Advanced Microeconomic Theory: An Intuitive Approach with Examples

Contents
Preface
	Organization of the Book
	How to Use This Textbook
	Examples of Course Guidelines
	Ancillary Materials
	Acknowledgments
1 Preferences and Utility
	1.1 Preference and Choice: The Preference-Based Approach
	1.2 Utility Function
	1.3 Desirability
	1.4 Indifference Sets, Upper Contour Sets, and Lower Contour Sets
	1.5 Convexity of Preferences
	1.6 Interpretation of Convexity
	1.7 Quasi-Concavity
	1.8 Common Utility Functions in Economics
	1.9 Properties of Preference Relations
	1.10 Continuous Preferences
	1.11 Existence of a Utility Function
	1.12 Behavioral Economics—Two Utility Functions
	1.13 Choice-Based Approach
	1.14 Consistency on Choices: The Weak Axiom of Revealed Preference (WARP)
	1.15 Consumption Sets
	Appendix: Rational Preference Relations Satisfy the WARP
	Exercises
	References
2 Demand Theory
	2.1 The Utility Maximization Problem
	2.2 Walrasian Demand—Comparative Statics
	2.3 Indirect Utility Function
	2.4 WARP and Demand
	2.5 Slutsky Matrix
	2.6 Expenditure Minimization Problem
	2.7 Relationships between the Expenditure Function and Hicksian Demand
	2.8 Relationship between the Walrasian and Hicksian Demand
	2.9 Relationship between the Walrasian Demand and the Indirect Utility Function
	2.10 Summary of Relationships
	Appendix A: Duality in Consumption
	Appendix B: Relationship between the Expenditure Function and Hicksian Demand
	Appendix C: Generalized Axiom of Revealed Preference
	Exercises
	References
3 Demand Theory—Applications
	3.1 Measuring the Welfare Effects of a Price Change
	3.2 Measuring the Welfare Change Associated with the Introduction of a Tax
	3.3 What If We Use the Walrasian Demand to Measure Welfare Changes?
	3.4 When Can We Use the Walrasian Demand as a Measure of Welfare Change?
	3.5 Application of Income and Substitution Effects—I
	3.6 Application of Income and Substitution Effects—II: The Consumer as a Labor Supplier
	3.7 Application of Income and Substitution Effects—III: Income and Substitution Effects among Different Goods
	3.8 Aggregate Demand
	Appendix: Applying Euler’s Theorem to the Hicksian Demand
	Exercises
	References
4 Production Theory
	4.1 Production Sets
	4.2 Properties of Production Sets
	4.3 Elasticity of Substitution
	4.4 Profit Maximization
	4.5 Cost Minimization
	4.6 Cost Function
	4.7 Conditional Factor Demand Correspondence, z(w, q)
	4.8 Production Function, f(z)
	4.9 Alternative Representation of the PMP
	4.10 Average and Marginal Costs with a Single Output
	4.11 Aggregation in Production
	4.12 Efficient Production
	Appendix A: Graphical Representation of Cost Functions
	Appendix B: Output and Cost Elasticity
	Exercises
	References
5 Choice under Uncertainty
	5.1 Simple and Compound Lotteries
	5.2 Preferences over Lotteries
	5.3 Violations of the IA
	5.4 Behavioral Theories That Modify Expected Utility Theory
	5.5 Money Lotteries
	5.6 Measuring Risk Preferences
	5.7 Arrow–Pratt Coefficients of Absolute and Relative Risk Aversion
	5.8 Prudence
	5.9 Prospect Theory and Reference-Dependent Utility
	5.10 Comparison of Payoff Distributions
	5.11 Subjective Probability Theory
	5.12 Alternatives to SEU: Ambiguity Aversion (MEU), Capacities (CEU), and Smooth Ambiguity Aversion (SAA)
	Appendix A: State-Dependent Utility
	Appendix B: “Extended” Expected Utility Representation
	Exercises
	References
6 Partial and General Equilibrium
	6.1 Partial Equilibrium Analysis
	6.2 Comparative Statics
	6.3 Welfare Analysis
	6.4 General Equilibrium
	6.5 Comparative Statics
	6.6 Introducing Taxes
	Appendix A: Large Economies and the Core
	Appendix B: Marshall–Hicks Four Laws of Derived Demand
	Exercises
	References
7 Monopoly
	7.1 Barriers to Entry
	7.2 Profit-Maximizing Output under Monopoly
	7.3 Welfare Loss of Monopoly
	7.4 Comparative Statics
	7.5 Multiplant Monopolist
	7.6 Price Discrimination
	7.7 Advertising in Monopoly
	7.8 Regulation of Natural Monopolies
	7.9 Monopsony
	Exercises
	References
8 Game Theory and Imperfect Competition
	8.1 Game Theory Tools
	8.2 Bertrand Model of Price Competition with Homogeneous Products
	8.3 Cournot Model of Quantity Competition
	8.4 Product Differentiation
	8.5 Dynamic Competition
	8.6 Reconciling Cournot and Bertrand: Introducing Capacity Constraints
	8.7 Endogenous Entry
	8.8 Repeated Interaction
	Appendix A: Cournot Model with Asymmetric Costs
	Appendix B: Cournot Competition with J ≥ 2 Firms
	Exercises
	References
9 Externalities and Public Goods
	9.1 Externalities
	9.2 Common Pool Resources
	9.3 Solutions to the Externality Problem
	9.4 Regulating a Polluting Monopolist
	9.5 Regulating a Polluting Oligopoly
	9.6 Fee Comparison
	9.7 Setting Quotas under Incomplete Information
	9.8 Setting Emission Fees under Incomplete Information
	9.9 Comparing Policy Instruments under Incomplete Information
	9.10 Pollution Abatement
	9.11 Public Goods
	9.12 Inefficiency of the Private Provision of Public Goods
	9.13 Neutrality and the Crowding-out Effect
	9.14 Remedies to the Underprovision of Public Goods
	9.15 Lindahl Equilibria
	9.16 Public Goods That Experience Congestion
	9.17 Behavioral Motives in Public Good Games
	Appendix: More General Policy Mechanisms
	Exercises
	References
10 Contract Theory
	10.1 Moral Hazard
	10.2 Moral Hazard with a Continuum of Effort Levels—The First-Order Approach
	10.3 Moral Hazard with Multiple Signals
	10.4 Adverse Selection—The “Lemons” Problem
	10.5 Adverse Selection—The Principal–Agent Problem
	10.6 Application of Adverse Selection—Regulation
	Exercises
	References
Mathematical Appendix
	A.1 Sets
	A.2 Intervals of Real Numbers
	A.3 Inequalities
	A.4 Sequences
	A.5 Functions
	A.6 Limits
	A.7 Continuity
	A.8 Differentiation
	A.9 Integration
	A.10 Introduction to Topology
	A.11 Compactness
	A.12 Fixed Point Theorems
	A.13 Optimization
	A.14 Comparative Statics
	A.15 Monotone Comparative Statics: An Introduction
	A.16 Introduction to Mathematical Proofs
	References
Index