Solution Manual For Microeconomics 6th Edition
Solutions Manual
by David Besanko and Ronald Braeutigam
Chapter1 AnalyzingEconomicProblems il
SolutionstoReviewQuestions
1. What is the difference between microeconomics and macroeconomics?
Micro economicsstudiestheeconomicbehavior ofindividualeconomicdecisionmakers, suchas a
li
consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
economyperforms, examining such topics as the aggregate levels of income and employment, the
levels of interest rates and prices, the rateof 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 necessaryto produce those
goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce” because
their supplyis limited. This scarcityimplies that we are constrained in the choices we can make
about whichgoodsand servicesto produce. Thus, economics isoftendescribed asthe science of
li li
constrained choice.
3. Howdoesthetoolofconstrained optimizationhelpdecisionmakersmakechoices?
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What roles do the objective function and constraints play in a model of constrained
optimization?
Constrained optimizationallowsthedecision makerto select thebest (optimal) alternativewhile
li
accounting for anypossible limitations or restrictions on the choices. The objective function
representstherelationship to bemaximizedorminimized. Forexample, afirm‟sprofit might be the
li li
objective functionandallchoiceswillbe evaluated inthe profit functionto determine which yields the
li
highest profit. The constraints place limitations onthe choice the decision maker can select and
defines the set of alternatives from which the best will be chosen.
4. Supposethemarket forwheat iscompetitive, with anupward-sloping supplycurve, a
il il il
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 suppliersrealize
theyare notsellingthe unitstheyhave madeavailable, sellerswill biddownthe li
Chapter 1 - 1
,Solution Manual For Microeconomics 6th Edition
Solutions Manual
by David Besanko and Ronald Braeutigam
price to entice more consumers to purchase their goods or services. Bydefinition, equilibrium is a
statethat will remain unchanged as long as exogenous factorsremainunchanged. Since inthis case
suppliers will lower their price, this high price cannot be an equilibrium.
Whentheprice is belowthe equilibriumprice, consumerswilldemand more unitsthansuppliers 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. Whatisthedifferencebetween anexogenousvariableand an endogenousvariable in
il
an economic model? Would it ever be useful to construct a model that contained only
exogenous variables (and no endogenous variables)?
Exogenousvariablesare takenas given inaneconomic model, i.e.,theyaredetermined bysome process
il li li
outside the model, while endogenous variables are determined within the economic model being
studied.
Aneconomic modelthat contained no endogenous variables would not be veryinteresting. With no
endogenous variables, nothing would be determined by the model so it would not serve much
purpose.
6. Whydoeconomistsdocomparativestaticsanalysis? Whatroledoendogenous
il
variables and exogenous variables play in comparative statics analysis?
Comparative staticsanalysesare performed to determine how thelevelsofendogenousvariables
change as some exogenous variable is changed. This type ofanalysis is veryimportant since in the
real world the exogenous variables, such as weather, policytools, etc. are always changing and it is
usefulto 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 extraordinarilylowrainfall
(anexogenousvariable) causesa30percent reductionincornsupply, byhow much will the market
li
price for corn (an endogenous variable) increase?
7. Whatisthedifferencebetweenpositiveandnormativeanalysis? Which ofthe
following questions would entail positive analysis, and which normative analysis?
a) Whateffect willInternet auction companieshaveontheprofitsoflocalautomobile
il il il
dealerships?
b) Shouldthegovernmentimposespecialtaxes on sales of merchandisemadeoverthe
il il
Internet?
Positive analysis attempts to explain how an economic system works or to predict how it will change
overtime byaskingexplanatoryor predictivequestions. Normativeanalysis focuseson what should
be done byasking prescriptive questions.
Chapter 1 - 2
,Solution Manual For Microeconomics 6th Edition
Solutions Manual
by David Besanko and Ronald Braeutigam
a) Because this question asks whether dealership profits willgo upor down(and byhow
il
much) – but refrains frominquiring as to whetherthis would be a goodthing – it is an
example of positive analysis.
b) Ontheother hand,thisquestionaskswhether it isdesirabletoimposetaxeson
li il
Internet sales, so it is normative analysis. Notably, this question does not ask
what the effect of such taxes would be.
SolutionstoProblems
1.1 Discuss the following statement: ―Sincesupply and demand curvesare
il
always shifting, markets never actually reach an equilibrium. Therefore, the
concept of equilibrium is useless.‖
While the claim that markets never reach an equilibrium is probablydebatable, even if markets do
not ever reach equilibrium, the concept is still of central importance. The concept of equilibrium is
important because it provides a simple wayto predict how market prices and quantities will change
as exogenous variables change. Thus, while we may never reach a particularequilibriumprice, say
becauseasupplyordemand scheduleshiftsasthe market moves toward equilibrium, we can predict
li
with relative ease, for example, whether prices will be rising or falling when exogenous market
factors change as we move toward equilibrium. As exogenous variables continue to change, we
can continue to predict the direction of change for the endogenous variables, and this is not “useless.”
1.2 Inanarticleentitled, ―Corn PricesSurgeon Export Demand, Crop Data,‖ TheWall
Street Journal identified several exogenous shocks that pushed U.S. corn prices sharply
higher.(See the article by Aaron Lucchetti, August 22, 1997, p. C17. on national income.) Suppose the U.S.
market for corn is competitive, with an upward-sloping supply curve and a downward-
sloping demand curve. For each of the following scenarios, illustrate graphically how the
exogenous event described will contribute to a higher price of corn in the U.S. market.
a) The U.S. Department ofAgriculture announcesthatexportsofcorn to Taiwanand
il
Japan were―surprisingly bullish,‖ around 30 percent higherthan had beenexpected.
il il
b) Someanalystsproject thatthesize ofthe U.S. corncropwillhit asix-yearlowbecause of dry
weather.
c) Thestrengthening ofElNiño,the meteorologicaltrend that bringswarmerweatherto the
il
western coast of South America, reduces corn production outside the United States,
thereby increasing foreign countries’ dependence on the U.S. corn crop.
Chapter 1 - 3
, Solution Manual For Microeconomics 6th Edition
Solutions Manual
by David Besanko and Ronald Braeutigam
a) Surprisinglyhighexportsales meanthatthedemand for cornwashigher than
li il li
expected, at D2 rather than D1.
P
S
P2
P1
D2
D1
Q
b) Dryweather would reduce the supplyofcorn, to S2 ratherthanS1.
S2
P
S1
P2
P1
D
Q
c) Assuming the U.S. does not import corn, reduced production outside the U.S.
would not impact U.S. corn market supply. El Nino would, however, cause
demand for U.S. cornto shift out, thefigurebeing thesameas inpart (a) above.
li
1.3 Inearly 2008, theprice of oilon theworld market increased, hitting a peak of about
il il
$140 per barrel in July, 2008. In the second half of 2008, the price of oil declined, ending the
yearat justover$40 perbarrel. Supposethat theglobal market foroilcanbedescribed by an
il il
upward-sloping supplycurve and a downward-sloping demand curve. For each of the
followingscenarios, illustrate graphically howtheexogenousevent contributed to arise or a il
decline in the price of oil in 2008:
Chapter 1 - 4
Solutions Manual
by David Besanko and Ronald Braeutigam
Chapter1 AnalyzingEconomicProblems il
SolutionstoReviewQuestions
1. What is the difference between microeconomics and macroeconomics?
Micro economicsstudiestheeconomicbehavior ofindividualeconomicdecisionmakers, suchas a
li
consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
economyperforms, examining such topics as the aggregate levels of income and employment, the
levels of interest rates and prices, the rateof 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 necessaryto produce those
goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce” because
their supplyis limited. This scarcityimplies that we are constrained in the choices we can make
about whichgoodsand servicesto produce. Thus, economics isoftendescribed asthe science of
li li
constrained choice.
3. Howdoesthetoolofconstrained optimizationhelpdecisionmakersmakechoices?
il
What roles do the objective function and constraints play in a model of constrained
optimization?
Constrained optimizationallowsthedecision makerto select thebest (optimal) alternativewhile
li
accounting for anypossible limitations or restrictions on the choices. The objective function
representstherelationship to bemaximizedorminimized. Forexample, afirm‟sprofit might be the
li li
objective functionandallchoiceswillbe evaluated inthe profit functionto determine which yields the
li
highest profit. The constraints place limitations onthe choice the decision maker can select and
defines the set of alternatives from which the best will be chosen.
4. Supposethemarket forwheat iscompetitive, with anupward-sloping supplycurve, a
il il il
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 suppliersrealize
theyare notsellingthe unitstheyhave madeavailable, sellerswill biddownthe li
Chapter 1 - 1
,Solution Manual For Microeconomics 6th Edition
Solutions Manual
by David Besanko and Ronald Braeutigam
price to entice more consumers to purchase their goods or services. Bydefinition, equilibrium is a
statethat will remain unchanged as long as exogenous factorsremainunchanged. Since inthis case
suppliers will lower their price, this high price cannot be an equilibrium.
Whentheprice is belowthe equilibriumprice, consumerswilldemand more unitsthansuppliers 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. Whatisthedifferencebetween anexogenousvariableand an endogenousvariable in
il
an economic model? Would it ever be useful to construct a model that contained only
exogenous variables (and no endogenous variables)?
Exogenousvariablesare takenas given inaneconomic model, i.e.,theyaredetermined bysome process
il li li
outside the model, while endogenous variables are determined within the economic model being
studied.
Aneconomic modelthat contained no endogenous variables would not be veryinteresting. With no
endogenous variables, nothing would be determined by the model so it would not serve much
purpose.
6. Whydoeconomistsdocomparativestaticsanalysis? Whatroledoendogenous
il
variables and exogenous variables play in comparative statics analysis?
Comparative staticsanalysesare performed to determine how thelevelsofendogenousvariables
change as some exogenous variable is changed. This type ofanalysis is veryimportant since in the
real world the exogenous variables, such as weather, policytools, etc. are always changing and it is
usefulto 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 extraordinarilylowrainfall
(anexogenousvariable) causesa30percent reductionincornsupply, byhow much will the market
li
price for corn (an endogenous variable) increase?
7. Whatisthedifferencebetweenpositiveandnormativeanalysis? Which ofthe
following questions would entail positive analysis, and which normative analysis?
a) Whateffect willInternet auction companieshaveontheprofitsoflocalautomobile
il il il
dealerships?
b) Shouldthegovernmentimposespecialtaxes on sales of merchandisemadeoverthe
il il
Internet?
Positive analysis attempts to explain how an economic system works or to predict how it will change
overtime byaskingexplanatoryor predictivequestions. Normativeanalysis focuseson what should
be done byasking prescriptive questions.
Chapter 1 - 2
,Solution Manual For Microeconomics 6th Edition
Solutions Manual
by David Besanko and Ronald Braeutigam
a) Because this question asks whether dealership profits willgo upor down(and byhow
il
much) – but refrains frominquiring as to whetherthis would be a goodthing – it is an
example of positive analysis.
b) Ontheother hand,thisquestionaskswhether it isdesirabletoimposetaxeson
li il
Internet sales, so it is normative analysis. Notably, this question does not ask
what the effect of such taxes would be.
SolutionstoProblems
1.1 Discuss the following statement: ―Sincesupply and demand curvesare
il
always shifting, markets never actually reach an equilibrium. Therefore, the
concept of equilibrium is useless.‖
While the claim that markets never reach an equilibrium is probablydebatable, even if markets do
not ever reach equilibrium, the concept is still of central importance. The concept of equilibrium is
important because it provides a simple wayto predict how market prices and quantities will change
as exogenous variables change. Thus, while we may never reach a particularequilibriumprice, say
becauseasupplyordemand scheduleshiftsasthe market moves toward equilibrium, we can predict
li
with relative ease, for example, whether prices will be rising or falling when exogenous market
factors change as we move toward equilibrium. As exogenous variables continue to change, we
can continue to predict the direction of change for the endogenous variables, and this is not “useless.”
1.2 Inanarticleentitled, ―Corn PricesSurgeon Export Demand, Crop Data,‖ TheWall
Street Journal identified several exogenous shocks that pushed U.S. corn prices sharply
higher.(See the article by Aaron Lucchetti, August 22, 1997, p. C17. on national income.) Suppose the U.S.
market for corn is competitive, with an upward-sloping supply curve and a downward-
sloping demand curve. For each of the following scenarios, illustrate graphically how the
exogenous event described will contribute to a higher price of corn in the U.S. market.
a) The U.S. Department ofAgriculture announcesthatexportsofcorn to Taiwanand
il
Japan were―surprisingly bullish,‖ around 30 percent higherthan had beenexpected.
il il
b) Someanalystsproject thatthesize ofthe U.S. corncropwillhit asix-yearlowbecause of dry
weather.
c) Thestrengthening ofElNiño,the meteorologicaltrend that bringswarmerweatherto the
il
western coast of South America, reduces corn production outside the United States,
thereby increasing foreign countries’ dependence on the U.S. corn crop.
Chapter 1 - 3
, Solution Manual For Microeconomics 6th Edition
Solutions Manual
by David Besanko and Ronald Braeutigam
a) Surprisinglyhighexportsales meanthatthedemand for cornwashigher than
li il li
expected, at D2 rather than D1.
P
S
P2
P1
D2
D1
Q
b) Dryweather would reduce the supplyofcorn, to S2 ratherthanS1.
S2
P
S1
P2
P1
D
Q
c) Assuming the U.S. does not import corn, reduced production outside the U.S.
would not impact U.S. corn market supply. El Nino would, however, cause
demand for U.S. cornto shift out, thefigurebeing thesameas inpart (a) above.
li
1.3 Inearly 2008, theprice of oilon theworld market increased, hitting a peak of about
il il
$140 per barrel in July, 2008. In the second half of 2008, the price of oil declined, ending the
yearat justover$40 perbarrel. Supposethat theglobal market foroilcanbedescribed by an
il il
upward-sloping supplycurve and a downward-sloping demand curve. For each of the
followingscenarios, illustrate graphically howtheexogenousevent contributed to arise or a il
decline in the price of oil in 2008:
Chapter 1 - 4
