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Solution Manual For Microeconomics 6th Edition by David Besanko, Ronald Braeutigam

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microeconomics 6th edition by david besanko ronal

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Besanko & Braeutigam – Microeconomics, 6th edition
j j j j j j Solutions Manual j

Chapter 1 j

Analyzing Economic Problems j j

Solutions to Review Questions j j j

1. What is the difference between microeconomics and macroeconomics?
j j j j j j j

Microeconomics studies the economic behavior of individual economic decision makers, such asa j j j j j j j j j j j j

consumer, a worker, a firm, or a manager. Macroeconomics studies how an entire national
j j j j j j j j j j j j j j

economy performs, examining such topics as the aggregate levels of income and employment, the
j j j j j j j j j j j j j j

levels of interest rates and prices, the rate of inflation, and the nature of business cycles.
j j j j j j j j j j j j j j j j

2. Why is economics often described as the science of constrained choice?
j j j j j j j j j j

While our wants for goods and services are unlimited, the resources necessary to produce those
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goods and services, such as labor, managerial talent, capital, and raw materials, are “scarce”
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because their supply is limited. This scarcity implies that we are constrained in the choices we can
j j j j j j j j j j j j j j j j j

make about which goods and services to produce. Thus, economics is often described as
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thescience of constrained choice.
j j j j j

3. How does the tool of constrained optimization help decision makers make j j j j j j j j j j

choices?What roles do the objective function and constraints play in a model of
j j j j j j j j j j j j j j

constrained optimization?
j j

Constrained optimization allows the decision maker to select the best (optimal) alternative
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whileaccounting for any possible limitations or restrictions on the choices. The objective function
j j j j j j j j j j j j j j

represents the relationship to be maximized or minimized. For example, a firm‟s profit might
j j j j j j j j j j j j j j

bethe objective function and all choices will be evaluated in the profit function to determine
j j j j j j j j j j j j j j j j

whichyields the highest profit. The constraints place limitations on the choice the decision maker
j j j j j j j j j j j j j j j

can select and defines the set of alternatives from which the best will be chosen.
j j j j j j j j j j j j j j j

4. Suppose the market for wheat is competitive, with an upward-sloping supply curve,a j j j j j j j j j j j j

downward-sloping demand curve, and an equilibrium price of $4.00 per bushel. Why
j j j j j j j j j j j j

would a higher price (e.g., $5.00 per bushel) not be an equilibrium price? Why would a
j j j j j j j j j j j j j j j j

lower price (e.g., $2.50 per bushel) not be an equilibrium price?
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If the price in the market was above the equilibrium price, consumers would be willing to purchase
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fewer units than suppliers would be willing to sell, creating an excess supply. As suppliers realize
j j j j j j j j j j j j j j j j

they are not selling the units they have made available, sellers will bid down the
j j j j j j j j j j j j j j j

Copyright © 2014 John Wiley & Sons, Inc. j j j j j j j Chapter 1 - 1 j j j

,Besanko & Braeutigam – Microeconomics, 6th edition
j j j j j j Solutions Manual j

price to entice more consumers to purchase their goods or services. By definition, equilibrium isa
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state that will remain unchanged as long as exogenous factors remain unchanged. Since in thiscase
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suppliers will lower their price, this high price cannot be an equilibrium.
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When the price is below the equilibrium price, consumers will demand more units than
j j j j j j j j j j j j j

suppliers have made available. This excess demand will entice consumers to bid up the prices to
j j j j j j j j j j j j j j j j

purchasethe limited units available. Since the price will change, it cannot be an equilibrium.
j j j j j j j j j j j j j j j

5. What is the difference between an exogenous variable and an endogenous variablein j j j j j j j j j j j j

an economic model? Would it ever be useful to construct a model that contained only
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exogenous variables (and no endogenous variables)?
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Exogenous variables are taken as given in an economic model, i.e., they are determined by
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someprocess outside the model, while endogenous variables are determined within the economic
j j j j j j j j j j j j j

model being studied.
j j j

An economic model that contained no endogenous variables would not be very interesting.
j j j j j j j j j j j j

jWith no endogenous variables, nothing would be determined by the model so it would not serve
j j j j j j j j j j j j j j j

muchpurpose.
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6. Why do economists do comparative statics analysis? What role do j j j j j j j j j

endogenousvariables and exogenous variables play in comparative statics analysis?
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Comparative statics analyses are performed to determine how the levels of endogenous j j j j j j j j j j j

variableschange as some exogenous variable is changed. This type of analysis is very important
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since in the real world the exogenous variables, such as weather, policy tools, etc. are always
j j j j j j j j j j j j j j j j

changing and it is useful to know how changes in these variables affect the levels of other,
j j j j j j j j j j j j j j j j j

endogenous, variables. An example of comparative statics analysis would be asking the question:
j j j j j j j j j j j j j

If extraordinarily low rainfall (an exogenous variable) causes a 30 percent reduction in corn
j j j j j j j j j j j j j j

supply,by how much will the market price for corn (an endogenous variable) increase?
j j j j j j j j j j j j j j

7. What is the difference between positive and normative analysis? Which of j j j j j j j j j j

thefollowing questions would entail positive analysis, and which normative analysis?
j j j j j j j j j j j

a) What effect will Internet auction companies have on the profits of local
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automobiledealerships?
j j

b) Should the government impose special taxes on sales of merchandise made over j j j j j j j j j j j

theInternet?
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Positive analysis attempts to explain how an economic system works or to predict how it will
j j j j j j j j j j j j j j j

change over time by asking explanatory or predictive questions. Normative analysis focuses
j j j j j j j j j j j j

onwhat should be done by asking prescriptive questions.
j j j j j j j j j

Copyright © 2014 John Wiley & Sons, Inc. j j j j j j j Chapter 1 - 2 j j j

,Besanko & Braeutigam – Microeconomics, 6th edition
j j j j j j Solutions Manual j

a) Because this question asks whether dealership profits will go up or down (and
j j j j j j j j j j j j

byhow much) – but refrains from inquiring as to whether this would be a good thing
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– it is an example of positive analysis.
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b) On the other hand, this question asks whether it is desirable to impose taxes
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onInternet sales, so it is normative analysis. Notably, this question does not ask
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what the effect of such taxes would be.
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Solutions to Problems j j

1.1 Discuss the following statement: ―Since supply and demand curves are j j j j j j j j j

alwaysshifting, markets never actually reach an equilibrium. Therefore, the concept
j j j j j j j j j j j

of equilibrium is useless.‖
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While the claim that markets never reach an equilibrium is probably debatable, even if markets do
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not ever reach equilibrium, the concept is still of central importance. The concept of equilibrium is
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important because it provides a simple way to predict how market prices and quantities will change
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as exogenous variables change. Thus, while we may never reach a particular equilibrium price, say
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because a supply or demand schedule shifts as the market movestoward equilibrium, we can predict
j j j j j j j j j j j j j j j j

with relative ease, for example, whether prices will be rising or falling when exogenous market
j j j j j j j j j j j j j j j

factors change as we move toward equilibrium. As exogenous variables continue to change, we
j j j j j j j j j j j j j j

can continue to predict the direction of change for the endogenous variables, and this is not
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“useless.”
j

1.2 In an article entitled, ―Corn Prices Surge on Export Demand, Crop Data,‖ The
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WallStreet Journal identified several exogenous shocks that pushed U.S. corn prices sharply
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higher.(See the article by Aaron Lucchetti, August 22, 1997, p. C17. on national income.) Suppose the U.S.
j j j j j j j j j j j j j j j j j

market for corn is competitive, with an upward-sloping supply curve and a downward-
j j j j j j j j j j j j j

sloping demand curve. For each of the following scenarios, illustrate graphically how the
j j j j j j j j j j j j j

exogenous event described will contribute to a higher price of corn in the U.S. market.
j j j j j j j j j j j j j j j

a) The U.S. Department of Agriculture announces that exports of corn to Taiwan
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andJapan were ―surprisingly bullish,‖ around 30 percent higher than had been
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expected.
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b) Some analysts project that the size of the U.S. corn crop will hit a six-year low because
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ofdry weather.
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c) The strengthening of El Niño, the meteorological trend that brings warmer weather
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tothe western coast of South America, reduces corn production outside the United States,
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thereby increasing foreign countries’ dependence on the U.S. corn crop.
j j j j j j j j j j

Copyright © 2014 John Wiley & Sons, Inc. j j j j j j j Chapter 1 - 3 j j j

, Besanko & Braeutigam – Microeconomics, 6th edition
j j j j j j Solutions Manual j

a) Surprisingly high export sales mean that the demand for corn was higher j j j j j j j j j j j

thanexpected, at D2 rather than D1.
j j j j j j j

P
S

P2

j P
1

D2
D1

Q

b) Dry weather would reduce the supply of corn, to S2 rather than S1.
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S2

P
S1
P2

P1

D

Q

c) Assuming the U.S. does not import corn, reduced production outside the U.S.
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would not impact U.S. corn market supply. El Nino would, however, cause
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demand for U.S. corn to shift out, the figure being the same as in part (a) above.
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1.3 In early 2008, the price of oil on the world market increased, hitting a peak of about
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$140 per barrel in July, 2008. In the second half of 2008, the price of oil declined, ending the
j j j j j j j j j j j j j j j j j j

year at just over $40 per barrel. Suppose that the global market for oil can be describedby an
j j j j j j j j j j j j j j j j j j j

upward-sloping supply curve and a downward-sloping demand curve. For each of the
j j j j j j j j j j j j

following scenarios, illustrate graphically how the exogenous event contributed to a riseor a
j j j j j j j j j j j j j j

decline in the price of oil in 2008:
j j j j j j j j

Copyright © 2014 John Wiley & Sons, Inc.
j j j j j j j Chapter 1 - 4 j j j

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