Besankoj&jBraeutigamj–jMicroeconomics,j6thjedition SolutionsjManual
SOLUTION MANUAL j
Microeconomics
by David Besanko, Ronald Braeutigam
j j j j
6th Edition
j
SOLUTIONMANUALS!!! j
,Besankoj&jBraeutigamj–jMicroeconomics,j6thjedition SolutionsjManual
Chapter 1 j
Analyzing Economic Problems
j j
SolutionsjtojReviewjQuestions
1. Whatjisjthejdifferencejbetweenjmicroeconomicsjandjmacroeconomics?
Microeconomicsjstudiesjthejeconomicjbehaviorjofjindividualjeconomicjdecisionjmakers,jsuchjasjajc
onsumer,jajworker,jajfirm,jorjajmanager.jMacroeconomicsjstudiesjhowjanjentirejnationaljeconomyj
performs,jexaminingjsuchjtopicsjasjthejaggregatejlevelsjofjincomejandjemployment,jthejlevelsjofjin
terestjratesjandjprices,jthejratejofjinflation,jandjthejnaturejofjbusinessjcycles.
2. Whyjisjeconomicsjoftenjdescribedjasjthejsciencejofjconstrainedjchoice?
Whilejourjwantsjforjgoodsjandjservicesjarejunlimited,jthejresourcesjnecessaryjtojproducejthosejgoo
dsjandjservices,jsuchjasjlabor,jmanagerialjtalent,jcapital,jandjrawjmaterials,jarej“scarce”jbecausejth
eirjsupplyjisjlimited.jThisjscarcityjimpliesjthatjwejarejconstrainedjinjthejchoicesjwejcanjmakejaboutj
whichjgoodsjandjservicesjtojproduce.j Thus,jeconomicsjisjoftenjdescribedjasjthejsciencejofjconstrain
edjchoice.
3. Howjdoesjthejtooljofjconstrainedjoptimizationjhelpjdecisionjmakersjmakejchoices?j
Whatjrolesjdojthejobjectivejfunctionjandjconstraintsjplayjinjajmodeljofjconstrainedjoptimi
zation?
Constrainedjoptimizationjallowsjthejdecisionjmakerjtojselectjthejbestj(optimal)jalternativejwhilejac
countingjforjanyjpossiblejlimitationsjorjrestrictionsjonjthejchoices.jThejobjectivejfunctionjrepresent
sjthejrelationshipjtojbejmaximizedjorjminimized.j Forjexample,jajfirm’sjprofitjmightjbejthejobjective
jfunctionjandjalljchoicesjwilljbejevaluatedjinjthejprofitjfunctionjtojdeterminejwhichjyieldsjthejhighe
stjprofit.jThejconstraintsjplacejlimitationsjonjthejchoicejthejdecisionjmakerjcanjselectjandjdefinesjth
ejsetjofjalternativesjfromjwhichjthejbestjwilljbejchosen.
4. Supposejthejmarketjforjwheatjisjcompetitive,jwithjanjupward-
slopingjsupplyjcurve,jajdownward-
slopingjdemandjcurve,jandjanjequilibriumjpricejofj$4.00jperjbushel.jWhyjwouldjajhigherjpr
icej(e.g.,j$5.00jperjbushel)jnotjbejanjequilibriumjprice?jWhyjwouldjajlowerjpricej(e.g.,j$2.50j
perjbushel)jnotjbejanjequilibriumjprice?
Ifjthejpricejinjthejmarketjwasjabovejthejequilibriumjprice,jconsumersjwouldjbejwillingjtojpurchasejf
ewerjunitsjthanjsuppliersjwouldjbejwillingjtojsell,jcreatingjanjexcessjsupply.jAsjsuppliersjrealizejthe
yjarejnotjsellingjthejunitsjtheyjhavejmadejavailable,jsellersjwilljbidjdownjthe
,Besankoj&jBraeutigamj–jMicroeconomics,j6thjedition SolutionsjManual
pricejtojenticejmorejconsumersjtojpurchasejtheirjgoodsjorjservices.j Byjdefinition,jequilibriumjisjajst
atejthatjwilljremainjunchangedjasjlongjasjexogenousjfactorsjremainjunchanged.jSincejinjthisjcasejs
uppliersjwilljlowerjtheirjprice,jthisjhighjpricejcannotjbejanjequilibrium.
Whenjthejpricejisjbelowjthejequilibriumjprice,jconsumersjwilljdemandjmorejunitsjthanjsuppliersjha
vejmadejavailable.jThisjexcessjdemandjwilljenticejconsumersjtojbidjupjthejpricesjtojpurchasejthejli
mitedjunitsjavailable.jSincejthejpricejwilljchange,jitjcannotjbejanjequilibrium.
5. Whatjisjthejdifferencejbetweenjanjexogenousjvariablejandjanjendogenousjvariableji
njanjeconomicjmodel?jWouldjitjeverjbejusefuljtojconstructjajmodeljthatjcontainedjonlyjexo
genousjvariablesj(andjnojendogenousjvariables)?
Exogenousjvariablesjarejtakenjasjgivenjinjanjeconomicjmodel,ji.e.,jtheyjarejdeterminedjbyjsomejpro
cessjoutsidejthejmodel,jwhilejendogenousjvariablesjarejdeterminedjwithinjthejeconomicjmodeljbei
ngjstudied.
Anjeconomicjmodeljthatjcontainedjnojendogenousjvariablesjwouldjnotjbejveryjinteresting.j Withjnoj
endogenousjvariables,jnothingjwouldjbejdeterminedjbyjthejmodeljsojitjwouldjnotjservejmuchjpurpo
se.
6. Whyjdojeconomistsjdojcomparativejstaticsjanalysis?jWhatjrolejdojendogenousjv
ariablesjandjexogenousjvariablesjplayjinjcomparativejstaticsjanalysis?
Comparativejstaticsjanalysesjarejperformedjtojdeterminejhowjthejlevelsjofjendogenousjvariablesjch
angejasjsomejexogenousjvariablejisjchanged.jThisjtypejofjanalysisjisjveryjimportantjsincejinjthejreal
jworldjthejexogenousjvariables,jsuchjasjweather,jpolicyjtools,jetc.jarejalwaysjchangingjandjitjisjusef
uljtojknowjhowjchangesjinjthesejvariablesjaffectjthejlevelsjofjother,jendogenous,jvariables.jAnjexa
mplejofjcomparativejstaticsjanalysisjwouldjbejaskingjthejquestion:jIfjextraordinarilyjlowjrainfallj(a
njexogenousjvariable)jcausesjaj30jpercentjreductionjinjcornjsupply,jbyjhowjmuchjwilljthejmarketjpri
cejforjcornj(anjendogenousjvariable)jincrease?
7. Whatjisjthejdifferencejbetweenjpositivejandjnormativejanalysis?jWhichjofjthejf
ollowingjquestionsjwouldjentailjpositivejanalysis,jandjwhichjnormativejanalysis?
a) WhatjeffectjwilljInternetjauctionjcompaniesjhavejonjthejprofitsjofjlocaljautomobilejd
ealerships?
b) ShouldjthejgovernmentjimposejspecialjtaxesjonjsalesjofjmerchandisejmadejoverjthejI
nternet?
Positivejanalysisjattemptsjtojexplainjhowjanjeconomicjsystemjworksjorjtojpredictjhowjitjwilljchang
ejoverjtimejbyjaskingjexplanatoryjorjpredictivejquestions.jNormativejanalysisjfocusesjonjwhatjshou
ldjbejdonejbyjaskingjprescriptivejquestions.
, Besankoj&jBraeutigamj–jMicroeconomics,j6thjedition SolutionsjManual
a) Becausejthisjquestionjasksjwhetherjdealershipjprofitsjwilljgojupjorjdownj(andjbyjho
wjmuch)j–jbutjrefrainsjfromjinquiringjasjtojwhetherjthisjwouldjbejajgoodjthingj–
jitjisjanjexamplejofjpositivejanalysis.
b) Onjthejotherjhand,jthisjquestionjasksjwhetherjitjisjdesirablejtojimposejtaxesjonjInt
ernetjsales,jsojitjisjnormativejanalysis.jNotably,jthisjquestionjdoesjnotjaskjwhatjt
hejeffectjofjsuchjtaxesjwouldjbe.
SolutionsjtojProblems
1.1 Discussjthejfollowingjstatement:j“Sincejsupplyjandjdemandjcurvesjarejalwaysjs
hifting,jmarketsjneverjactuallyjreachjanjequilibrium.jTherefore,jthejconceptjofjequili
briumjisjuseless.”
Whilejthejclaimjthatjmarketsjneverjreachjanjequilibriumjisjprobablyjdebatable,jevenjifjmarketsjdojn
otjeverjreachjequilibrium,jthejconceptjisjstilljofjcentraljimportance.jThejconceptjofjequilibriumjisji
mportantjbecausejitjprovidesjajsimplejwayjtojpredictjhowjmarketjpricesjandjquantitiesjwilljchangeja
sjexogenousjvariablesjchange.jThus,jwhilejwejmayjneverjreachjajparticularjequilibriumjprice,jsayjb
ecausejajsupplyjorjdemandjschedulejshiftsjasjthejmarketjmovesjtowardjequilibrium,jwejcanjpredictj
withjrelativejease,jforjexample,jwhetherjpricesjwilljbejrisingjorjfallingjwhenjexogenousjmarketjfact
orsjchangejasjwejmovejtowardjequilibrium.j Asjexogenousjvariablesjcontinuejtojchange,jwejcanjco
ntinuejtojpredictjthejdirectionjofjchangejforjthejendogenousjvariables,jandjthisjisjnotj“useless.”
1.2 Injanjarticlejentitled,j“CornjPricesjSurgejonjExportjDemand,jCropjData,”jThejWalljS
treetjJournaljidentifiedjseveraljexogenousjshocksjthatjpushedjU.S.jcornjpricesjsharplyjhigher
.(SeejthejarticlejbyjAaronjLucchetti,jAugustj22,j1997,jp.jC17.jonjnationaljincome.)jSupposejthejU.S.jmarketjf
orjcornjisjcompetitive,jwithjanjupward-slopingjsupplyjcurvejandjajdownward-
jslopingjdemandjcurve.jForjeachjofjthejfollowingjscenarios,jillustratejgraphicallyjhowjthejex
ogenousjeventjdescribedjwilljcontributejtojajhigherjpricejofjcornjinjthejU.S.jmarket.
a) ThejU.S.jDepartmentjofjAgriculturejannouncesjthatjexportsjofjcornjtojTaiwanjandjJ
apanjwerej“surprisinglyjbullish,”jaroundj30jpercentjhigherjthanjhadjbeenjexpected.
b) SomejanalystsjprojectjthatjthejsizejofjthejU.S.jcornjcropjwilljhitjajsix-
yearjlowjbecausejofjdryjweather.
c) ThejstrengtheningjofjEljNiño,jthejmeteorologicaljtrendjthatjbringsjwarmerjweatherjtojt
hejwesternjcoastjofjSouthjAmerica,jreducesjcornjproductionjoutsidejthejUnitedjStates,jth
erebyjincreasingjforeignjcountries’jdependencejonjthejU.S.jcornjcrop.
SOLUTION MANUAL j
Microeconomics
by David Besanko, Ronald Braeutigam
j j j j
6th Edition
j
SOLUTIONMANUALS!!! j
,Besankoj&jBraeutigamj–jMicroeconomics,j6thjedition SolutionsjManual
Chapter 1 j
Analyzing Economic Problems
j j
SolutionsjtojReviewjQuestions
1. Whatjisjthejdifferencejbetweenjmicroeconomicsjandjmacroeconomics?
Microeconomicsjstudiesjthejeconomicjbehaviorjofjindividualjeconomicjdecisionjmakers,jsuchjasjajc
onsumer,jajworker,jajfirm,jorjajmanager.jMacroeconomicsjstudiesjhowjanjentirejnationaljeconomyj
performs,jexaminingjsuchjtopicsjasjthejaggregatejlevelsjofjincomejandjemployment,jthejlevelsjofjin
terestjratesjandjprices,jthejratejofjinflation,jandjthejnaturejofjbusinessjcycles.
2. Whyjisjeconomicsjoftenjdescribedjasjthejsciencejofjconstrainedjchoice?
Whilejourjwantsjforjgoodsjandjservicesjarejunlimited,jthejresourcesjnecessaryjtojproducejthosejgoo
dsjandjservices,jsuchjasjlabor,jmanagerialjtalent,jcapital,jandjrawjmaterials,jarej“scarce”jbecausejth
eirjsupplyjisjlimited.jThisjscarcityjimpliesjthatjwejarejconstrainedjinjthejchoicesjwejcanjmakejaboutj
whichjgoodsjandjservicesjtojproduce.j Thus,jeconomicsjisjoftenjdescribedjasjthejsciencejofjconstrain
edjchoice.
3. Howjdoesjthejtooljofjconstrainedjoptimizationjhelpjdecisionjmakersjmakejchoices?j
Whatjrolesjdojthejobjectivejfunctionjandjconstraintsjplayjinjajmodeljofjconstrainedjoptimi
zation?
Constrainedjoptimizationjallowsjthejdecisionjmakerjtojselectjthejbestj(optimal)jalternativejwhilejac
countingjforjanyjpossiblejlimitationsjorjrestrictionsjonjthejchoices.jThejobjectivejfunctionjrepresent
sjthejrelationshipjtojbejmaximizedjorjminimized.j Forjexample,jajfirm’sjprofitjmightjbejthejobjective
jfunctionjandjalljchoicesjwilljbejevaluatedjinjthejprofitjfunctionjtojdeterminejwhichjyieldsjthejhighe
stjprofit.jThejconstraintsjplacejlimitationsjonjthejchoicejthejdecisionjmakerjcanjselectjandjdefinesjth
ejsetjofjalternativesjfromjwhichjthejbestjwilljbejchosen.
4. Supposejthejmarketjforjwheatjisjcompetitive,jwithjanjupward-
slopingjsupplyjcurve,jajdownward-
slopingjdemandjcurve,jandjanjequilibriumjpricejofj$4.00jperjbushel.jWhyjwouldjajhigherjpr
icej(e.g.,j$5.00jperjbushel)jnotjbejanjequilibriumjprice?jWhyjwouldjajlowerjpricej(e.g.,j$2.50j
perjbushel)jnotjbejanjequilibriumjprice?
Ifjthejpricejinjthejmarketjwasjabovejthejequilibriumjprice,jconsumersjwouldjbejwillingjtojpurchasejf
ewerjunitsjthanjsuppliersjwouldjbejwillingjtojsell,jcreatingjanjexcessjsupply.jAsjsuppliersjrealizejthe
yjarejnotjsellingjthejunitsjtheyjhavejmadejavailable,jsellersjwilljbidjdownjthe
,Besankoj&jBraeutigamj–jMicroeconomics,j6thjedition SolutionsjManual
pricejtojenticejmorejconsumersjtojpurchasejtheirjgoodsjorjservices.j Byjdefinition,jequilibriumjisjajst
atejthatjwilljremainjunchangedjasjlongjasjexogenousjfactorsjremainjunchanged.jSincejinjthisjcasejs
uppliersjwilljlowerjtheirjprice,jthisjhighjpricejcannotjbejanjequilibrium.
Whenjthejpricejisjbelowjthejequilibriumjprice,jconsumersjwilljdemandjmorejunitsjthanjsuppliersjha
vejmadejavailable.jThisjexcessjdemandjwilljenticejconsumersjtojbidjupjthejpricesjtojpurchasejthejli
mitedjunitsjavailable.jSincejthejpricejwilljchange,jitjcannotjbejanjequilibrium.
5. Whatjisjthejdifferencejbetweenjanjexogenousjvariablejandjanjendogenousjvariableji
njanjeconomicjmodel?jWouldjitjeverjbejusefuljtojconstructjajmodeljthatjcontainedjonlyjexo
genousjvariablesj(andjnojendogenousjvariables)?
Exogenousjvariablesjarejtakenjasjgivenjinjanjeconomicjmodel,ji.e.,jtheyjarejdeterminedjbyjsomejpro
cessjoutsidejthejmodel,jwhilejendogenousjvariablesjarejdeterminedjwithinjthejeconomicjmodeljbei
ngjstudied.
Anjeconomicjmodeljthatjcontainedjnojendogenousjvariablesjwouldjnotjbejveryjinteresting.j Withjnoj
endogenousjvariables,jnothingjwouldjbejdeterminedjbyjthejmodeljsojitjwouldjnotjservejmuchjpurpo
se.
6. Whyjdojeconomistsjdojcomparativejstaticsjanalysis?jWhatjrolejdojendogenousjv
ariablesjandjexogenousjvariablesjplayjinjcomparativejstaticsjanalysis?
Comparativejstaticsjanalysesjarejperformedjtojdeterminejhowjthejlevelsjofjendogenousjvariablesjch
angejasjsomejexogenousjvariablejisjchanged.jThisjtypejofjanalysisjisjveryjimportantjsincejinjthejreal
jworldjthejexogenousjvariables,jsuchjasjweather,jpolicyjtools,jetc.jarejalwaysjchangingjandjitjisjusef
uljtojknowjhowjchangesjinjthesejvariablesjaffectjthejlevelsjofjother,jendogenous,jvariables.jAnjexa
mplejofjcomparativejstaticsjanalysisjwouldjbejaskingjthejquestion:jIfjextraordinarilyjlowjrainfallj(a
njexogenousjvariable)jcausesjaj30jpercentjreductionjinjcornjsupply,jbyjhowjmuchjwilljthejmarketjpri
cejforjcornj(anjendogenousjvariable)jincrease?
7. Whatjisjthejdifferencejbetweenjpositivejandjnormativejanalysis?jWhichjofjthejf
ollowingjquestionsjwouldjentailjpositivejanalysis,jandjwhichjnormativejanalysis?
a) WhatjeffectjwilljInternetjauctionjcompaniesjhavejonjthejprofitsjofjlocaljautomobilejd
ealerships?
b) ShouldjthejgovernmentjimposejspecialjtaxesjonjsalesjofjmerchandisejmadejoverjthejI
nternet?
Positivejanalysisjattemptsjtojexplainjhowjanjeconomicjsystemjworksjorjtojpredictjhowjitjwilljchang
ejoverjtimejbyjaskingjexplanatoryjorjpredictivejquestions.jNormativejanalysisjfocusesjonjwhatjshou
ldjbejdonejbyjaskingjprescriptivejquestions.
, Besankoj&jBraeutigamj–jMicroeconomics,j6thjedition SolutionsjManual
a) Becausejthisjquestionjasksjwhetherjdealershipjprofitsjwilljgojupjorjdownj(andjbyjho
wjmuch)j–jbutjrefrainsjfromjinquiringjasjtojwhetherjthisjwouldjbejajgoodjthingj–
jitjisjanjexamplejofjpositivejanalysis.
b) Onjthejotherjhand,jthisjquestionjasksjwhetherjitjisjdesirablejtojimposejtaxesjonjInt
ernetjsales,jsojitjisjnormativejanalysis.jNotably,jthisjquestionjdoesjnotjaskjwhatjt
hejeffectjofjsuchjtaxesjwouldjbe.
SolutionsjtojProblems
1.1 Discussjthejfollowingjstatement:j“Sincejsupplyjandjdemandjcurvesjarejalwaysjs
hifting,jmarketsjneverjactuallyjreachjanjequilibrium.jTherefore,jthejconceptjofjequili
briumjisjuseless.”
Whilejthejclaimjthatjmarketsjneverjreachjanjequilibriumjisjprobablyjdebatable,jevenjifjmarketsjdojn
otjeverjreachjequilibrium,jthejconceptjisjstilljofjcentraljimportance.jThejconceptjofjequilibriumjisji
mportantjbecausejitjprovidesjajsimplejwayjtojpredictjhowjmarketjpricesjandjquantitiesjwilljchangeja
sjexogenousjvariablesjchange.jThus,jwhilejwejmayjneverjreachjajparticularjequilibriumjprice,jsayjb
ecausejajsupplyjorjdemandjschedulejshiftsjasjthejmarketjmovesjtowardjequilibrium,jwejcanjpredictj
withjrelativejease,jforjexample,jwhetherjpricesjwilljbejrisingjorjfallingjwhenjexogenousjmarketjfact
orsjchangejasjwejmovejtowardjequilibrium.j Asjexogenousjvariablesjcontinuejtojchange,jwejcanjco
ntinuejtojpredictjthejdirectionjofjchangejforjthejendogenousjvariables,jandjthisjisjnotj“useless.”
1.2 Injanjarticlejentitled,j“CornjPricesjSurgejonjExportjDemand,jCropjData,”jThejWalljS
treetjJournaljidentifiedjseveraljexogenousjshocksjthatjpushedjU.S.jcornjpricesjsharplyjhigher
.(SeejthejarticlejbyjAaronjLucchetti,jAugustj22,j1997,jp.jC17.jonjnationaljincome.)jSupposejthejU.S.jmarketjf
orjcornjisjcompetitive,jwithjanjupward-slopingjsupplyjcurvejandjajdownward-
jslopingjdemandjcurve.jForjeachjofjthejfollowingjscenarios,jillustratejgraphicallyjhowjthejex
ogenousjeventjdescribedjwilljcontributejtojajhigherjpricejofjcornjinjthejU.S.jmarket.
a) ThejU.S.jDepartmentjofjAgriculturejannouncesjthatjexportsjofjcornjtojTaiwanjandjJ
apanjwerej“surprisinglyjbullish,”jaroundj30jpercentjhigherjthanjhadjbeenjexpected.
b) SomejanalystsjprojectjthatjthejsizejofjthejU.S.jcornjcropjwilljhitjajsix-
yearjlowjbecausejofjdryjweather.
c) ThejstrengtheningjofjEljNiño,jthejmeteorologicaljtrendjthatjbringsjwarmerjweatherjtojt
hejwesternjcoastjofjSouthjAmerica,jreducesjcornjproductionjoutsidejthejUnitedjStates,jth
erebyjincreasingjforeignjcountries’jdependencejonjthejU.S.jcornjcrop.
