Besanko & Braeutigam – Microeconomics, 5th edition
E E E E E E Solutions Manual
E
Chapter1 E
AnalyzingEconomicProblems E E
Solutions to Review Questions
E E E
Copyright © 2014 John Wiley & Sons, Inc.
E E E E E E E Chapter 1 - 1
E E E
,Besanko & Braeutigam – Microeconomics, 5th edition
E E E E E E Solutions Manual E
1. What is the difference between microeconomics and macroeconomics?
E E E E E E E
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
E E E E E E E E E E E E E E
economy performs, examining such topics as the aggregate levels of income and employment, the
E E E E E E E E E E E E E E
levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
E E E E E E E E E E E E E E E E
2. Why is economics often described as the science of constrained choice?
E E E E E E E E E E
While our wants for goods and services are unlimited, the resources necessary to produce those
E E E E E E E E E E E E E E
goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce”
E E E E E E E E E E E E E E
because their supply is limited. This scarcity implies that we are constrained in the choices we
E E E E E E E E E E E E E E E E
can make about which goods and services to produce. Thus, economics is often described as the
E E E E E E E E E E E E E E E E
science of constrained choice.
E E E E
3. How does the tool of constrained optimization help decision makers make choices?
E E E E E E E E E E E
What roles do the objective function and constraints play in a model of constrained
E E E E E E E E E E E E E E
optimization?
E
Constrained optimization allows the decision maker to select the best (optimal) alternative while
E E E E E E E E E E E E
accounting for any possible limitations or restrictions on the choices. The objective function
E E E E E E E E E E E E E
represents the relationship to be maximized or minimized. For example, a firm‟s profit might be the
E E E E E E E E E E E E E E E E
objective function and all choices will be evaluated in the profit function to determine which yields
E E E E E E E E E E E E E E E E
the highest profit. The constraints place limitations on the choice the decision maker can select
E E E E E E E E E E E E E E E
and defines the set of alternatives from which the best will be chosen.
E E E E E E E E E E E E E
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
E E E E E E E E E E E E
would a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a
E E E E E E E E E E E E E E E E
lower price (e.g., $2.50 per bushel) not be an equilibrium price?
E E E E E E E E E E E
If the price in the market was above the equilibrium price, consumers would be willing to purchase
E E E E E E E E E E E E E E E E
fewer units than suppliers would be willing to sell, creating an excess supply. As suppliers realize
E E E E E E E E E E E E E E E E
they are not selling the units they have made available, sellers will bid down the
E E E E E E E E E E E E E E E
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
E E E E E E E E E E E E E E E
state that will remain unchanged as long as exogenous factors remain unchanged. Since in this
E E E E E E E E E E E E E E E
case suppliers will lower their price, this high price cannot be an equilibrium.
E E E E E E E E E E E E E
When the price is below the equilibrium price, consumers will demand more units than suppliers
E E E E E E E E E E E E E E
have made available. This excess demand will entice consumers to bid up the prices to purchase
E E E E E E E E E E E E E E E E
the limited units available. Since the price will change, it cannot be an equilibrium.
E E E E E E E E E E E E E E
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
E E E E E E E E E E E E E E E
exogenous variables (and no endogenous variables)?
E E E E E E
Exogenous variables are taken as given in an economic model, i.e., they are determined by some
E E E E E E E E E E E E E E E
process outside the model, while endogenous variables are determined within the economic model
E E E E E E E E E E E E E
being studied.
E E
An economic model that contained no endogenous variables would not be very interesting. With no
E E E E E E E E E E E E E E
endogenous variables, nothing would be determined by the model so it would not serve much
E E E E E E E E E E E E E E E
purpose.
E
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?
E E E E E E E E E
Comparative statics analyses are performed to determine how the levels of endogenous variables
E E E E E E E E E E E E
change as some exogenous variable is changed. This type of analysis is very important since in
E E E E E E E E E E E E E E E E
the real world the exogenous variables, such as weather, policy tools, etc. are always changing and
E E E E E E E E E E E E E E E E
it is useful to know how changes in these variables affect the levels of other, endogenous,
E E E E E E E E E E E E E E E E
variables. An example of comparative statics analysis would be asking the question: If
E E E E E E E E E E E E E
extraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn supply, by
E E E E E E E E E E E E E E E
how much will the market price for corn (an endogenous variable) increase?
E E E E E E E E E E E E
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?
E E E E E E E E E E
a) What effect will Internet auction companies have on the profits of local automobile
E E E E E E E E E E E E
dealerships?
E
b) Should the government impose special taxes on sales of merchandise made over the
E E E E E E E E E E E E
Internet?
E
Positive analysis attempts to explain how an economic system works or to predict how it will
E E E E E E E E E E E E E E E
change over time by asking explanatory or predictive questions. Normative analysis focuses on
E E E E E E E E E E E E E
what should be done by asking prescriptive questions.
E E E E E E E E
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
E E E E E E E E E E E E E
how much) – but refrains from inquiring as to whether this would be a good thing – it
E E E E E E E E E E E E E E E E E E
is an example of positive analysis.
E E E E E E
b) On the other hand, this question asks whether it is desirable to impose taxes on
E E E E E E E E E E E E E E
Internet sales, so it is normative analysis. Notably, this question does not ask
E E E E E E E E E E E E E
what the effect of such taxes would be.
E E E E E E E E
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
E E E E E E E E E E E
equilibrium is useless.‖
E E E
While the claim that markets never reach an equilibrium is probably debatable, even if markets do
E E E E E E E E E E E E E E E
not ever reach equilibrium, the concept is still of central importance. The concept of equilibrium
E E E E E E E E E E E E E E E
is important because it provides a simple way to predict how market prices and quantities will
E E E E E E E E E E E E E E E E
change as exogenous variables change. Thus, while we may never reach a particular equilibrium
E E E E E E E E E E E E E E
price, say because a supply or demand schedule shifts as the market moves toward equilibrium, we
E E E E E E E E E E E E E E E E
can predict with relative ease, for example, whether prices will be rising or falling when exogenous
E E E E E E E E E E E E E E E E
market factors change as we move toward equilibrium. As exogenous variables continue to
E E E E E E E E E E E E E
change, we can continue to predict the direction of change for the endogenous variables, and this is
E E E E E E E E E E E E E E E E E
not “useless.”
E E
1.2 In an article entitled, ―Corn Prices Surge on Export Demand, Crop Data,‖ The Wall
E E E E E E E E E E E E E
Street Journal identified several exogenous shocks that pushed U.S. corn prices sharply
E E E E E E E E E E E E
higher.(See the article by Aaron Lucchetti, August 22, 1997, p. C17. on national income.) Suppose the U.S.
E E E E E E E E E E E E E E E E E
market for corn is competitive, with an upward-sloping supply curve and a downward-
E E E E E E E E E E E E E
sloping demand curve. For each of the following scenarios, illustrate graphically how the
E E E E E E E E E E E E E
exogenous event described will contribute to a higher price of corn in the U.S. market.
E E E E E E E E E E E E E E E
a) The U.S. Department of Agriculture announces that exports of corn to Taiwan and
E E E E E E E E E E E E
Japan were ―surprisingly bullish,‖ around 30 percent higher than had been expected.
E E E E E E E E E E E E
b) Some analysts project that the size of the U.S. corn crop will hit a six-year low because of
E E E E E E E E E E E E E E E E E
dry weather.
E E
c) The strengthening of El Niño, the meteorological trend that brings warmer weather to
E E E E E E E E E E E E
the western coast of South America, reduces corn production outside the United States,
E E E E E E E E E E E E E
thereby increasing foreign countries’ dependence on the U.S. corn crop.
E E E E E E E E E E
Copyright © 2014 John Wiley & Sons, Inc.
E E E E E E E Chapter 1 - 4 E E E
E E E E E E Solutions Manual
E
Chapter1 E
AnalyzingEconomicProblems E E
Solutions to Review Questions
E E E
Copyright © 2014 John Wiley & Sons, Inc.
E E E E E E E Chapter 1 - 1
E E E
,Besanko & Braeutigam – Microeconomics, 5th edition
E E E E E E Solutions Manual E
1. What is the difference between microeconomics and macroeconomics?
E E E E E E E
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
E E E E E E E E E E E E E E
economy performs, examining such topics as the aggregate levels of income and employment, the
E E E E E E E E E E E E E E
levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
E E E E E E E E E E E E E E E E
2. Why is economics often described as the science of constrained choice?
E E E E E E E E E E
While our wants for goods and services are unlimited, the resources necessary to produce those
E E E E E E E E E E E E E E
goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce”
E E E E E E E E E E E E E E
because their supply is limited. This scarcity implies that we are constrained in the choices we
E E E E E E E E E E E E E E E E
can make about which goods and services to produce. Thus, economics is often described as the
E E E E E E E E E E E E E E E E
science of constrained choice.
E E E E
3. How does the tool of constrained optimization help decision makers make choices?
E E E E E E E E E E E
What roles do the objective function and constraints play in a model of constrained
E E E E E E E E E E E E E E
optimization?
E
Constrained optimization allows the decision maker to select the best (optimal) alternative while
E E E E E E E E E E E E
accounting for any possible limitations or restrictions on the choices. The objective function
E E E E E E E E E E E E E
represents the relationship to be maximized or minimized. For example, a firm‟s profit might be the
E E E E E E E E E E E E E E E E
objective function and all choices will be evaluated in the profit function to determine which yields
E E E E E E E E E E E E E E E E
the highest profit. The constraints place limitations on the choice the decision maker can select
E E E E E E E E E E E E E E E
and defines the set of alternatives from which the best will be chosen.
E E E E E E E E E E E E E
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
E E E E E E E E E E E E
would a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a
E E E E E E E E E E E E E E E E
lower price (e.g., $2.50 per bushel) not be an equilibrium price?
E E E E E E E E E E E
If the price in the market was above the equilibrium price, consumers would be willing to purchase
E E E E E E E E E E E E E E E E
fewer units than suppliers would be willing to sell, creating an excess supply. As suppliers realize
E E E E E E E E E E E E E E E E
they are not selling the units they have made available, sellers will bid down the
E E E E E E E E E E E E E E E
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
E E E E E E E E E E E E E E E
state that will remain unchanged as long as exogenous factors remain unchanged. Since in this
E E E E E E E E E E E E E E E
case suppliers will lower their price, this high price cannot be an equilibrium.
E E E E E E E E E E E E E
When the price is below the equilibrium price, consumers will demand more units than suppliers
E E E E E E E E E E E E E E
have made available. This excess demand will entice consumers to bid up the prices to purchase
E E E E E E E E E E E E E E E E
the limited units available. Since the price will change, it cannot be an equilibrium.
E E E E E E E E E E E E E E
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
E E E E E E E E E E E E E E E
exogenous variables (and no endogenous variables)?
E E E E E E
Exogenous variables are taken as given in an economic model, i.e., they are determined by some
E E E E E E E E E E E E E E E
process outside the model, while endogenous variables are determined within the economic model
E E E E E E E E E E E E E
being studied.
E E
An economic model that contained no endogenous variables would not be very interesting. With no
E E E E E E E E E E E E E E
endogenous variables, nothing would be determined by the model so it would not serve much
E E E E E E E E E E E E E E E
purpose.
E
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?
E E E E E E E E E
Comparative statics analyses are performed to determine how the levels of endogenous variables
E E E E E E E E E E E E
change as some exogenous variable is changed. This type of analysis is very important since in
E E E E E E E E E E E E E E E E
the real world the exogenous variables, such as weather, policy tools, etc. are always changing and
E E E E E E E E E E E E E E E E
it is useful to know how changes in these variables affect the levels of other, endogenous,
E E E E E E E E E E E E E E E E
variables. An example of comparative statics analysis would be asking the question: If
E E E E E E E E E E E E E
extraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn supply, by
E E E E E E E E E E E E E E E
how much will the market price for corn (an endogenous variable) increase?
E E E E E E E E E E E E
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?
E E E E E E E E E E
a) What effect will Internet auction companies have on the profits of local automobile
E E E E E E E E E E E E
dealerships?
E
b) Should the government impose special taxes on sales of merchandise made over the
E E E E E E E E E E E E
Internet?
E
Positive analysis attempts to explain how an economic system works or to predict how it will
E E E E E E E E E E E E E E E
change over time by asking explanatory or predictive questions. Normative analysis focuses on
E E E E E E E E E E E E E
what should be done by asking prescriptive questions.
E E E E E E E E
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
E E E E E E E E E E E E E
how much) – but refrains from inquiring as to whether this would be a good thing – it
E E E E E E E E E E E E E E E E E E
is an example of positive analysis.
E E E E E E
b) On the other hand, this question asks whether it is desirable to impose taxes on
E E E E E E E E E E E E E E
Internet sales, so it is normative analysis. Notably, this question does not ask
E E E E E E E E E E E E E
what the effect of such taxes would be.
E E E E E E E E
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
E E E E E E E E E E E
equilibrium is useless.‖
E E E
While the claim that markets never reach an equilibrium is probably debatable, even if markets do
E E E E E E E E E E E E E E E
not ever reach equilibrium, the concept is still of central importance. The concept of equilibrium
E E E E E E E E E E E E E E E
is important because it provides a simple way to predict how market prices and quantities will
E E E E E E E E E E E E E E E E
change as exogenous variables change. Thus, while we may never reach a particular equilibrium
E E E E E E E E E E E E E E
price, say because a supply or demand schedule shifts as the market moves toward equilibrium, we
E E E E E E E E E E E E E E E E
can predict with relative ease, for example, whether prices will be rising or falling when exogenous
E E E E E E E E E E E E E E E E
market factors change as we move toward equilibrium. As exogenous variables continue to
E E E E E E E E E E E E E
change, we can continue to predict the direction of change for the endogenous variables, and this is
E E E E E E E E E E E E E E E E E
not “useless.”
E E
1.2 In an article entitled, ―Corn Prices Surge on Export Demand, Crop Data,‖ The Wall
E E E E E E E E E E E E E
Street Journal identified several exogenous shocks that pushed U.S. corn prices sharply
E E E E E E E E E E E E
higher.(See the article by Aaron Lucchetti, August 22, 1997, p. C17. on national income.) Suppose the U.S.
E E E E E E E E E E E E E E E E E
market for corn is competitive, with an upward-sloping supply curve and a downward-
E E E E E E E E E E E E E
sloping demand curve. For each of the following scenarios, illustrate graphically how the
E E E E E E E E E E E E E
exogenous event described will contribute to a higher price of corn in the U.S. market.
E E E E E E E E E E E E E E E
a) The U.S. Department of Agriculture announces that exports of corn to Taiwan and
E E E E E E E E E E E E
Japan were ―surprisingly bullish,‖ around 30 percent higher than had been expected.
E E E E E E E E E E E E
b) Some analysts project that the size of the U.S. corn crop will hit a six-year low because of
E E E E E E E E E E E E E E E E E
dry weather.
E E
c) The strengthening of El Niño, the meteorological trend that brings warmer weather to
E E E E E E E E E E E E
the western coast of South America, reduces corn production outside the United States,
E E E E E E E E E E E E E
thereby increasing foreign countries’ dependence on the U.S. corn crop.
E E E E E E E E E E
Copyright © 2014 John Wiley & Sons, Inc.
E E E E E E E Chapter 1 - 4 E E E
