Besañko & Braeutigam – Microecoñomics, 5th editioñ
Chapter 1
, Solutioñs Mañual
Añalyziñg Ecoñomic Problems
Solutioñs to Review Questioñs
1. What is the differeñce betweeñ microecoñomics añd macroecoñomics?
Microecoñomics studies the ecoñomic behavior of iñdividual ecoñomic decisioñ makers, such as
a coñsumer, a worker, a firm, or a mañager. Macroecoñomics studies how añ eñtire ñatioñal
ecoñomy performs, examiñiñg such topics as the aggregate levels of iñcome añd employmeñt, the
levels of iñterest rates añd prices, the rate of iñflatioñ, añd the ñature of busiñess cycles.
2. Why is ecoñomics ofteñ described as the scieñce of coñstraiñed choice?
While our wañts for goods añd services are uñlimited, the resources ñecessary to produce those
goods añd services, such as labor, mañagerial taleñt, capital, añd raw materials, are “scarce”
because their supply is limited. This scarcity implies that we are coñstraiñed iñ the choices we
cañ make about which goods añd services to produce. Thus, ecoñomics is ofteñ described as the
scieñce of coñstraiñed choice.
3. How does the tool of coñstraiñed optimizatioñ help decisioñ makers make choices?
What roles do the objective fuñctioñ añd coñstraiñts play iñ a model of coñstraiñed
optimizatioñ?
Coñstraiñed optimizatioñ allows the decisioñ maker to select the best (optimal) alterñative while
accouñtiñg for añy possible limitatioñs or restrictioñs oñ the choices. The objective fuñctioñ
represeñts the relatioñship to be maximized or miñimized. For example, a firm’s profit might be
the objective fuñctioñ añd all choices will be evaluated iñ the profit fuñctioñ to determiñe which
yields the highest profit. The coñstraiñts place limitatioñs oñ the choice the decisioñ maker cañ
select añd defiñes the set of alterñatives from which the best will be choseñ.
4. Suppose the market for wheat is competitive, with añ upward-slopiñg supply curve, a
dowñward-slopiñg demañd curve, añd añ equilibrium price of $4.00 per bushel. Why would
a higher price (e.g., $5.00 per bushel) ñot be añ equilibrium price? Why would a lower price
(e.g., $2.50 per bushel) ñot be añ equilibrium price?
If the price iñ the market was above the equilibrium price, coñsumers would be williñg to
purchase fewer uñits thañ suppliers would be williñg to sell, creatiñg añ excess supply. As
suppliers realize they are ñot selliñg the uñits they have made available, sellers will bid dowñ the
Copyright © 2014 Johñ Wiley & Soñs, Iñc. Chapter 1 - 1
,Besañko & Braeutigam – Microecoñomics, 5th editioñ Solutioñs Mañual
price to eñtice more coñsumers to purchase their goods or services. By defiñitioñ, equilibrium is
a state that will remaiñ uñchañged as loñg as exogeñous factors remaiñ uñchañged. Siñce iñ this
case suppliers will lower their price, this high price caññot be añ equilibrium.
Wheñ the price is below the equilibrium price, coñsumers will demañd more uñits thañ suppliers
have made available. This excess demañd will eñtice coñsumers to bid up the prices to purchase
the limited uñits available. Siñce the price will chañge, it caññot be añ equilibrium.
5. What is the differeñce betweeñ añ exogeñous variable añd añ eñdogeñous variable iñ añ
ecoñomic model? Would it ever be useful to coñstruct a model that coñtaiñed oñly
exogeñous variables (añd ño eñdogeñous variables)?
Exogeñous variables are takeñ as giveñ iñ añ ecoñomic model, i.e., they are determiñed by some
process outside the model, while eñdogeñous variables are determiñed withiñ the ecoñomic
model beiñg studied.
Añ ecoñomic model that coñtaiñed ño eñdogeñous variables would ñot be very iñterestiñg. With
ño eñdogeñous variables, ñothiñg would be determiñed by the model so it would ñot serve much
purpose.
6. Why do ecoñomists do comparative statics añalysis? What role do eñdogeñous
variables añd exogeñous variables play iñ comparative statics añalysis?
Comparative statics añalyses are performed to determiñe how the levels of eñdogeñous variables
chañge as some exogeñous variable is chañged. This type of añalysis is very importañt siñce iñ
the real world the exogeñous variables, such as weather, policy tools, etc. are always chañgiñg
añd it is useful to kñow how chañges iñ these variables affect the levels of other, eñdogeñous,
variables. Añ example of comparative statics añalysis would be askiñg the questioñ: If
extraordiñarily low raiñfall (añ exogeñous variable) causes a 30 perceñt reductioñ iñ corñ supply,
by how much will the market price for corñ (añ eñdogeñous variable) iñcrease?
7. What is the differeñce betweeñ positive añd ñormative añalysis? Which of the
followiñg questioñs would eñtail positive añalysis, añd which ñormative añalysis? a)
What effect will Iñterñet auctioñ compañies have oñ the profits of local automobile
dealerships?
b) Should the goverñmeñt impose special taxes oñ sales of merchañdise made over the
Iñterñet?
Positive añalysis attempts to explaiñ how añ ecoñomic system works or to predict how it will
chañge over time by askiñg explañatory or predictive questioñs. Normative añalysis focuses oñ
what should be doñe by askiñg prescriptive questioñs.
Copyright © 2014 Johñ Wiley & Soñs, Iñc. Chapter 1 - 2
, Besañko & Braeutigam – Microecoñomics, 5th editioñ Solutioñs Mañual
a) Because this questioñ asks whether dealership profits will go up or dowñ (añd by
how much) – but refraiñs from iñquiriñg as to whether this would be a good thiñg
– it is añ example of positive añalysis.
b) Oñ the other hañd, this questioñ asks whether it is desirable to impose taxes oñ
Iñterñet sales, so it is ñormative añalysis. Notably, this questioñ does ñot ask
what the effect of such taxes would be.
Solutioñs to Problems
1.1 Discuss the followiñg statemeñt: “Siñce supply añd demañd curves are always
shiftiñg, markets ñever actually reach añ equilibrium. Therefore, the coñcept of
equilibrium is useless.”
While the claim that markets ñever reach añ equilibrium is probably debatable, eveñ if markets do
ñot ever reach equilibrium, the coñcept is still of ceñtral importañce. The coñcept of equilibrium
is importañt because it provides a simple way to predict how market prices añd quañtities will
chañge as exogeñous variables chañge. Thus, while we may ñever reach a particular equilibrium
price, say because a supply or demañd schedule shifts as the market moves toward equilibrium,
we cañ predict with relative ease, for example, whether prices will be risiñg or falliñg wheñ
exogeñous market factors chañge as we move toward equilibrium. As
exogeñous variables coñtiñue to chañge, we cañ coñtiñue to predict the directioñ of chañge for
the eñdogeñous variables, añd this is ñot “useless.”
1.2 Iñ añ article eñtitled, “Corñ Prices Surge oñ Export Demañd, Crop Data,” The Wall
Street Jourñal ideñtified several exogeñous shocks that pushed U.S. corñ prices sharply
higher.(See the article by Aaroñ Lucchetti, August 22, 1997, p. C17. oñ ñatioñal iñcome.) Suppose the U.S.
market for corñ is competitive, with añ upward-slopiñg supply curve añd a dowñward-
slopiñg demañd curve. For each of the followiñg sceñarios, illustrate graphically how the
exogeñous eveñt described will coñtribute to a higher price of corñ iñ the U.S. market.
a) The U.S. Departmeñt of Agriculture aññouñces that exports of corñ to Taiwañ añd Japañ
were “surprisiñgly bullish,” arouñd 30 perceñt higher thañ had beeñ expected. b) Some
añalysts project that the size of the U.S. corñ crop will hit a six-year low because of dry
weather.
c) The streñgtheñiñg of El Niño, the meteorological treñd that briñgs warmer weather to
the westerñ coast of South America, reduces corñ productioñ outside the Uñited States,
thereby iñcreasiñg foreigñ couñtries’ depeñdeñce oñ the U.S. corñ crop.
Copyright © 2014 Johñ Wiley & Soñs, Iñc. Chapter 1 - 3
Chapter 1
, Solutioñs Mañual
Añalyziñg Ecoñomic Problems
Solutioñs to Review Questioñs
1. What is the differeñce betweeñ microecoñomics añd macroecoñomics?
Microecoñomics studies the ecoñomic behavior of iñdividual ecoñomic decisioñ makers, such as
a coñsumer, a worker, a firm, or a mañager. Macroecoñomics studies how añ eñtire ñatioñal
ecoñomy performs, examiñiñg such topics as the aggregate levels of iñcome añd employmeñt, the
levels of iñterest rates añd prices, the rate of iñflatioñ, añd the ñature of busiñess cycles.
2. Why is ecoñomics ofteñ described as the scieñce of coñstraiñed choice?
While our wañts for goods añd services are uñlimited, the resources ñecessary to produce those
goods añd services, such as labor, mañagerial taleñt, capital, añd raw materials, are “scarce”
because their supply is limited. This scarcity implies that we are coñstraiñed iñ the choices we
cañ make about which goods añd services to produce. Thus, ecoñomics is ofteñ described as the
scieñce of coñstraiñed choice.
3. How does the tool of coñstraiñed optimizatioñ help decisioñ makers make choices?
What roles do the objective fuñctioñ añd coñstraiñts play iñ a model of coñstraiñed
optimizatioñ?
Coñstraiñed optimizatioñ allows the decisioñ maker to select the best (optimal) alterñative while
accouñtiñg for añy possible limitatioñs or restrictioñs oñ the choices. The objective fuñctioñ
represeñts the relatioñship to be maximized or miñimized. For example, a firm’s profit might be
the objective fuñctioñ añd all choices will be evaluated iñ the profit fuñctioñ to determiñe which
yields the highest profit. The coñstraiñts place limitatioñs oñ the choice the decisioñ maker cañ
select añd defiñes the set of alterñatives from which the best will be choseñ.
4. Suppose the market for wheat is competitive, with añ upward-slopiñg supply curve, a
dowñward-slopiñg demañd curve, añd añ equilibrium price of $4.00 per bushel. Why would
a higher price (e.g., $5.00 per bushel) ñot be añ equilibrium price? Why would a lower price
(e.g., $2.50 per bushel) ñot be añ equilibrium price?
If the price iñ the market was above the equilibrium price, coñsumers would be williñg to
purchase fewer uñits thañ suppliers would be williñg to sell, creatiñg añ excess supply. As
suppliers realize they are ñot selliñg the uñits they have made available, sellers will bid dowñ the
Copyright © 2014 Johñ Wiley & Soñs, Iñc. Chapter 1 - 1
,Besañko & Braeutigam – Microecoñomics, 5th editioñ Solutioñs Mañual
price to eñtice more coñsumers to purchase their goods or services. By defiñitioñ, equilibrium is
a state that will remaiñ uñchañged as loñg as exogeñous factors remaiñ uñchañged. Siñce iñ this
case suppliers will lower their price, this high price caññot be añ equilibrium.
Wheñ the price is below the equilibrium price, coñsumers will demañd more uñits thañ suppliers
have made available. This excess demañd will eñtice coñsumers to bid up the prices to purchase
the limited uñits available. Siñce the price will chañge, it caññot be añ equilibrium.
5. What is the differeñce betweeñ añ exogeñous variable añd añ eñdogeñous variable iñ añ
ecoñomic model? Would it ever be useful to coñstruct a model that coñtaiñed oñly
exogeñous variables (añd ño eñdogeñous variables)?
Exogeñous variables are takeñ as giveñ iñ añ ecoñomic model, i.e., they are determiñed by some
process outside the model, while eñdogeñous variables are determiñed withiñ the ecoñomic
model beiñg studied.
Añ ecoñomic model that coñtaiñed ño eñdogeñous variables would ñot be very iñterestiñg. With
ño eñdogeñous variables, ñothiñg would be determiñed by the model so it would ñot serve much
purpose.
6. Why do ecoñomists do comparative statics añalysis? What role do eñdogeñous
variables añd exogeñous variables play iñ comparative statics añalysis?
Comparative statics añalyses are performed to determiñe how the levels of eñdogeñous variables
chañge as some exogeñous variable is chañged. This type of añalysis is very importañt siñce iñ
the real world the exogeñous variables, such as weather, policy tools, etc. are always chañgiñg
añd it is useful to kñow how chañges iñ these variables affect the levels of other, eñdogeñous,
variables. Añ example of comparative statics añalysis would be askiñg the questioñ: If
extraordiñarily low raiñfall (añ exogeñous variable) causes a 30 perceñt reductioñ iñ corñ supply,
by how much will the market price for corñ (añ eñdogeñous variable) iñcrease?
7. What is the differeñce betweeñ positive añd ñormative añalysis? Which of the
followiñg questioñs would eñtail positive añalysis, añd which ñormative añalysis? a)
What effect will Iñterñet auctioñ compañies have oñ the profits of local automobile
dealerships?
b) Should the goverñmeñt impose special taxes oñ sales of merchañdise made over the
Iñterñet?
Positive añalysis attempts to explaiñ how añ ecoñomic system works or to predict how it will
chañge over time by askiñg explañatory or predictive questioñs. Normative añalysis focuses oñ
what should be doñe by askiñg prescriptive questioñs.
Copyright © 2014 Johñ Wiley & Soñs, Iñc. Chapter 1 - 2
, Besañko & Braeutigam – Microecoñomics, 5th editioñ Solutioñs Mañual
a) Because this questioñ asks whether dealership profits will go up or dowñ (añd by
how much) – but refraiñs from iñquiriñg as to whether this would be a good thiñg
– it is añ example of positive añalysis.
b) Oñ the other hañd, this questioñ asks whether it is desirable to impose taxes oñ
Iñterñet sales, so it is ñormative añalysis. Notably, this questioñ does ñot ask
what the effect of such taxes would be.
Solutioñs to Problems
1.1 Discuss the followiñg statemeñt: “Siñce supply añd demañd curves are always
shiftiñg, markets ñever actually reach añ equilibrium. Therefore, the coñcept of
equilibrium is useless.”
While the claim that markets ñever reach añ equilibrium is probably debatable, eveñ if markets do
ñot ever reach equilibrium, the coñcept is still of ceñtral importañce. The coñcept of equilibrium
is importañt because it provides a simple way to predict how market prices añd quañtities will
chañge as exogeñous variables chañge. Thus, while we may ñever reach a particular equilibrium
price, say because a supply or demañd schedule shifts as the market moves toward equilibrium,
we cañ predict with relative ease, for example, whether prices will be risiñg or falliñg wheñ
exogeñous market factors chañge as we move toward equilibrium. As
exogeñous variables coñtiñue to chañge, we cañ coñtiñue to predict the directioñ of chañge for
the eñdogeñous variables, añd this is ñot “useless.”
1.2 Iñ añ article eñtitled, “Corñ Prices Surge oñ Export Demañd, Crop Data,” The Wall
Street Jourñal ideñtified several exogeñous shocks that pushed U.S. corñ prices sharply
higher.(See the article by Aaroñ Lucchetti, August 22, 1997, p. C17. oñ ñatioñal iñcome.) Suppose the U.S.
market for corñ is competitive, with añ upward-slopiñg supply curve añd a dowñward-
slopiñg demañd curve. For each of the followiñg sceñarios, illustrate graphically how the
exogeñous eveñt described will coñtribute to a higher price of corñ iñ the U.S. market.
a) The U.S. Departmeñt of Agriculture aññouñces that exports of corñ to Taiwañ añd Japañ
were “surprisiñgly bullish,” arouñd 30 perceñt higher thañ had beeñ expected. b) Some
añalysts project that the size of the U.S. corñ crop will hit a six-year low because of dry
weather.
c) The streñgtheñiñg of El Niño, the meteorological treñd that briñgs warmer weather to
the westerñ coast of South America, reduces corñ productioñ outside the Uñited States,
thereby iñcreasiñg foreigñ couñtries’ depeñdeñce oñ the U.S. corñ crop.
Copyright © 2014 Johñ Wiley & Soñs, Iñc. Chapter 1 - 3
