter 1 - 2 ss ss ss
,Besanko & Braeutigam – Microeconomics, 5th edition
ss ss ss ss ss ss Solutions Manual
ss
suppliers realize they are not selling the units they have made available, sellers will bid down
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
the
ss
Copyright © 2014 John Wiley & Sons, Inc.
ss ss ss ss ss ss ss Chapter 1 - 3
ss ss ss
, Besanko & Braeutigam – Microeconomics, 5th edition
ss ss ss ss ss ss Solutions Manual ss
price to entice more consumers to purchase their goods or services. By definition, equilibrium
ss ss ss ss ss ss ss ss ss ss s s ss ss
is a state that will remain unchanged as long as exogenous factors remain unchanged. Since
ss ss ss ss ss ss ss ss ss ss ss ss ss ss s s
in this case suppliers will lower their price, this high price cannot be an equilibrium.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss 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 prices
ss ss ss ss s s ss ss ss ss ss ss ss ss ss ss
to purchase the limited units available. Since the price will change, it cannot be an
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 variable ss ss ss ss ss ss ss ss ss ss ss
in an economic model? Would it ever be useful to construct a model that contained only
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
exogenous variables (and no endogenous variables)?
ss ss ss ss ss ss
Exogenous variables are taken as given in an economic model, i.e., they are determined by some
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
process outside the model, while endogenous variables are determined within the economic
ss ss ss ss ss ss ss ss ss ss ss ss
model being studied.
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 endogenousss ss ss ss ss ss ss ss ss ss
variables and exogenous variables play in comparative statics analysis?
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, etc.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
are always changing and it is useful to know how changes in these variables affect the levels
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
of other, endogenous, variables. An example of comparative statics analysis would be asking
ss ss ss ss s s ss ss ss ss ss ss ss ss
the question: If extraordinarily low rainfall (an exogenous variable) causes a 30 percent
ss ss ss ss ss ss ss ss ss ss ss ss ss
reduction in corn supply, by how much will the market price for corn (an endogenous variable)
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
increase?
ss
7. What is the difference between positive and normative analysis? Which of the ss ss ss ss ss ss ss ss ss ss ss
following questions would entail positive analysis, and which normative analysis?
ss ss ss ss ss ss ss ss ss ss
a) What effect will Internet auction companies have on the profits of local automobile
ss ss ss ss ss ss ss ss ss ss ss ss
dealerships?
ss
b) Should the government impose special taxes on sales of merchandise made over the
ss ss ss ss ss ss ss ss ss ss ss ss
Internet?
ss
Positive analysis attempts to explain how an economic system works or to predict how it will
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss
Copyright © 2014 John Wiley & Sons, Inc. ss ss ss ss ss ss ss Chapter 1 - 4 ss ss ss
