Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
Chapter 1
Analyzing Economic Problems
Solutions to Review Questions
1. What is the difference between microeconomics and macroeconomics?
MicroeconomicsAstudiesAtheAeconomicAbehaviorAofAindividualAeconomicAdecisionAmakers,AsuchAa
sAaAconsumer,AaAworker,AaAfirm,AorAaAmanager.A MacroeconomicsAstudiesAhowAanAentireAnationalA
economyAperforms,AexaminingAsuchAtopicsAasAtheAaggregateAlevelsAofAincomeAandAemployment,A
theAlevelsAofAinterestAratesAandAprices,AtheArateAofAinflation,AandAtheAnatureAofAbusinessAcycles.
2. WhyAisAeconomicsAoftenAdescribedAasAtheAscienceAofAconstrainedAchoice?
WhileAourAwantsAforAgoodsAandAservicesAareAunlimited,AtheAresourcesAnecessaryAtoAproduceAthos
eAgoodsAandAservices,AsuchAasAlabor,AmanagerialAtalent,Acapital,AandArawAmaterials,AareA“scarce”A
becauseAtheirAsupplyAisAlimited.A ThisAscarcityAimpliesAthatAweAareAconstrainedAinAtheAchoicesAwe
AcanAmakeAaboutAwhichAgoodsAandAservicesAtoAproduce.A Thus,AeconomicsAisAoftenAdescribedAasAt
heAscienceAofAconstrainedAchoice.
3. HowAdoesAtheAtoolAofAconstrainedAoptimizationAhelpAdecisionAmakersAmakeAchoices
?AWhatArolesAdoAtheAobjectiveAfunctionAandAconstraintsAplayAinAaAmodelAofAconstrainedAo
ptimization?
ConstrainedAoptimizationAallowsAtheAdecisionAmakerAtoAselectAtheAbestA(optimal)AalternativeAwhil
eAaccountingAforAanyApossibleAlimitationsAorArestrictionsAonAtheAchoices.A TheAobjectiveAfunctionA
representsAtheArelationshipAtoAbeAmaximizedAorAminimized.A ForAexample,AaAfirm’sAprofitAmightAb
eAtheAobjectiveAfunctionAandAallAchoicesAwillAbeAevaluatedAinAtheAprofitAfunctionAtoAdetermineAwh
ichAyieldsAtheAhighestAprofit.A TheAconstraintsAplaceAlimitationsAonAtheAchoiceAtheAdecisionAmaker
AcanAselectAandAdefinesAtheAsetAofAalternativesAfromAwhichAtheAbestAwillAbeAchosen.
4. SupposeAtheAmarketAforAwheatAisAcompetitive,AwithAanAupward-
slopingAsupplyAcurve,AaAdownward-
slopingAdemandAcurve,AandAanAequilibriumApriceAofA$4.00AperAbushel.AWhyAwouldAaAhighe
rApriceA(e.g.,A$5.00AperAbushel)AnotAbeAanAequilibriumAprice?AWhyAwouldAaAlowerApriceA(e.
g.,A$2.50AperAbushel)AnotAbeAanAequilibriumAprice?
IfAtheApriceAinAtheAmarketAwasAaboveAtheAequilibriumAprice,AconsumersAwouldAbeAwillingAtoApurc
haseAfewerAunitsAthanAsuppliersAwouldAbeAwillingAtoAsell,AcreatingAanAexcessAsupply.A AsAsupplie
rsArealizeAtheyAareAnotAsellingAtheAunitsAtheyAhaveAmadeAavailable,AsellersAwillAbidAdownAthe
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 1
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
priceAtoAenticeAmoreAconsumersAtoApurchaseAtheirAgoodsAorAservices.A ByAdefinition,AequilibriumA
isAaAstateAthatAwillAremainAunchangedAasAlongAasAexogenousAfactorsAremainAunchanged.A SinceAin
AthisAcaseAsuppliersAwillAlowerAtheirAprice,AthisAhighApriceAcannotAbeAanAequilibrium.
WhenAtheApriceAisAbelowAtheAequilibriumAprice,AconsumersAwillAdemandAmoreAunitsAthanAsupplie
rsAhaveAmadeAavailable.A ThisAexcessAdemandAwillAenticeAconsumersAtoAbidAupAtheApricesAtoApurc
haseAtheAlimitedAunitsAavailable.A SinceAtheApriceAwillAchange,AitAcannotAbeAanAequilibrium.
5. WhatAaisAatheAadifferenceAabetweenAaanAaexogenousAavariableAaandAaanAaendogenous
AavariableAainAaanAaeconomicAamodel?AaWouldAaitAaeverAabeAausefulAatoAaconstructAaaAamo
delAathatAacontainedAaonlyAaexogenousAavariablesAa(andAanoAaendogenousAavariables)?
ExogenousAavariablesAaareAatakenAaasAagivenAainAaanAaeconomicAamodel,Aai.e.,AatheyaareAadeterminedAab
yAasomeAaprocessAaoutsideAatheAamodel,AawhileAaendogenousAavariablesAaareAadeterminedAawithinAat
heAaeconomicAamodelAabeingAastudied.
AnAaeconomicA amodelAathatA acontainedA anoA aendogenousA avariablesA awouldA anotAabeAaveryAainteresting
.AaAWithAanoAaendogenousAavariables,AanothingAawouldAabeAadeterminedAabyAatheAamodelAasoAaitAawo
uldAanotAaserveAamuchAapurpose.
6. WhyAadoAaeconomistsAadoAacomparativeAastaticsAaanalysis?AaWhatAaroleAad
oAaendogenousAavariablesAaandAaexogenousAavariablesAaplayAainAacomparativeAastat
icsAaanalysis?
ComparativeAastaticsAaanalysesAaareAaperformedAatoAadetermineAahowAatheAalevelsAaofAaendogenousA
avariablesAachangeAaasAasomeAaexogenousAavariableAaisAachanged.A aAThisAatypeAaofAaanalysisAaisAaver
yAaimportantAasinceAainAatheAarealAaworldAatheAaexogenousAavariables,AasuchAaasAaweather,AapolicyAatoo
ls,Aaetc.AaareAaalwaysAachangingAaandAaitAaisAausefulAatoAaknowAahowAachangesAainAatheseAavariablesAaaf
fectAatheAalevelsAaofAaother,Aaendogenous,Aavariables.A aAAnAaexampleAaofAacomparativeAastaticsAaana
lysisAawouldAabeAaaskingAatheAaquestion:AaIfAaextraordinarilyAalowAarainfallAa(anAaexogenousAavariabl
e)AacausesAaaAa30AapercentAareductionAainAacornAasupply,AabyAahowAamuchAawillAatheAamarketAapriceAaf
orAacornAa(anAaendogenousAavariable)Aaincrease?
7. WhatAaisAatheAadifferenceAabetweenAapositiveAaandAanormativeAaanalysis?AaWhic
hAaofAatheAafollowingAaquestionsAawouldAaentailAapositiveAaanalysis,AaandAawhichAanormat
iveAaanalysis?
a) WhatAaeffectAawillAaInternetAaauctionAacompaniesahaveAaonAatheAaprofitsAaofAaloc
alAaautomobileAadealerships?
b) ShouldAatheAagovernmentAaimposeAaspecialAataxesAaonAasalesAaofAamerchandiseAamad
eAaoverAatheAaInternet?
PositiveAaanalysisAaattemptsAatoAaexplainAahowAaanAaeconomicAasystemAaworksAaorAatoAapredictAahowAa
itAawillAachangeAaoverAatimeAabyaaskingAaexplanatoryaorAapredictiveAaquestions.A aANormativeAaanaly
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 2
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
sis
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 3
, Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
afocusesAaonA awhatA ashouldA abeA adoneAabyAaaskingAaprescriptiveA aquestions.
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 4
Chapter 1
Analyzing Economic Problems
Solutions to Review Questions
1. What is the difference between microeconomics and macroeconomics?
MicroeconomicsAstudiesAtheAeconomicAbehaviorAofAindividualAeconomicAdecisionAmakers,AsuchAa
sAaAconsumer,AaAworker,AaAfirm,AorAaAmanager.A MacroeconomicsAstudiesAhowAanAentireAnationalA
economyAperforms,AexaminingAsuchAtopicsAasAtheAaggregateAlevelsAofAincomeAandAemployment,A
theAlevelsAofAinterestAratesAandAprices,AtheArateAofAinflation,AandAtheAnatureAofAbusinessAcycles.
2. WhyAisAeconomicsAoftenAdescribedAasAtheAscienceAofAconstrainedAchoice?
WhileAourAwantsAforAgoodsAandAservicesAareAunlimited,AtheAresourcesAnecessaryAtoAproduceAthos
eAgoodsAandAservices,AsuchAasAlabor,AmanagerialAtalent,Acapital,AandArawAmaterials,AareA“scarce”A
becauseAtheirAsupplyAisAlimited.A ThisAscarcityAimpliesAthatAweAareAconstrainedAinAtheAchoicesAwe
AcanAmakeAaboutAwhichAgoodsAandAservicesAtoAproduce.A Thus,AeconomicsAisAoftenAdescribedAasAt
heAscienceAofAconstrainedAchoice.
3. HowAdoesAtheAtoolAofAconstrainedAoptimizationAhelpAdecisionAmakersAmakeAchoices
?AWhatArolesAdoAtheAobjectiveAfunctionAandAconstraintsAplayAinAaAmodelAofAconstrainedAo
ptimization?
ConstrainedAoptimizationAallowsAtheAdecisionAmakerAtoAselectAtheAbestA(optimal)AalternativeAwhil
eAaccountingAforAanyApossibleAlimitationsAorArestrictionsAonAtheAchoices.A TheAobjectiveAfunctionA
representsAtheArelationshipAtoAbeAmaximizedAorAminimized.A ForAexample,AaAfirm’sAprofitAmightAb
eAtheAobjectiveAfunctionAandAallAchoicesAwillAbeAevaluatedAinAtheAprofitAfunctionAtoAdetermineAwh
ichAyieldsAtheAhighestAprofit.A TheAconstraintsAplaceAlimitationsAonAtheAchoiceAtheAdecisionAmaker
AcanAselectAandAdefinesAtheAsetAofAalternativesAfromAwhichAtheAbestAwillAbeAchosen.
4. SupposeAtheAmarketAforAwheatAisAcompetitive,AwithAanAupward-
slopingAsupplyAcurve,AaAdownward-
slopingAdemandAcurve,AandAanAequilibriumApriceAofA$4.00AperAbushel.AWhyAwouldAaAhighe
rApriceA(e.g.,A$5.00AperAbushel)AnotAbeAanAequilibriumAprice?AWhyAwouldAaAlowerApriceA(e.
g.,A$2.50AperAbushel)AnotAbeAanAequilibriumAprice?
IfAtheApriceAinAtheAmarketAwasAaboveAtheAequilibriumAprice,AconsumersAwouldAbeAwillingAtoApurc
haseAfewerAunitsAthanAsuppliersAwouldAbeAwillingAtoAsell,AcreatingAanAexcessAsupply.A AsAsupplie
rsArealizeAtheyAareAnotAsellingAtheAunitsAtheyAhaveAmadeAavailable,AsellersAwillAbidAdownAthe
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 1
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
priceAtoAenticeAmoreAconsumersAtoApurchaseAtheirAgoodsAorAservices.A ByAdefinition,AequilibriumA
isAaAstateAthatAwillAremainAunchangedAasAlongAasAexogenousAfactorsAremainAunchanged.A SinceAin
AthisAcaseAsuppliersAwillAlowerAtheirAprice,AthisAhighApriceAcannotAbeAanAequilibrium.
WhenAtheApriceAisAbelowAtheAequilibriumAprice,AconsumersAwillAdemandAmoreAunitsAthanAsupplie
rsAhaveAmadeAavailable.A ThisAexcessAdemandAwillAenticeAconsumersAtoAbidAupAtheApricesAtoApurc
haseAtheAlimitedAunitsAavailable.A SinceAtheApriceAwillAchange,AitAcannotAbeAanAequilibrium.
5. WhatAaisAatheAadifferenceAabetweenAaanAaexogenousAavariableAaandAaanAaendogenous
AavariableAainAaanAaeconomicAamodel?AaWouldAaitAaeverAabeAausefulAatoAaconstructAaaAamo
delAathatAacontainedAaonlyAaexogenousAavariablesAa(andAanoAaendogenousAavariables)?
ExogenousAavariablesAaareAatakenAaasAagivenAainAaanAaeconomicAamodel,Aai.e.,AatheyaareAadeterminedAab
yAasomeAaprocessAaoutsideAatheAamodel,AawhileAaendogenousAavariablesAaareAadeterminedAawithinAat
heAaeconomicAamodelAabeingAastudied.
AnAaeconomicA amodelAathatA acontainedA anoA aendogenousA avariablesA awouldA anotAabeAaveryAainteresting
.AaAWithAanoAaendogenousAavariables,AanothingAawouldAabeAadeterminedAabyAatheAamodelAasoAaitAawo
uldAanotAaserveAamuchAapurpose.
6. WhyAadoAaeconomistsAadoAacomparativeAastaticsAaanalysis?AaWhatAaroleAad
oAaendogenousAavariablesAaandAaexogenousAavariablesAaplayAainAacomparativeAastat
icsAaanalysis?
ComparativeAastaticsAaanalysesAaareAaperformedAatoAadetermineAahowAatheAalevelsAaofAaendogenousA
avariablesAachangeAaasAasomeAaexogenousAavariableAaisAachanged.A aAThisAatypeAaofAaanalysisAaisAaver
yAaimportantAasinceAainAatheAarealAaworldAatheAaexogenousAavariables,AasuchAaasAaweather,AapolicyAatoo
ls,Aaetc.AaareAaalwaysAachangingAaandAaitAaisAausefulAatoAaknowAahowAachangesAainAatheseAavariablesAaaf
fectAatheAalevelsAaofAaother,Aaendogenous,Aavariables.A aAAnAaexampleAaofAacomparativeAastaticsAaana
lysisAawouldAabeAaaskingAatheAaquestion:AaIfAaextraordinarilyAalowAarainfallAa(anAaexogenousAavariabl
e)AacausesAaaAa30AapercentAareductionAainAacornAasupply,AabyAahowAamuchAawillAatheAamarketAapriceAaf
orAacornAa(anAaendogenousAavariable)Aaincrease?
7. WhatAaisAatheAadifferenceAabetweenAapositiveAaandAanormativeAaanalysis?AaWhic
hAaofAatheAafollowingAaquestionsAawouldAaentailAapositiveAaanalysis,AaandAawhichAanormat
iveAaanalysis?
a) WhatAaeffectAawillAaInternetAaauctionAacompaniesahaveAaonAatheAaprofitsAaofAaloc
alAaautomobileAadealerships?
b) ShouldAatheAagovernmentAaimposeAaspecialAataxesAaonAasalesAaofAamerchandiseAamad
eAaoverAatheAaInternet?
PositiveAaanalysisAaattemptsAatoAaexplainAahowAaanAaeconomicAasystemAaworksAaorAatoAapredictAahowAa
itAawillAachangeAaoverAatimeAabyaaskingAaexplanatoryaorAapredictiveAaquestions.A aANormativeAaanaly
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 2
,Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
sis
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 3
, Besanko & Braeutigam – Microeconomics, 5th edition Solutions Manual
afocusesAaonA awhatA ashouldA abeA adoneAabyAaaskingAaprescriptiveA aquestions.
Copyright © 2014 John Wiley & Sons, Inc. Chapter 1 - 4
