Besanko ll& llBraeutigam ll– llMicroeconomics, ll5th Solutions
llManual
ll
edition
Chapter 1 ll
Analyzing Economic Problems l l
Solutions to Review Questions
ll ll ll
1. What llis llthe lldifference llbetween llmicroeconomics lland llmacroeconomics?
Microeconomics llstudies llthe lleconomic llbehavior llof llindividual lleconomic lldecision
llmakers, ll such llas l l a llconsumer, ll a llworker, lla ll firm, ll or lla llmanager. ll ll Macroeconomics
llstudies ll how llan llentire llnational l l economy llperforms, ll examining llsuch lltopics llas ll the
llaggregate lllevels ll of llincome lland llemployment, l l the lllevels llof llinterest ll rates lland
llprices, ll the llrate llof llinflation, ll and llthe llnature llof llbusiness llcycles.
2. Why llis lleconomics lloften lldescribed llas llthe llscience llof llconstrained llchoice?
While llour llwants llfor llgoods lland llservices llare llunlimited, llthe llresources llnecessary llto
llproduce llthose l l goods lland llservices, ll such llas ll labor, ll managerial lltalent, ll capital, lland
llraw ll materials, llare ll“scarce” l l because lltheir llsupply llis ll limited. ll ll This llscarcity
llimplies llthat ll we llare llconstrained ll in llthe llchoices llwe l l can llmake llabout llwhich llgoods
lland llservices llto llproduce. ll llThus, lleconomics ll is lloften lldescribed llas ll the l l science ll of
llconstrained llchoice.
3. How lldoes llthe lltool llof llconstrained lloptimization llhelp lldecision llmakers
ll make llchoices? l l What ll roles lldo llthe llobjective llfunction lland llconstraints llplay llin
ll a llmodel llof llconstrained l l optimization?
Constrained lloptimization llallows llthe lldecision llmaker llto ll select llthe llbest ll(optimal)
ll alternative llwhile l l accounting ll for ll any llpossible ll limitations llor llrestrictions llon llthe
llchoices. ll ll The llobjective ll function l l represents llthe llrelationship ll to ll be llmaximized ll or
ll minimized. ll ll For llexample, ll a llfirm’s llprofit ll might ll be l l the llobjective ll function lland
llall llchoices llwill llbe llevaluated llin llthe llprofit l l function llto ll determine llwhich l l yields
llthe llhighest ll profit. ll llThe llconstraints llplace ll limitations llon llthe llchoice llthe lldecision
llmaker ll can l l select ll and lldefines llthe llset ll of llalternatives ll from llwhich llthe llbest ll will
llbe llchosen.
4. Suppose llthe llmarket llfor llwheat llis llcompetitive, llwith llan llupward-sloping
llsupply llcurve, l l a lldownward-sloping lldemand llcurve, ll and llan llequilibrium llprice
llof ll$4.00 llper llbushel. ll Why l l would lla llhigher llprice ll(e.g., ll $5.00 llper llbushel) llnot
Copyright ll© ll2014 llJohn llWiley ll& llSons, Chapter ll1 ll- ll
ll Inc. 1
,Besanko ll& llBraeutigam ll– llMicroeconomics, ll5th Solutions
ll be llan llequilibrium llprice? llWhy llwould lla lower llprice ll(e.g., ll$2.50 llperllllManual
bushel)
ll
edition l l
ll not llbe llan llequilibrium llprice?
If llthe llprice llin llthe llmarket llwas llabove llthe llequilibrium llprice, llconsumers llwould llbe
llwilling ll to l l purchase ll fewer ll units llthan llsuppliers llwould llbe llwilling llto ll sell, ll creating
llan llexcess llsupply. ll ll As l l suppliers llrealize llthey llare ll not llselling llthe ll units llthey llhave
ll made llavailable, ll sellers llwill ll bid lldown llthe
Copyright ll© ll2014 llJohn llWiley ll& llSons, Chapter ll1 ll- ll
ll Inc. 2
,Besanko ll& llBraeutigam ll– llMicroeconomics, ll5th Solutions
llManual
ll
edition
price llto llentice llmore llconsumers llto llpurchase lltheir llgoods llor llservices. ll llBy lldefinition,
ll equilibrium llis l l a ll state llthat llwill llremain llunchanged llas ll long llas llexogenous ll factors
llremain llunchanged. ll Since ll in llthis l l case llsuppliers llwill lllower ll their llprice, ll this ll high
llprice ll cannot llbe llan llequilibrium.
When llthe llprice llis llbelow llthe llequilibrium llprice, llconsumers llwill lldemand llmore
llunits llthan llsuppliers l l have ll made llavailable. ll This llexcess lldemand llwill llentice
llconsumers llto llbid ll up llthe llprices ll to llpurchase l l the lllimited llunits llavailable. ll ll Since
llthe llprice llwill llchange, ll it ll cannot llbe llan llequilibrium.
5. What llis llthe lldifference llbetween llan llexogenous llvariable lland llan
llendogenous llvariable l l in ll an lleconomic llmodel? llWould llit ll ever llbe lluseful llto
llconstruct ll a llmodel llthat ll contained llonly l l exogenous llvariables ll(and llno
llendogenous llvariables)?
Exogenous llvariables llare lltaken llas llgiven llin llan lleconomic llmodel, ll i.e., llthey llare
lldetermined ll by llsome l l process lloutside llthe ll model, ll while llendogenous llvariables
llare lldetermined llwithin llthe lleconomic l l model llbeing llstudied.
An lleconomic llmodel llthat llcontained llno llendogenous llvariables llwould llnot llbe llvery
llinteresting. ll With l l no ll endogenous llvariables, ll nothing llwould ll be lldetermined ll by llthe
ll model llso ll it ll would ll not llserve ll much l l purpose.
6. Why lldo lleconomists lldo llcomparative llstatics llanalysis? llWhat llrole lldo
llendogenous l l variables lland llexogenous llvariables llplay llin ll comparative
llstatics llanalysis?
Comparative llstatics llanalyses llare llperformed llto lldetermine llhow ll the lllevels llof
llendogenous llvariables l l change llas llsome llexogenous llvariable ll is llchanged. ll ll This lltype
llof llanalysis ll is ll very llimportant llsince ll in l l the llreal llworld llthe llexogenous llvariables,
ll such llas llweather, ll policy lltools, ll etc. ll are llalways llchanging l l and ll it l l is lluseful llto
ll know llhow llchanges ll in llthese llvariables llaffect l l the ll levels llof llother, ll endogenous,
l l variables. ll ll An llexample ll of llcomparative llstatics llanalysis llwould ll be llasking llthe
llquestion: ll If l l extraordinarily lllow llrainfall ll(an llexogenous llvariable) ll causes lla ll30
llpercent ll reduction llin llcorn llsupply, l l by llhow ll much llwill llthe ll market ll price ll for ll corn
ll(an llendogenous llvariable) ll increase?
7. What llis llthe lldifference llbetween llpositive lland llnormative llanalysis?
llWhich llof llthe l l following llquestions llwould llentail llpositive llanalysis, ll and
llwhich llnormative llanalysis?
a) What lleffect llwill llInternet llauction llcompanies llhave llon llthe llprofits llof lllocal
Copyright ll© ll2014 llJohn llWiley ll& llSons, Chapter ll1 ll- ll
ll Inc. 3
, Besanko ll& llBraeutigam ll– llMicroeconomics, ll5th Solutions
llautomobile l l dealerships? llManual
ll
edition
b) Should llthe llgovernment llimpose llspecial lltaxes llon llsales llof llmerchandise
llmade llover llthe l l Internet?
Positive llanalysis llattempts llto llexplain llhow llan lleconomic llsystem llworks llor llto llpredict
ll how llit ll will l l change llover lltime ll by llasking ll explanatory llor ll predictive llquestions. ll
ll Normative llanalysis ll focuses llon l l what ll should llbe lldone llby llasking llprescriptive
llquestions.
Copyright ll© ll2014 llJohn llWiley ll& llSons, Chapter ll1 ll- ll
ll Inc. 4
llManual
ll
edition
Chapter 1 ll
Analyzing Economic Problems l l
Solutions to Review Questions
ll ll ll
1. What llis llthe lldifference llbetween llmicroeconomics lland llmacroeconomics?
Microeconomics llstudies llthe lleconomic llbehavior llof llindividual lleconomic lldecision
llmakers, ll such llas l l a llconsumer, ll a llworker, lla ll firm, ll or lla llmanager. ll ll Macroeconomics
llstudies ll how llan llentire llnational l l economy llperforms, ll examining llsuch lltopics llas ll the
llaggregate lllevels ll of llincome lland llemployment, l l the lllevels llof llinterest ll rates lland
llprices, ll the llrate llof llinflation, ll and llthe llnature llof llbusiness llcycles.
2. Why llis lleconomics lloften lldescribed llas llthe llscience llof llconstrained llchoice?
While llour llwants llfor llgoods lland llservices llare llunlimited, llthe llresources llnecessary llto
llproduce llthose l l goods lland llservices, ll such llas ll labor, ll managerial lltalent, ll capital, lland
llraw ll materials, llare ll“scarce” l l because lltheir llsupply llis ll limited. ll ll This llscarcity
llimplies llthat ll we llare llconstrained ll in llthe llchoices llwe l l can llmake llabout llwhich llgoods
lland llservices llto llproduce. ll llThus, lleconomics ll is lloften lldescribed llas ll the l l science ll of
llconstrained llchoice.
3. How lldoes llthe lltool llof llconstrained lloptimization llhelp lldecision llmakers
ll make llchoices? l l What ll roles lldo llthe llobjective llfunction lland llconstraints llplay llin
ll a llmodel llof llconstrained l l optimization?
Constrained lloptimization llallows llthe lldecision llmaker llto ll select llthe llbest ll(optimal)
ll alternative llwhile l l accounting ll for ll any llpossible ll limitations llor llrestrictions llon llthe
llchoices. ll ll The llobjective ll function l l represents llthe llrelationship ll to ll be llmaximized ll or
ll minimized. ll ll For llexample, ll a llfirm’s llprofit ll might ll be l l the llobjective ll function lland
llall llchoices llwill llbe llevaluated llin llthe llprofit l l function llto ll determine llwhich l l yields
llthe llhighest ll profit. ll llThe llconstraints llplace ll limitations llon llthe llchoice llthe lldecision
llmaker ll can l l select ll and lldefines llthe llset ll of llalternatives ll from llwhich llthe llbest ll will
llbe llchosen.
4. Suppose llthe llmarket llfor llwheat llis llcompetitive, llwith llan llupward-sloping
llsupply llcurve, l l a lldownward-sloping lldemand llcurve, ll and llan llequilibrium llprice
llof ll$4.00 llper llbushel. ll Why l l would lla llhigher llprice ll(e.g., ll $5.00 llper llbushel) llnot
Copyright ll© ll2014 llJohn llWiley ll& llSons, Chapter ll1 ll- ll
ll Inc. 1
,Besanko ll& llBraeutigam ll– llMicroeconomics, ll5th Solutions
ll be llan llequilibrium llprice? llWhy llwould lla lower llprice ll(e.g., ll$2.50 llperllllManual
bushel)
ll
edition l l
ll not llbe llan llequilibrium llprice?
If llthe llprice llin llthe llmarket llwas llabove llthe llequilibrium llprice, llconsumers llwould llbe
llwilling ll to l l purchase ll fewer ll units llthan llsuppliers llwould llbe llwilling llto ll sell, ll creating
llan llexcess llsupply. ll ll As l l suppliers llrealize llthey llare ll not llselling llthe ll units llthey llhave
ll made llavailable, ll sellers llwill ll bid lldown llthe
Copyright ll© ll2014 llJohn llWiley ll& llSons, Chapter ll1 ll- ll
ll Inc. 2
,Besanko ll& llBraeutigam ll– llMicroeconomics, ll5th Solutions
llManual
ll
edition
price llto llentice llmore llconsumers llto llpurchase lltheir llgoods llor llservices. ll llBy lldefinition,
ll equilibrium llis l l a ll state llthat llwill llremain llunchanged llas ll long llas llexogenous ll factors
llremain llunchanged. ll Since ll in llthis l l case llsuppliers llwill lllower ll their llprice, ll this ll high
llprice ll cannot llbe llan llequilibrium.
When llthe llprice llis llbelow llthe llequilibrium llprice, llconsumers llwill lldemand llmore
llunits llthan llsuppliers l l have ll made llavailable. ll This llexcess lldemand llwill llentice
llconsumers llto llbid ll up llthe llprices ll to llpurchase l l the lllimited llunits llavailable. ll ll Since
llthe llprice llwill llchange, ll it ll cannot llbe llan llequilibrium.
5. What llis llthe lldifference llbetween llan llexogenous llvariable lland llan
llendogenous llvariable l l in ll an lleconomic llmodel? llWould llit ll ever llbe lluseful llto
llconstruct ll a llmodel llthat ll contained llonly l l exogenous llvariables ll(and llno
llendogenous llvariables)?
Exogenous llvariables llare lltaken llas llgiven llin llan lleconomic llmodel, ll i.e., llthey llare
lldetermined ll by llsome l l process lloutside llthe ll model, ll while llendogenous llvariables
llare lldetermined llwithin llthe lleconomic l l model llbeing llstudied.
An lleconomic llmodel llthat llcontained llno llendogenous llvariables llwould llnot llbe llvery
llinteresting. ll With l l no ll endogenous llvariables, ll nothing llwould ll be lldetermined ll by llthe
ll model llso ll it ll would ll not llserve ll much l l purpose.
6. Why lldo lleconomists lldo llcomparative llstatics llanalysis? llWhat llrole lldo
llendogenous l l variables lland llexogenous llvariables llplay llin ll comparative
llstatics llanalysis?
Comparative llstatics llanalyses llare llperformed llto lldetermine llhow ll the lllevels llof
llendogenous llvariables l l change llas llsome llexogenous llvariable ll is llchanged. ll ll This lltype
llof llanalysis ll is ll very llimportant llsince ll in l l the llreal llworld llthe llexogenous llvariables,
ll such llas llweather, ll policy lltools, ll etc. ll are llalways llchanging l l and ll it l l is lluseful llto
ll know llhow llchanges ll in llthese llvariables llaffect l l the ll levels llof llother, ll endogenous,
l l variables. ll ll An llexample ll of llcomparative llstatics llanalysis llwould ll be llasking llthe
llquestion: ll If l l extraordinarily lllow llrainfall ll(an llexogenous llvariable) ll causes lla ll30
llpercent ll reduction llin llcorn llsupply, l l by llhow ll much llwill llthe ll market ll price ll for ll corn
ll(an llendogenous llvariable) ll increase?
7. What llis llthe lldifference llbetween llpositive lland llnormative llanalysis?
llWhich llof llthe l l following llquestions llwould llentail llpositive llanalysis, ll and
llwhich llnormative llanalysis?
a) What lleffect llwill llInternet llauction llcompanies llhave llon llthe llprofits llof lllocal
Copyright ll© ll2014 llJohn llWiley ll& llSons, Chapter ll1 ll- ll
ll Inc. 3
, Besanko ll& llBraeutigam ll– llMicroeconomics, ll5th Solutions
llautomobile l l dealerships? llManual
ll
edition
b) Should llthe llgovernment llimpose llspecial lltaxes llon llsales llof llmerchandise
llmade llover llthe l l Internet?
Positive llanalysis llattempts llto llexplain llhow llan lleconomic llsystem llworks llor llto llpredict
ll how llit ll will l l change llover lltime ll by llasking ll explanatory llor ll predictive llquestions. ll
ll Normative llanalysis ll focuses llon l l what ll should llbe lldone llby llasking llprescriptive
llquestions.
Copyright ll© ll2014 llJohn llWiley ll& llSons, Chapter ll1 ll- ll
ll Inc. 4
