Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
Chapter 1
Analyzing Economic Problems
Solutions to Review Questions
1. What is the difference between microeconomics and macroeconomics?
Microeconomics studies the economic behavior of individual economic decision makers, such as
a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
economy performs, examining such topics as the aggregate levels of income and employment,
the levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
2. Why is economics often described as the science of constrained choice?
While our wants for goods and services are unlimited, the resources necessary to produce those
goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce”
because their supply is limited. This scarcity implies that we are constrained in the choices we
can make about which goods and services to produce. Thus, economics is often described as the
science of constrained choice.
3. How does the tool of constrained optimization help decision makers make choices?
What roles do the objective function and constraints play in a model of constrained
optimization?
Constrained optimization allows the decision maker to select the best (optimal) alternative while
accounting for any possible limitations or restrictions on the choices. The objective function
represents the relationship to be maximized or minimized. For example, a firm’s profit might be
the objective function and all choices will be evaluated in the profit function to determine which
yields the highest profit. The constraints place limitations on the choice the decision maker can
select and defines the set of alternatives from which the best will be chosen.
4. Suppose the market for wheat is competitive, with an upward-sloping supply curve,
a downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why
would a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a
lower price (e.g., $2.50 per bushel) not be an equilibrium price?
If the price in the market was above the equilibrium price, consumers would be willing to
purchase fewer units than suppliers would be willing to sell, creating an excess supply. As
suppliers realize they are not selling the units they have made available, sellers will bid down the
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 1
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
price to entice more consumers to purchase their goods or services. By definition, equilibrium is
a state that will remain unchanged as long as exogenous factors remain unchanged. Since in this
case suppliers will lower their price, this high price cannot be an equilibrium.
When the price is below the equilibrium price, consumers will demand more units than suppliers
have made available. This excess demand will entice consumers to bid up the prices to purchase
the limited units available. Since the price will change, it cannot be an equilibrium.
5. What ais athe adifference abetween aan aexogenous avariable aand aan aendogenous
avariable ain aan aeconomic amodel? aWould ait aever abe auseful ato aconstruct aa amodel
athat acontained aonly aexogenous avariables a(and ano aendogenous avariables)?
Exogenous avariables aare ataken aas agiven ain aan aeconomic amodel, ai.e., athey aare adetermined aby
asome aprocess aoutside athe amodel, awhile aendogenous avariables aare adetermined awithin athe
aeconomic amodel abeing astudied.
An aeconomic amodel athat acontained ano aendogenous avariables awould anot abe avery ainteresting.
a With ano aendogenous avariables, anothing awould abe adetermined aby athe amodel aso ait awould
anot aserve amuch apurpose.
6. Why ado aeconomists ado acomparative astatics aanalysis? aWhat arole ado
aendogenous avariables aand aexogenous avariables aplay ain acomparative astatics
aanalysis?
Comparative astatics aanalyses aare aperformed ato adetermine ahow athe alevels aof aendogenous
avariables achange aas asome aexogenous avariable ais achanged. a This atype aof aanalysis ais avery
aimportant asince ain athe areal aworld athe aexogenous avariables, asuch aas aweather, apolicy atools,
aetc. aare aalways achanging aand ait ais auseful ato aknow ahow achanges ain athese avariables aaffect
athe alevels aof aother, aendogenous, avariables. a An aexample aof acomparative astatics aanalysis
awould abe aasking athe aquestion: aIf aextraordinarily alow arainfall a(an aexogenous avariable)
acauses aa a30 apercent areduction ain acorn asupply, aby ahow amuch awill athe amarket aprice afor
acorn a(an aendogenous avariable) aincrease?
7. What ais athe adifference abetween apositive aand anormative aanalysis? aWhich
aof athe afollowing aquestions awould aentail apositive aanalysis, aand awhich anormative
aanalysis?
a) What aeffect awill aInternet aauction acompanies ahave aon athe aprofits aof alocal
aautomobile adealerships?
b) Should athe agovernment aimpose aspecial ataxes aon asales aof amerchandise amade
aover athe aInternet?
Positive aanalysis aattempts ato aexplain ahow aan aeconomic asystem aworks aor ato apredict ahow ait
awill achange aover atime aby aasking aexplanatory aor apredictive aquestions. a Normative aanalysis
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 2
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
afocuses aon awhat ashould abe adone aby aasking aprescriptive aquestions.
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 3
, Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
a) Because athis aquestion aasks awhether adealership aprofits awill ago aup aor adown
a(and aby ahow amuch) a– abut arefrains afrom ainquiring aas ato awhether athis awould
abe aa agood athing a– ait ais aan aexample aof apositive aanalysis.
b) On athe aother ahand, athis aquestion aasks awhether ait ais adesirable ato aimpose
ataxes aon aInternet asales, aso ait ais anormative aanalysis. a Notably, athis
aquestion adoes anot aask awhat athe aeffect aof asuch ataxes awould abe.
Solutions ato aProblems
1.1 Discuss athe afollowing astatement: a“Since asupply aand ademand acurves aare
aalways ashifting, amarkets anever aactually areach aan aequilibrium. aTherefore, athe
aconcept aof aequilibrium ais auseless.”
While athe aclaim athat amarkets anever areach aan aequilibrium ais aprobably adebatable, aeven aif
amarkets ado anot aever areach aequilibrium, athe aconcept ais astill aof acentral aimportance. a The
aconcept aof aequilibrium ais aimportant abecause ait aprovides aa asimple away ato apredict ahow
amarket aprices aand aquantities awill achange aas aexogenous avariables achange. a Thus, awhile awe
amay anever areach aa aparticular aequilibrium aprice, asay abecause aa asupply aor ademand aschedule
ashifts aas athe amarket amoves atoward aequilibrium, awe acan apredict awith arelative aease, afor
aexample, awhether aprices awill abe arising aor afalling awhen aexogenous amarket afactors achange
aas awe amove atoward aequilibrium. a As aexogenous avariables acontinue ato achange, awe acan
acontinue ato apredict athe adirection aof achange afor athe aendogenous avariables, aand athis ais anot
a“useless.”
1.2 In aan aarticle aentitled, a“Corn aPrices aSurge aon aExport aDemand, aCrop aData,”
aThe aWall aStreet aJournal aidentified aseveral aexogenous ashocks athat apushed aU.S. acorn
aprices asharply ahigher.(See athe aarticle aby aAaron aLucchetti, aAugust a22, a1997, ap. aC17. aon anational
aincome.) aSuppose athe aU.S. amarket afor acorn ais acompetitive, awith aan aupward-sloping
asupply acurve aand aa adownward- asloping ademand acurve. aFor aeach aof athe afollowing
ascenarios, aillustrate agraphically ahow athe aexogenous aevent adescribed awill acontribute
ato aa ahigher aprice aof acorn ain athe aU.S. amarket.
a) The aU.S. aDepartment aof aAgriculture aannounces athat aexports aof acorn ato
aTaiwan aand aJapan awere a“surprisingly abullish,” aaround a30 apercent ahigher athan
ahad abeen aexpected.
b) Some aanalysts aproject athat athe asize aof athe aU.S. acorn acrop awill ahit aa asix-year alow
abecause aof adry aweather.
c) The astrengthening aof aEl aNiño, athe ameteorological atrend athat abrings awarmer
aweather ato athe awestern acoast aof aSouth aAmerica, areduces acorn aproduction aoutside
athe aUnited aStates, athereby aincreasing aforeign acountries’ adependence aon athe aU.S.
acorn acrop.
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 4
Chapter 1
Analyzing Economic Problems
Solutions to Review Questions
1. What is the difference between microeconomics and macroeconomics?
Microeconomics studies the economic behavior of individual economic decision makers, such as
a consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
economy performs, examining such topics as the aggregate levels of income and employment,
the levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
2. Why is economics often described as the science of constrained choice?
While our wants for goods and services are unlimited, the resources necessary to produce those
goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce”
because their supply is limited. This scarcity implies that we are constrained in the choices we
can make about which goods and services to produce. Thus, economics is often described as the
science of constrained choice.
3. How does the tool of constrained optimization help decision makers make choices?
What roles do the objective function and constraints play in a model of constrained
optimization?
Constrained optimization allows the decision maker to select the best (optimal) alternative while
accounting for any possible limitations or restrictions on the choices. The objective function
represents the relationship to be maximized or minimized. For example, a firm’s profit might be
the objective function and all choices will be evaluated in the profit function to determine which
yields the highest profit. The constraints place limitations on the choice the decision maker can
select and defines the set of alternatives from which the best will be chosen.
4. Suppose the market for wheat is competitive, with an upward-sloping supply curve,
a downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why
would a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a
lower price (e.g., $2.50 per bushel) not be an equilibrium price?
If the price in the market was above the equilibrium price, consumers would be willing to
purchase fewer units than suppliers would be willing to sell, creating an excess supply. As
suppliers realize they are not selling the units they have made available, sellers will bid down the
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 1
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
price to entice more consumers to purchase their goods or services. By definition, equilibrium is
a state that will remain unchanged as long as exogenous factors remain unchanged. Since in this
case suppliers will lower their price, this high price cannot be an equilibrium.
When the price is below the equilibrium price, consumers will demand more units than suppliers
have made available. This excess demand will entice consumers to bid up the prices to purchase
the limited units available. Since the price will change, it cannot be an equilibrium.
5. What ais athe adifference abetween aan aexogenous avariable aand aan aendogenous
avariable ain aan aeconomic amodel? aWould ait aever abe auseful ato aconstruct aa amodel
athat acontained aonly aexogenous avariables a(and ano aendogenous avariables)?
Exogenous avariables aare ataken aas agiven ain aan aeconomic amodel, ai.e., athey aare adetermined aby
asome aprocess aoutside athe amodel, awhile aendogenous avariables aare adetermined awithin athe
aeconomic amodel abeing astudied.
An aeconomic amodel athat acontained ano aendogenous avariables awould anot abe avery ainteresting.
a With ano aendogenous avariables, anothing awould abe adetermined aby athe amodel aso ait awould
anot aserve amuch apurpose.
6. Why ado aeconomists ado acomparative astatics aanalysis? aWhat arole ado
aendogenous avariables aand aexogenous avariables aplay ain acomparative astatics
aanalysis?
Comparative astatics aanalyses aare aperformed ato adetermine ahow athe alevels aof aendogenous
avariables achange aas asome aexogenous avariable ais achanged. a This atype aof aanalysis ais avery
aimportant asince ain athe areal aworld athe aexogenous avariables, asuch aas aweather, apolicy atools,
aetc. aare aalways achanging aand ait ais auseful ato aknow ahow achanges ain athese avariables aaffect
athe alevels aof aother, aendogenous, avariables. a An aexample aof acomparative astatics aanalysis
awould abe aasking athe aquestion: aIf aextraordinarily alow arainfall a(an aexogenous avariable)
acauses aa a30 apercent areduction ain acorn asupply, aby ahow amuch awill athe amarket aprice afor
acorn a(an aendogenous avariable) aincrease?
7. What ais athe adifference abetween apositive aand anormative aanalysis? aWhich
aof athe afollowing aquestions awould aentail apositive aanalysis, aand awhich anormative
aanalysis?
a) What aeffect awill aInternet aauction acompanies ahave aon athe aprofits aof alocal
aautomobile adealerships?
b) Should athe agovernment aimpose aspecial ataxes aon asales aof amerchandise amade
aover athe aInternet?
Positive aanalysis aattempts ato aexplain ahow aan aeconomic asystem aworks aor ato apredict ahow ait
awill achange aover atime aby aasking aexplanatory aor apredictive aquestions. a Normative aanalysis
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 2
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
afocuses aon awhat ashould abe adone aby aasking aprescriptive aquestions.
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 3
, Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
a) Because athis aquestion aasks awhether adealership aprofits awill ago aup aor adown
a(and aby ahow amuch) a– abut arefrains afrom ainquiring aas ato awhether athis awould
abe aa agood athing a– ait ais aan aexample aof apositive aanalysis.
b) On athe aother ahand, athis aquestion aasks awhether ait ais adesirable ato aimpose
ataxes aon aInternet asales, aso ait ais anormative aanalysis. a Notably, athis
aquestion adoes anot aask awhat athe aeffect aof asuch ataxes awould abe.
Solutions ato aProblems
1.1 Discuss athe afollowing astatement: a“Since asupply aand ademand acurves aare
aalways ashifting, amarkets anever aactually areach aan aequilibrium. aTherefore, athe
aconcept aof aequilibrium ais auseless.”
While athe aclaim athat amarkets anever areach aan aequilibrium ais aprobably adebatable, aeven aif
amarkets ado anot aever areach aequilibrium, athe aconcept ais astill aof acentral aimportance. a The
aconcept aof aequilibrium ais aimportant abecause ait aprovides aa asimple away ato apredict ahow
amarket aprices aand aquantities awill achange aas aexogenous avariables achange. a Thus, awhile awe
amay anever areach aa aparticular aequilibrium aprice, asay abecause aa asupply aor ademand aschedule
ashifts aas athe amarket amoves atoward aequilibrium, awe acan apredict awith arelative aease, afor
aexample, awhether aprices awill abe arising aor afalling awhen aexogenous amarket afactors achange
aas awe amove atoward aequilibrium. a As aexogenous avariables acontinue ato achange, awe acan
acontinue ato apredict athe adirection aof achange afor athe aendogenous avariables, aand athis ais anot
a“useless.”
1.2 In aan aarticle aentitled, a“Corn aPrices aSurge aon aExport aDemand, aCrop aData,”
aThe aWall aStreet aJournal aidentified aseveral aexogenous ashocks athat apushed aU.S. acorn
aprices asharply ahigher.(See athe aarticle aby aAaron aLucchetti, aAugust a22, a1997, ap. aC17. aon anational
aincome.) aSuppose athe aU.S. amarket afor acorn ais acompetitive, awith aan aupward-sloping
asupply acurve aand aa adownward- asloping ademand acurve. aFor aeach aof athe afollowing
ascenarios, aillustrate agraphically ahow athe aexogenous aevent adescribed awill acontribute
ato aa ahigher aprice aof acorn ain athe aU.S. amarket.
a) The aU.S. aDepartment aof aAgriculture aannounces athat aexports aof acorn ato
aTaiwan aand aJapan awere a“surprisingly abullish,” aaround a30 apercent ahigher athan
ahad abeen aexpected.
b) Some aanalysts aproject athat athe asize aof athe aU.S. acorn acrop awill ahit aa asix-year alow
abecause aof adry aweather.
c) The astrengthening aof aEl aNiño, athe ameteorological atrend athat abrings awarmer
aweather ato athe awestern acoast aof aSouth aAmerica, areduces acorn aproduction aoutside
athe aUnited aStates, athereby aincreasing aforeign acountries’ adependence aon athe aU.S.
acorn acrop.
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 4
