@PROFDOCDIGITALLIBRARIES
SOLUTION MANUAL
Microeconomics
David Besanko
6th Edition
Chapters 1-16 (All Chapters Verified)
SO
LU
TI
O
N
S
,@PROFDOCDIGITALLIBRARIES
Table of Contents
Chapters
1. Analyzing Economic Problems
2. Demand and Supply Analysis
Consumer Theory
3. Consumer Preferences and the Concept of Utility
4. Consumer Choice
5. The Theory of Demand
Production and Cost Theory
6. Inputs and Production Functions
SO
7. Costs and Cost Minimization
8. Cost Curves
Perfect Competition
9. Perfectly Competitive Markets
10.Competitive Markets: Applications
LU
Market Power
11.Monopoly and Monopsony
12.Capturing Surplus
Imperfect Competition and Strategy
13.Market Structure and Competition
TI
14.Game Theory and Strategic Behavior
15.Risk and Information
Special Topics
O
16.General Equilibrium Theory
17.Externalities and Public Goods
N
S
,@PROFDOCDIGITALLIBRARIES
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.
SO
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
LU
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
TI
optimization?
Constrained optimization allows the decision maker to select the best (optimal) alternative while
O
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
N
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.
S
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
, @PROFDOCDIGITALLIBRARIES
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 is the difference between an exogenous variable and an endogenous variable
in an economic model? Would it ever be useful to construct a model that contained only
exogenous variables (and no endogenous variables)?
SO
Exogenous variables are taken as given in an economic model, i.e., they are determined by some
process outside the model, while endogenous variables are determined within the economic
model being studied.
An economic model that contained no endogenous variables would not be very interesting. With
no endogenous variables, nothing would be determined by the model so it would not serve much
LU
purpose.
6. Why do economists do comparative statics analysis? What role do endogenous
variables and exogenous variables play in comparative statics analysis?
TI
Comparative statics analyses are performed to determine how the levels of endogenous variables
change as some exogenous variable is changed. This type of analysis is very important since in
the real world the exogenous variables, such as weather, policy tools, etc. are always changing
O
and it is useful to know how changes in these variables affect the levels of other, endogenous,
variables. An example of comparative statics analysis would be asking the question: If
extraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn supply,
N
by how much will the market price for corn (an endogenous variable) increase?
S
7. What is the difference between positive and normative analysis? Which of the
following questions would entail positive analysis, and which normative analysis?
a) What effect will Internet auction companies have on the profits of local automobile
dealerships?
b) Should the government impose special taxes on sales of merchandise made over the
Internet?
Positive analysis attempts to explain how an economic system works or to predict how it will
change over time by asking explanatory or predictive questions. Normative analysis focuses on
what should be done by asking prescriptive questions.
SOLUTION MANUAL
Microeconomics
David Besanko
6th Edition
Chapters 1-16 (All Chapters Verified)
SO
LU
TI
O
N
S
,@PROFDOCDIGITALLIBRARIES
Table of Contents
Chapters
1. Analyzing Economic Problems
2. Demand and Supply Analysis
Consumer Theory
3. Consumer Preferences and the Concept of Utility
4. Consumer Choice
5. The Theory of Demand
Production and Cost Theory
6. Inputs and Production Functions
SO
7. Costs and Cost Minimization
8. Cost Curves
Perfect Competition
9. Perfectly Competitive Markets
10.Competitive Markets: Applications
LU
Market Power
11.Monopoly and Monopsony
12.Capturing Surplus
Imperfect Competition and Strategy
13.Market Structure and Competition
TI
14.Game Theory and Strategic Behavior
15.Risk and Information
Special Topics
O
16.General Equilibrium Theory
17.Externalities and Public Goods
N
S
,@PROFDOCDIGITALLIBRARIES
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.
SO
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
LU
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
TI
optimization?
Constrained optimization allows the decision maker to select the best (optimal) alternative while
O
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
N
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.
S
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
, @PROFDOCDIGITALLIBRARIES
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 is the difference between an exogenous variable and an endogenous variable
in an economic model? Would it ever be useful to construct a model that contained only
exogenous variables (and no endogenous variables)?
SO
Exogenous variables are taken as given in an economic model, i.e., they are determined by some
process outside the model, while endogenous variables are determined within the economic
model being studied.
An economic model that contained no endogenous variables would not be very interesting. With
no endogenous variables, nothing would be determined by the model so it would not serve much
LU
purpose.
6. Why do economists do comparative statics analysis? What role do endogenous
variables and exogenous variables play in comparative statics analysis?
TI
Comparative statics analyses are performed to determine how the levels of endogenous variables
change as some exogenous variable is changed. This type of analysis is very important since in
the real world the exogenous variables, such as weather, policy tools, etc. are always changing
O
and it is useful to know how changes in these variables affect the levels of other, endogenous,
variables. An example of comparative statics analysis would be asking the question: If
extraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn supply,
N
by how much will the market price for corn (an endogenous variable) increase?
S
7. What is the difference between positive and normative analysis? Which of the
following questions would entail positive analysis, and which normative analysis?
a) What effect will Internet auction companies have on the profits of local automobile
dealerships?
b) Should the government impose special taxes on sales of merchandise made over the
Internet?
Positive analysis attempts to explain how an economic system works or to predict how it will
change over time by asking explanatory or predictive questions. Normative analysis focuses on
what should be done by asking prescriptive questions.
