Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
Chapter 1
Analyzing Economic Problems
Solutions to Review Questions
1. Whatiiisiitheiidifference!!between!!microeconomics!!and!!macroeconomics?
Microeconomics studies the economic behavior of individual economic decision makers, such as a
F F F F F F F F F F F F F
consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national economy
F F F F F F F FF F F F F F F F
performs, examining such topics as the aggregate levels of income and employment, the levels of interest
F F F F F F F F F F F F F F F F
rates and prices, the rate of inflation, and the nature of business cycles.
F F F F F F F F F F F F
2. Why is economics often described as the science of constrained choice?
F F F F F F F F F F
While our wants for goods and services are unlimited, the resources necessary to produce those goods
F F F F F F F F F F F F F F F F
and services, such as labor, managerial talent, capital, and raw materials, are “scarce” because their supply
F F F F F F F F F F F F F F F F
is limited. This scarcity implies that we are constrained in the choices we can make about which goods and
F FF F F F F F F F F F F F F F F F F F
services to produce. Thus, economics is often described as the science of constrained choice.
F F FF F F F F F F F F F F
3. How does the tool of constrained optimization help decision makers make choices? What
F F F F F F F F F F F F F
roles do the objective function and constraints play in a model of constrained optimization?
F F F F F F F F F F F F F
Constrained optimization allows the decision maker to select the best (optimal) alternative while
F F F F F F F F F F F F F
accounting for any possible limitations or restrictions on the choices. The objective function represents the
F F F F F F F F F FF F F F F F
relationship to be maximized or minimized. For example, a firm’s profit might be the objective function and
F F F F F FF F F F F F F F F F F F
all choices will be evaluated in the profit function to determine which yields the highest profit. The
F F F F F F F F F F F F F F F FF F
constraints place limitations on the choice the decision maker can select and defines the set of alternatives
F F F F F F F F F F F F F F F F F
from which the best will be chosen.
F F F F F F
4. Suppose the market for wheat is competitive, with an upward-sloping supply curve, a F F F F F F F F F F F F F
downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why would a higher F F F F F F F F F F F F F F F
price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a lower price (e.g., $2.50 per
F F F F F F F F F F F F F F F F F F
bushel) not be an equilibrium price?
F F F F F
If the price in the market was above the equilibrium price, consumers would be willing to purchase fewer
F F F F F F F F F F F F F F F F F F
units than suppliers would be willing to sell, creating an excess supply. As suppliers realize they are not
F F F F F F F F F F F FF F F F F F F
selling the units they have made available, sellers will bid down the
F F F F F F F F F F F
,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
F F F F F F F F F F FF F F F F F F F
will remain unchanged as long as exogenous factors remain unchanged. Since in this case suppliers will
F F F F F F F F F F F F F F F F
lower their price, this high price cannot be an equilibrium.
F F F F F F F F F
When the price is below the equilibrium price, consumers will demand more units than suppliers have made
F F F F F F F F F F F F F F F F F
available. This excess demand will entice consumers to bid up the prices to purchase the limited units
F F F F F F F F F F F F F F F F F
available. Since the price will change, it cannot be an equilibrium.
FF F F F F F F F F F
5. What is the difference between an exogenous variable and an endogenous variable in an
F F F F F F F F F F F F F F
economic model? Would it ever be useful to construct a model that contained only exogenous
F F F F F F F F F F F F F F F
variables (and no endogenous variables)? F F F F
Exogenous variables are taken as given in an economic model, i.e., they are determined by some process
F F F F F F F F F F F F F F F F F
outside the model, while endogenous variables are determined within the economic model being studied.
F F F F F F F F F F F F F
An economic model that contained no endogenous variables would not be very interesting. With no
F F F F F F F F F F F F F F F
endogenous variables, nothing would be determined by the model so it would not serve much purpose.
F F F F F F F F F F F F F F F
6. Why do economists do comparative statics analysis? What role do endogenous
F F F F F F F F F F F
variables and exogenous variables play in comparative statics analysis?
F F F F F F F F
Comparative statics analyses are performed to determine how the levels of endogenous variables change
F F F F F F F F F F F F F F
as some exogenous variable is changed. This type of analysis is very important since in the real world the
F F F F F FF F F F F F F F F F F F F F
exogenous variables, such as weather, policy tools, etc. are always changing and it is useful to know how
F F F F F F F F F F F F F F F F F F
changes in these variables affect the levels of other, endogenous, variables. An example of comparative
F F F F F F F F F F FF F F F F
statics analysis would be asking the question: If extraordinarily low rainfall (an exogenous variable) causes
F F F F F F F F F F F F F F F
a 30 percent reduction in corn supply, by how much will the market price for corn (an endogenous variable)
F F F F F F F F F F F F F F F F F F F
increase?
7. What is the difference between positive and normative analysis? Which of the
F F F F F F F F F F F F
following questions would entail positive analysis, and which normative analysis?
F F F F F F F F F
a) What effect will Internet auction companies have on the profits of local automobile
F F F F F F F F F F F F F
dealerships?
b) Should the government impose special taxes on sales of merchandise made over the
F F F F F F F F F F F F F
Internet?
Positive analysis attempts to explain how an economic system works or to predict how it will change over
F F F F F F F F F F F F F F F F F F
time by asking explanatory or predictive questions. Normative analysis focuses on what should be done by
F F F F F F FF F F F F F F F F F
asking prescriptive questions.
F F
, Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
a) Because this question asks whether dealership profits will go up or down (and by how
F F F F F F F F F F F F F F F
much) – but refrains from inquiring as to whether this would be a good thing
F F F F F F F F F F F F F F
– it is an example of positive analysis.
F F F F F F F
b) On the other hand, this question asks whether it is desirable to impose taxes on
F F F F F F F F F F F F F F F
Internet sales, so it is normative analysis. Notably, this question does not ask what the
F F F F F F FF F F F F F F F F
effect of such taxes would be. F F F F F
Solutions to Problems
1.1 Discuss the following statement: “Since supply and demand curves are always F F F F F F F F F F F
shifting, markets never actually reach an equilibrium. Therefore, the concept of equilibrium
F F F F F F F F F F F F
is useless.”
F
While the claim that markets never reach an equilibrium is probably debatable, even if markets do not ever
F F F F F F F F F F F F F F F F F F
reach equilibrium, the concept is still of central importance. The concept of equilibrium is important because
F F F F F F F F FF F F F F F F F
it provides a simple way to predict how market prices and quantities will change as exogenous variables
F F F F F F F F F F F F F F F F F
change. Thus, while we may never reach a particular equilibrium price, say because a supply or demand
FF F F F F F F F F F F F F F F F F
schedule shifts as the market moves toward equilibrium, we can predict with relative ease, for example,
F F F F F F F F F F F F F F F F
whether prices will be rising or falling when exogenous market factors change as we move toward
F F F F F F F F F F F F F F F F
equilibrium. As exogenous variables continue to change, we can continue to predict the direction of change
FF FF F F F F F F F F F F F F F F
for the endogenous variables, and this is not “useless.”
F F F F F F F F
1.2 In an article entitled, “Corn Prices Surge on Export Demand, Crop Data,” The Wall Street
F F F F F F F F F F F F F F F
Journal identified several exogenous shocks that pushed U.S. corn prices sharply higher.(See the
F F F F F F F F F F F
article by Aaron ucchetti, August 22, 1997, p. C17. on national income.) Suppose the U.S. market for corn is
F F F F F F F F
competitive, with an upward-sloping supply curve and a downward- sloping demand curve. For
F F F F F F F F F F F F F
each of the following scenarios, illustrate graphically how the exogenous event described will
F F F F F F F F F F F F F
contribute to a higher price of corn in the U.S. market.
F F F F F F F F F F
a) The U.S. Department of Agriculture announces that exports of corn to Taiwan and
F F F F F F F F F F F F
Japan were “surprisingly bullish,” around 30 percent higher than had been expected.
F F F F F F F F F F F
b) Some analysts project that the size of the U.S. corn crop will hit a six-year low because of dry
F F F F F F F F F F F F F F F F F F F
weather.
c) The strengthening of El Niño, the meteorological trend that brings warmer weather to the
F F F F F F F F F F F F F F
western coast of South America, reduces corn production outside the United States, thereby
F F F F F F F F F F F F F
increasing foreign countries’ dependence on the U.S. corn crop.
F F F F F F F F
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
Chapter 1
Analyzing Economic Problems
Solutions to Review Questions
1. Whatiiisiitheiidifference!!between!!microeconomics!!and!!macroeconomics?
Microeconomics studies the economic behavior of individual economic decision makers, such as a
F F F F F F F F F F F F F
consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national economy
F F F F F F F FF F F F F F F F
performs, examining such topics as the aggregate levels of income and employment, the levels of interest
F F F F F F F F F F F F F F F F
rates and prices, the rate of inflation, and the nature of business cycles.
F F F F F F F F F F F F
2. Why is economics often described as the science of constrained choice?
F F F F F F F F F F
While our wants for goods and services are unlimited, the resources necessary to produce those goods
F F F F F F F F F F F F F F F F
and services, such as labor, managerial talent, capital, and raw materials, are “scarce” because their supply
F F F F F F F F F F F F F F F F
is limited. This scarcity implies that we are constrained in the choices we can make about which goods and
F FF F F F F F F F F F F F F F F F F F
services to produce. Thus, economics is often described as the science of constrained choice.
F F FF F F F F F F F F F F
3. How does the tool of constrained optimization help decision makers make choices? What
F F F F F F F F F F F F F
roles do the objective function and constraints play in a model of constrained optimization?
F F F F F F F F F F F F F
Constrained optimization allows the decision maker to select the best (optimal) alternative while
F F F F F F F F F F F F F
accounting for any possible limitations or restrictions on the choices. The objective function represents the
F F F F F F F F F FF F F F F F
relationship to be maximized or minimized. For example, a firm’s profit might be the objective function and
F F F F F FF F F F F F F F F F F F
all choices will be evaluated in the profit function to determine which yields the highest profit. The
F F F F F F F F F F F F F F F FF F
constraints place limitations on the choice the decision maker can select and defines the set of alternatives
F F F F F F F F F F F F F F F F F
from which the best will be chosen.
F F F F F F
4. Suppose the market for wheat is competitive, with an upward-sloping supply curve, a F F F F F F F F F F F F F
downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why would a higher F F F F F F F F F F F F F F F
price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a lower price (e.g., $2.50 per
F F F F F F F F F F F F F F F F F F
bushel) not be an equilibrium price?
F F F F F
If the price in the market was above the equilibrium price, consumers would be willing to purchase fewer
F F F F F F F F F F F F F F F F F F
units than suppliers would be willing to sell, creating an excess supply. As suppliers realize they are not
F F F F F F F F F F F FF F F F F F F
selling the units they have made available, sellers will bid down the
F F F F F F F F F F F
,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
F F F F F F F F F F FF F F F F F F F
will remain unchanged as long as exogenous factors remain unchanged. Since in this case suppliers will
F F F F F F F F F F F F F F F F
lower their price, this high price cannot be an equilibrium.
F F F F F F F F F
When the price is below the equilibrium price, consumers will demand more units than suppliers have made
F F F F F F F F F F F F F F F F F
available. This excess demand will entice consumers to bid up the prices to purchase the limited units
F F F F F F F F F F F F F F F F F
available. Since the price will change, it cannot be an equilibrium.
FF F F F F F F F F F
5. What is the difference between an exogenous variable and an endogenous variable in an
F F F F F F F F F F F F F F
economic model? Would it ever be useful to construct a model that contained only exogenous
F F F F F F F F F F F F F F F
variables (and no endogenous variables)? F F F F
Exogenous variables are taken as given in an economic model, i.e., they are determined by some process
F F F F F F F F F F F F F F F F F
outside the model, while endogenous variables are determined within the economic model being studied.
F F F F F F F F F F F F F
An economic model that contained no endogenous variables would not be very interesting. With no
F F F F F F F F F F F F F F F
endogenous variables, nothing would be determined by the model so it would not serve much purpose.
F F F F F F F F F F F F F F F
6. Why do economists do comparative statics analysis? What role do endogenous
F F F F F F F F F F F
variables and exogenous variables play in comparative statics analysis?
F F F F F F F F
Comparative statics analyses are performed to determine how the levels of endogenous variables change
F F F F F F F F F F F F F F
as some exogenous variable is changed. This type of analysis is very important since in the real world the
F F F F F FF F F F F F F F F F F F F F
exogenous variables, such as weather, policy tools, etc. are always changing and it is useful to know how
F F F F F F F F F F F F F F F F F F
changes in these variables affect the levels of other, endogenous, variables. An example of comparative
F F F F F F F F F F FF F F F F
statics analysis would be asking the question: If extraordinarily low rainfall (an exogenous variable) causes
F F F F F F F F F F F F F F F
a 30 percent reduction in corn supply, by how much will the market price for corn (an endogenous variable)
F F F F F F F F F F F F F F F F F F F
increase?
7. What is the difference between positive and normative analysis? Which of the
F F F F F F F F F F F F
following questions would entail positive analysis, and which normative analysis?
F F F F F F F F F
a) What effect will Internet auction companies have on the profits of local automobile
F F F F F F F F F F F F F
dealerships?
b) Should the government impose special taxes on sales of merchandise made over the
F F F F F F F F F F F F F
Internet?
Positive analysis attempts to explain how an economic system works or to predict how it will change over
F F F F F F F F F F F F F F F F F F
time by asking explanatory or predictive questions. Normative analysis focuses on what should be done by
F F F F F F FF F F F F F F F F F
asking prescriptive questions.
F F
, Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
a) Because this question asks whether dealership profits will go up or down (and by how
F F F F F F F F F F F F F F F
much) – but refrains from inquiring as to whether this would be a good thing
F F F F F F F F F F F F F F
– it is an example of positive analysis.
F F F F F F F
b) On the other hand, this question asks whether it is desirable to impose taxes on
F F F F F F F F F F F F F F F
Internet sales, so it is normative analysis. Notably, this question does not ask what the
F F F F F F FF F F F F F F F F
effect of such taxes would be. F F F F F
Solutions to Problems
1.1 Discuss the following statement: “Since supply and demand curves are always F F F F F F F F F F F
shifting, markets never actually reach an equilibrium. Therefore, the concept of equilibrium
F F F F F F F F F F F F
is useless.”
F
While the claim that markets never reach an equilibrium is probably debatable, even if markets do not ever
F F F F F F F F F F F F F F F F F F
reach equilibrium, the concept is still of central importance. The concept of equilibrium is important because
F F F F F F F F FF F F F F F F F
it provides a simple way to predict how market prices and quantities will change as exogenous variables
F F F F F F F F F F F F F F F F F
change. Thus, while we may never reach a particular equilibrium price, say because a supply or demand
FF F F F F F F F F F F F F F F F F
schedule shifts as the market moves toward equilibrium, we can predict with relative ease, for example,
F F F F F F F F F F F F F F F F
whether prices will be rising or falling when exogenous market factors change as we move toward
F F F F F F F F F F F F F F F F
equilibrium. As exogenous variables continue to change, we can continue to predict the direction of change
FF FF F F F F F F F F F F F F F F
for the endogenous variables, and this is not “useless.”
F F F F F F F F
1.2 In an article entitled, “Corn Prices Surge on Export Demand, Crop Data,” The Wall Street
F F F F F F F F F F F F F F F
Journal identified several exogenous shocks that pushed U.S. corn prices sharply higher.(See the
F F F F F F F F F F F
article by Aaron ucchetti, August 22, 1997, p. C17. on national income.) Suppose the U.S. market for corn is
F F F F F F F F
competitive, with an upward-sloping supply curve and a downward- sloping demand curve. For
F F F F F F F F F F F F F
each of the following scenarios, illustrate graphically how the exogenous event described will
F F F F F F F F F F F F F
contribute to a higher price of corn in the U.S. market.
F F F F F F F F F F
a) The U.S. Department of Agriculture announces that exports of corn to Taiwan and
F F F F F F F F F F F F
Japan were “surprisingly bullish,” around 30 percent higher than had been expected.
F F F F F F F F F F F
b) Some analysts project that the size of the U.S. corn crop will hit a six-year low because of dry
F F F F F F F F F F F F F F F F F F F
weather.
c) The strengthening of El Niño, the meteorological trend that brings warmer weather to the
F F F F F F F F F F F F F F
western coast of South America, reduces corn production outside the United States, thereby
F F F F F F F F F F F F F
increasing foreign countries’ dependence on the U.S. corn crop.
F F F F F F F F
