Microeconomic Theory for the Social Sciences

Preface
Acknowledgements
Contents
About the Author
1 Introduction
	1.1 Rationality and Equilibrium
	1.2 Ordinalism and the Revealed Preference Approach
	1.3 Social Welfare, Efficiency and Fairness
	1.4 Perfect Competition and Imperfect Competition
	1.5 Complete Market and Incomplete Market
	1.6 Complete Information and Incomplete Information
	1.7 General Equilibrium Analysis and Partial Equilibrium Analysis
	References
Part I Individual Preference and Choice
2 Choice Objects and Choice Opportunities
	2.1 Description of Choice Objects
	2.2 Opportunity Sets
	2.3 Consumption Set
		2.3.1 Standard Consumption Set
		2.3.2 Indivisible Goods
		2.3.3 Labor and Leisure
		2.3.4 Consumption over Time
		2.3.5 Consumption Under Uncertainty: State-Contingent Consumption
	2.4 Budget Constraint
		2.4.1 Budget Constraint in Exchange Economy
		2.4.2 Labor and Consumption
		2.4.3 Saving and Borrowing
	2.5 Exercises
3 Preference
	3.1 Preference Relation
	3.2 Preference over Consumptions
		3.2.1 Indifference Curves
		3.2.2 Monotonicity
		3.2.3 Convexity
	3.3 Marginal Rate of Substitution
	3.4 Smooth Preferences
	3.5 Convexity and Diminishing Marginal Rate of Substitution
	3.6 Exercises
4 So-Called Utility Function
	4.1 ``Utility\'\' Representation of Preference
	4.2 Marginal Utility
		4.2.1 One-Good Case
		4.2.2 Two-Good Case
	4.3 Describing Marginal Rate of Substitution by Means of Marginal Utilities
	4.4 Ordinal Utility and Cardinal Utility
	4.5 Exercises
5 Choice and Demand
	5.1 Maximal Elements for Preference
	5.2 Smooth Consumption Choice
		5.2.1 An Example of Smooth Consumption: The Case of Cobb-Douglas Preference
	5.3 The Case of Perfect Substitution
	5.4 The Case of Perfect Complementarity
	5.5 Demand Function
	5.6 Consumption Choice and Demand in Exchange Economy
	5.7 Describing Choice as Utility Maximization
	5.8 Expenditure Minimization and Compensated Demand
	5.9 Exercises
6 Demand Analysis
	6.1 Normal and Inferior Goods
	6.2 Ordinary and Giffen Goods
	6.3 Gross Substitutes and Gross Complements
	6.4 Elasticity of Demand
	6.5 Substitution Effect and Income Effect
	6.6 Income Evaluation of Welfare Change
		6.6.1 Compensating Variation and Equivalent Variation
		6.6.2 Inverse Demand and Consumer Surplus
	6.7 Exercises
7 Willingness to Pay and Consumer Surplus
	7.1 Naive Utility Argument
	7.2 The Assumption of No Income Effect
	7.3 Marginal Willingness to Pay as Marginal Rate of Substitution
	7.4 No Income Effect and Inverse Demand Function
	7.5 Compensating Variation, Equivalent Variation and Consumer Surplus
	Reference
8 Choice over Time
	8.1 Intertemporal Choice and Intertemporal Budget Constraint
	8.2 How to Deal with Inflation
	8.3 Discounted Present Value of Streams
	8.4 Preference over Consumption Streams
		8.4.1 Impatience and Intertemporal Substitution
		8.4.2 Discounted Utility Representation
		8.4.3 Extension to Many Periods
	8.5 Intertemporal Consumption Choice
	8.6 Exercises
	References
9 Choice Under Risk
	9.1 Risk and Uncertainty
	9.2 Risk Attitude
	9.3 Expected Utility Representation: An Experimental Calibration
	9.4 Expected Utility Representation: The Formulation
	9.5 Axiomatic Characterization of Expected Utility Representation
	9.6 ``Cardinal\'\' Properties of vNM Indices
	9.7 Applications
		9.7.1 Insurance Purchase
		9.7.2 Portfolio Choice 1
		9.7.3 Portfolio Choice 2: Choosing State-Contingent Consumptions
	9.8 Violation of the Expected Utility Theory
		9.8.1 Violation of the Independence Condition
		9.8.2 Timing of Resolution of Risk
		9.8.3 Dependence on Reference Points
	9.9 Exercises
	References
10 Revealed Preference
Part II Perfectly Competitive and Complete Markets with Complete Information
11 General Equilibrium in Competitive Exchange Economies
	11.1 Exchange Economy
		11.1.1 Edgeworth Box
	11.2 Competitive Equilibrium
		11.2.1 Competitive Equilibrium Under Cobb-Douglas Preferences
	11.3 Interest Rate in Borrowing-Lending Economies
		11.3.1 Lifetime Budget Constraint and Intertemporal Competitive Equilibrium
		11.3.2 Ricardian Equivalence
		11.3.3 Liquidity Constraint and Market Incompleteness
	11.4 Security Exchange and Security Price
		11.4.1 Risk-Sharing Through Security Exchange
		11.4.2 The Case of No Aggregate Risk
		11.4.3 Risk-Sharing Between a Risk-Neutral Agent and a Risk-Averse Individual
		11.4.4 Incomplete Security Markets
	11.5 Exercise
	References
12 Efficiency of Allocation
	12.1 Pareto Improvement and Pareto Efficiency
	12.2 Efficiency of Competitive Equilibrium Allocation
	12.3 Important Remarks on Pareto Efficiency
	12.4 Exercises
	Reference
13 Production Technology
	13.1 1-Input/1-Output Case
	13.2 2-Input/1-Output Case
		13.2.1 Production Function
		13.2.2 Returns to Scale
		13.2.3 Marginal Product
		13.2.4 Technological Rate of Substitution
	13.3 Exercises
14 Profit Maximization and Cost Minimization with Price-Taking
	14.1 Profit Maximization When Output Price and Input Prices Are Given
		14.1.1 One-Input/One-Output Case
		14.1.2 Two-Input/One-Output Case
	14.2 Cost Minimization When Input Prices Are Given
	14.3 Long-Run and Short-Run
		14.3.1 Short-Run Profit Maximization
		14.3.2 Short-Run Cost Minimization
15 Cost Curve and Competitive Supply
	15.1 Average Cost and Marginal Cost
	15.2 Profit Maximization Under Perfect Competition
	15.3 Exercises
16 General Equilibrium in Competitive Production Economies
	16.1 Private Ownership Economy
		16.1.1 Firms\' Profit Maximization
		16.1.2 Consumers\' Choice
		16.1.3 Competitive Equilibrium
	16.2 The Representative Consumer/Producer Model
		16.2.1 Example 1: Decreasing Returns
		16.2.2 Example 2: Constant Returns
	16.3 Interest Rate Determination in an Intertemporal Production Economy
	16.4 Efficiency
	16.5 The Socialist Calculation Debate
	16.6 Exercises
17 General Equilibrium with Many Goods
	17.1 General Competitive Equilibrium with Many Goods
		17.1.1 Exchange Economy
		17.1.2 Efficiency
		17.1.3 Production Economy
		17.1.4 Efficiency
	17.2 Small Income Effects
	17.3 General Equilibrium over Time with ``Long-Lived\'\' Agents
		17.3.1 Preference in the Long-Lived Model
		17.3.2 Arrow-Debreu-McKenzie Equilibrium in an Intertemporal Exchange Economy
		17.3.3 Sequential Competitive Equilibrium
		17.3.4 Intertemporal Production Economy
		17.3.5 Euler Equation
		17.3.6 Who is the ``Representative\'\' Individual?
	17.4 The Overlapping Generations Model
	17.5 Security Trading Under Uncertainty
		17.5.1 Arrow-Debreu Market
		17.5.2 Sequential Trade
		17.5.3 Market Incompleteness and Inefficiency
	17.6 Exercises
	References
18 Comparative Welfare Properties of General Equilibrium
	18.1 Transfer Paradox
	18.2 Can Everyone Benefit from Having More Endowments?
	18.3 Can Everyone Benefit from Economic Integration?
	18.4 Can Everyone Benefit from Making the Market More Complete?
	18.5 Can Everyone Benefit from Innovation?
	Reference
19 Partial Equilibrium Analysis
	19.1 Competitive Partial Equilibrium
	19.2 Pareto Efficiency and Maximal Surplus
	19.3 Exercises
Part III Imperfect Competition and Strategic Interdependence
20 Monopoly
	20.1 Market Power and Imperfect Competition
	20.2 Monopoly Equilibrium
	20.3 Pareto Inefficiency of Monopoly Equilibrium
	20.4 Price Discrimination and Surplus Extraction
		20.4.1 First-Degree Price Discrimination, or Full Surplus Extraction
		20.4.2 Second-Degree Price Discrimination, or Non-linear Pricing
		20.4.3 Third-Degree Price Discrimination, or Multi-market Monopoly
		20.4.4 Two-Part Tariff
	20.5 Exercises
21 Basic Game Theory I: Normal-Form Games
	21.1 Description of Strategic Interdependence: Normal-Form Games
		21.1.1 On Payoff Functions
	21.2 Dominant Strategy
	21.3 Iterated Elimination of Dominated Strategies
		21.3.1 Elimination by Weak Dominance?
	21.4 Rationalizable Strategies
	21.5 Nash Equilibrium
		21.5.1 Nash Equilibrium and Dominant Strategy Equilibrium
		21.5.2 Nash Equilibrium, Iterated Elimination of Dominated Strategies and Rationalizability
		21.5.3 Why Is Nash Equilibrium Played?
	21.6 Mixed Strategies
	21.7 Refinement of Nash Equilibria
	21.8 How Should We Think of Multiple Equilibria?
	21.9 Exercises
	Reference
22 Basic Game Theory II: Extensive-Form Games
	22.1 Description of Strategic Interdependence: Extensive-Form Games
	22.2 Subgame-Perfect Nash Equilibrium
	22.3 Extensive-Form Games with Imperfect Information
		22.3.1 Perfect-Bayesian Equilibrium
	22.4 Bargaining Game
		22.4.1 One-Period Bargaining
		22.4.2 Two-Period Bargaining with Alternate Offers
		22.4.3 Multi-period Bargaining with Alternate Offers
	22.5 Repeated Games and Sustainable Cooperation
	22.6 Exercises
23 Oligopoly
	23.1 Simultaneous Quantity Setting (Cournot Competition)
	23.2 Sequential Quantity Setting (Stackelberg Competition)
	23.3 Simultaneous Price Setting (Bertand Competition)
		23.3.1 No Product Differentiation
		23.3.2 The Case with Product Differentiation
	23.4 Sequential Price Setting
		23.4.1 The Case of No Product Differentiation
		23.4.2 The Case with Product Differentiation
	23.5 Convergence to Perfect Competition
		23.5.1 Convergence of Cournot Competition to Perfect Competition
		23.5.2 Convergence of Bertand Competition to Perfect Competition
	23.6 Collusion
		23.6.1 Maximizing the Joint Profit
		23.6.2 Do They Keep the Promise?
	23.7 Location
		23.7.1 The Hotelling Model: Fixed Locations
		23.7.2 Variable Locations
	23.8 Exercises
Part IV Economic Analysis with Incomplete Information
24 Basic Game Theory III: Games with Incomplete Information
	24.1 Bayesian Game and Bayesian Nash Equilibrium
	24.2 On the Common Prior Assumption
	24.3 Exercises
25 Auction
	25.1 Prominent Auction Formats
	25.2 Information, Timeline and the Natures of Values
	25.3 Preferences
	25.4 First-Price Auction
		25.4.1 The Case of Complete Information and Discrete Bids
		25.4.2 The Case of Incomplete Information
	25.5 Second-Price Auction
		25.5.1 Weakness to Collusion
	25.6 The Revenue Equivalence Theorem
	25.7 Double Auction
		25.7.1 Complete Information
		25.7.2 Incomplete Information
	25.8 Exercises
26 Trade with Incomplete Information
	26.1 Adverse Selection
		26.1.1 Market for a ``Lemon\'\'
		26.1.2 Insurance Market
	26.2 Moral Hazard
		26.2.1 Insurance Market
		26.2.2 Reward Contract
		26.2.3 The Principal-Agent Problem
	26.3 Signaling
		26.3.1 Education as Signaling
		26.3.2 Price/Wage Offer as Signaling
	26.4 Speculative Trade
	26.5 Statistical Discrimination as a Self-fulfilling Prophecy
	26.6 Exercises
	References
Part V Market Failure, Normative Economic Analysis and Mechanism Design
27 Externality
	27.1 Market Failure
	27.2 Solutions
		27.2.1 Rationing
		27.2.2 Pigovian Tax
		27.2.3 Internalization of Externality: Creating a Right and Trading It
	27.3 Exercises
28 Public Goods and the Free-Rider Problem
	28.1 Public Goods
	28.2 Efficiency Criterion: The Samuelson Condition
	28.3 The Case of Quasi-linear Preferences
		28.3.1 Continuous Case
		28.3.2 Discrete Case
	28.4 The Free-Rider Problem
	28.5 Strategy-Proof Mechanism
	28.6 Exercises
	References
29 Indivisibility and Heterogeneity
	29.1 Allocation of Indivisible Objects
	29.2 Matching
	29.3 Exercises
	References
30 Welfare Comparison and Fairness
	30.1 The Kaldor/Hicks Criteria
	30.2 Fair Allocation in Exchange Economies
		30.2.1 Equal Division
		30.2.2 Equal Utility?
		30.2.3 Fairness as Absence of Envy
		30.2.4 Are Efficiency and Fairness Compatible?
	30.3 Fairness in Production Economies
	30.4 Exercises
	References
31 Aggregation of Preferences and Social Choice
	31.1 Motivations from Welfare Economics and Political Science
	31.2 Axioms for Aggregation of Preferences
		31.2.1 Completeness
		31.2.2 Transitivity
		31.2.3 Independence of Irrelevant Alternatives
	31.3 Arrow\'s Theorem
	31.4 May\'s Theorem
	31.5 Borda Rule Again
	31.6 Domain Restriction and Single-Peaked Preferences
		31.6.1 Downsian Electoral Competition
	31.7 Should Unanimity Be Obviously Respected?
	31.8 Exercises
	References
32 Implementability of Social Choice Objectives
	32.1 Social Choice Function and Mechanism
	32.2 Implementation in Dominant Strategy Equilibrium
		32.2.1 Definition and the Revelation Principle
		32.2.2 Gibbard–Satterthwaite Theorem
		32.2.3 Possibility in Specific Domains
	32.3 Implementation in Nash Equilibrium and Allowing Multiple Equilibria
	32.4 Exercises
	References
Appendix A Further Readings
A.1 Microeconomic Theory at the Graduate Level
A.2 Game Theory
A.3 Mechanism Design, Auction and Matching
A.4 Dynamic Stochastic General Equilibrium
A.5 Welfare and Collective Decision
A.6 Political Economics
A.7 Search Friction and Limited/Costly Enforcements
A.8 Bounded Rationality
Appendix B Solutions to the Exercises
Index