Solution Manual for Analyzing Economic Problems (PDF) | 2026 Economics Solutions | Economics Study Guide

Besanko & Braeutigam – Microeconomics, 5th
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edition Manual




Copyright © 2014 John Wiley & Sons,
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,Besanko & Braeutigam – Microeconomics, 5th
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edition Manual

Chapter 1 mm




Analyzing Economic Problems mm mm




Solutions to Review Questions mm mm mm




1. What is the difference between microeconomics and macroeconomics?
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Microeconomics studies the economic behavior of individual economic decision makers,
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such as a consumer, a worker, a firm, or a manager. Macroeconomics studies how an
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entire national economy performs, examining such topics as the aggregate levels of
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income and employment, the levels of interest rates and prices, the rate of inflation,
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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
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produce those goods and services, such as labor, managerial talent, capital, and raw
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materials, are “scarce” because their supply is limited. This scarcity implies that we
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are constrained in the choices we can make about which goods and services to
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produce. Thus, economics is often described as the science of constrained choice.
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3. How does the tool of constrained optimization help decision makers make
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choices? What roles do the objective function and constraints play in a model of
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constrained optimization?
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Constrained optimization allows the decision maker to select the best (optimal)
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alternative while accounting for any possible limitations or restrictions on the choices.
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The objective function represents the relationship to be maximized or minimized. For
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example, a firm’s profit might be the objective function and all choices will be
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evaluated in the profit function to determine which yields the highest profit. The
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constraints place limitations on the choice the decision maker can select and defines
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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
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curve, a downward-sloping demand curve, and an equilibrium price of $4.00 per
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bushel. Why would a higher price (e.g., $5.00 per bushel) not be an equilibrium
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price? Why would a 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
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Copyright © 2014 John Wiley & Sons,
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,Besanko & Braeutigam – Microeconomics, 5th
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edition Manual

mm to purchase fewer units than suppliers would be willing to sell, creating an excess
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mm supply. As suppliers realize they are not selling the units they have made available,
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mm sellers will bid down the
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Copyright © 2014 John Wiley & Sons,
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, Besanko & Braeutigam – Microeconomics, 5th
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edition Manual

price to entice more consumers to purchase their goods or services. By definition,
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equilibrium is a state that will remain unchanged as long as exogenous factors remain
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unchanged. Since in this case suppliers will lower their price, this high price cannot
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be an equilibrium.
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When the price is below the equilibrium price, consumers will demand more units than
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suppliers have made available. This excess demand will entice consumers to bid up the
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prices to purchase the limited units available. Since the price will change, it cannot
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be an equilibrium.
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5. What is the difference between an exogenous variable and an endogenous
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variable in an economic model? Would it ever be useful to construct a model that
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contained only 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
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by some process outside the model, while endogenous variables are determined within
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the economic model being studied.
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An economic model that contained no endogenous variables would not be very
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interesting. With no endogenous variables, nothing would be determined by the model
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so it would not serve much purpose.
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6. Why do economists do comparative statics analysis? What role do
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endogenous variables and exogenous variables play in comparative statics
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analysis?
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Comparative statics analyses are performed to determine how the levels of endogenous
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variables change as some exogenous variable is changed. This type of analysis is very
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important since in the real world the exogenous variables, such as weather, policy
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tools, etc. are always changing and it is useful to know how changes in these variables
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affect the levels of other, endogenous, variables. An example of comparative statics
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analysis would be asking the question: If extraordinarily low rainfall (an exogenous
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variable) causes a 30 percent reduction in corn supply, by how much will the market
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price for corn (an endogenous variable) increase?
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7. What is the difference between positive and normative analysis? Which of
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the following questions would entail positive analysis, and which normative
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analysis?
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a) What effect will Internet auction companies have on the profits of local
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automobile dealerships?
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b) Should the government impose special taxes on sales of merchandise made
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Copyright © 2014 John Wiley & Sons,
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Inc.