Microeconomics

Cover......Page 1
Title Page......Page 3
Copyright......Page 4
Contents......Page 16
Microeconomics and Climate Change......Page 23
1.1 Why Study Microeconomics? ......Page 26
1.2 Three Key Analytical Tools ......Page 27
Constrained Optimization ......Page 28
Equilibrium Analysis ......Page 34
Comparative Statics ......Page 35
1.4 Comparative Statics with Constrained Optimization......Page 40
1.1 Constrained Optimization: The Farmer’s Fence ......Page 29
1.2 Constrained Optimization: Consumer Choice ......Page 30
1.3 Comparative Statics with Market Equilibrium in the U.S. Market for Corn ......Page 38
What Gives with the Price of Corn?......Page 48
2.1 Demand, Supply, and Market Equilibrium ......Page 51
Demand Curves ......Page 52
Supply Curves ......Page 54
2.2 Sketching a Supply Curve ......Page 55
Shifts in Supply and Demand ......Page 57
2.2 Price Elasticity of Demand ......Page 67
2.5 Price Elasticity of Demand ......Page 69
2.6 Elasticities along Special Demand Curves ......Page 71
Determinants of the Price Elasticity of Demand ......Page 72
Market-Level versus Brand-Level Price Elasticities of Demand ......Page 73
Income Elasticity of Demand ......Page 75
Cross-Price Elasticity of Demand ......Page 76
Greater Elasticity in the Long Run Than in the Short Run ......Page 78
Greater Elasticity in the Short Run Than in the Long Run ......Page 80
2.5 Back-of-the-Envelope Calculations ......Page 81
Fitting Linear Demand Curves Using Quantity, Price, and Elasticity Information ......Page 82
Identifying Supply and Demand Curves on the Back of an Envelope ......Page 83
Identifying the Price Elasticity of Demand from Shifts in Supply ......Page 85
Appendix Price Elasticity of Demand Along a Constant Elasticity Demand Curve......Page 96
2.1 Sketching a Demand Curve ......Page 53
2.3 Calculating Equilibrium Price and Quantity ......Page 56
2.4 Comparative Statics on the Market Equilibrium ......Page 59
Why Do You Like What You Like?......Page 97
Assumptions About Consumer Preferences ......Page 99
Ordinal and Cardinal Ranking ......Page 101
Preferences with a Single Good: The Concept of Marginal Utility ......Page 102
Preferences with Multiple Goods: Marginal Utility, Indifference Curves, and the Marginal Rate of Substitution ......Page 106
Perfect Substitutes ......Page 117
Perfect Complements ......Page 118
The Cobb–Douglas Utility Function ......Page 119
Quasilinear Utility Functions ......Page 120
3.1 Marginal Utility ......Page 107
3.2 Marginal Utility That Is Not Diminishing ......Page 108
3.3 Indifference Curves with Diminishing MRSx,y ......Page 115
3.4 Indifference Curves with Increasing MRSx,y ......Page 116
How Much of What You Like Should You Buy?......Page 127
4.1 The Budget Constraint ......Page 129
How Does a Change in Price Affect the Budget Line? ......Page 131
4.1 Good News/Bad News and the Budget Line ......Page 134
Using the Tangency Condition to Understand When a Basket Is Not Optimal ......Page 138
4.2 Finding an Interior Optimum ......Page 139
Two Ways of Thinking About Optimality ......Page 140
Corner Points ......Page 142
Application: Coupons and Cash Subsidies ......Page 145
Application: Joining a Club ......Page 149
Application: Borrowing and Lending ......Page 150
Application: Quantity Discounts ......Page 155
4.4 Revealed Preference ......Page 156
Are Observed Choices Consistent with Utility Maximization? ......Page 157
Appendix 1 The Mathematics of Consumer Choice......Page 167
Appendix 2 The Time Value of Money......Page 168
4.3 Finding a Corner Point Solution ......Page 143
4.4 Corner Point Solution with Perfect Substitutes ......Page 144
4.5 Consumer Choice That Fails to Maximize Utility ......Page 158
4.6 Other Uses of Revealed Preference ......Page 160
Why Understanding the Demand for Cigarettes Is Important for Public Policy......Page 174
The Effects of a Change in Price ......Page 176
The Effects of a Change in Income ......Page 179
5.2  Finding a Demand Curve (No Corner Points) ......Page 184
5.2 Change in the Price of a Good: Substitution Effect and Income Effect ......Page 186
The Income Effect ......Page 187
Income and Substitution Effects When Goods Are Not Normal ......Page 189
Understanding Consumer Surplus from the Demand Curve ......Page 197
Understanding Consumer Surplus from the Optimal Choice Diagram: Compensating Variation and Equivalent Variation ......Page 199
5.4 Market Demand ......Page 206
Market Demand with Network Externalities ......Page 208
As Wages Rise, Leisure First Decreases, Then Increases ......Page 211
The Backward-Bending Supply of Labor ......Page 213
5.6 Consumer Price Indices ......Page 217
5.1  A Normal Good Has a Positive Income Elasticity of Demand ......Page 183
5.3  Finding a Demand Curve (with a Corner Point Solution) ......Page 185
5.4  Finding Income and Substitution Effects Algebraically ......Page 192
5.5  Income and Substitution Effects with a Price Increase ......Page 194
5.6  Income and Substitution Effects with a Quasilinear Utility Function ......Page 195
5.7  Consumer Surplus: Looking at the Demand Curve ......Page 198
5.8  Compensating and Equivalent Variations with No Income Effect ......Page 202
5.9  Compensating and Equivalent Variations with an Income Effect......Page 204
5.10 The Demand for Leisure and the Supply of Labor ......Page 215
Can They Do It Better and Cheaper?......Page 226
6.1 Introduction to Inputs and Production Functions ......Page 228
6.2 Production Functions with a Single Input ......Page 230
Total Product Functions ......Page 231
Marginal and Average Product ......Page 232
Total Product and Marginal Product with Two Inputs ......Page 236
Isoquants ......Page 238
6.1 Deriving the Equation of an Isoquant ......Page 242
Marginal Rate of Technical Substitution ......Page 243
6.2 Relating the Marginal Rate of Technical Substitution to Marginal Products ......Page 245
Describing a Firm’s Input Substitution Opportunities Graphically ......Page 246
Elasticity of Substitution ......Page 248
Special Production Functions ......Page 251
Definitions ......Page 256
6.6 Technological Progress ......Page 259
Appendix The Elasticity of Substitution for a Cobb–Douglas Production Function......Page 269
6.3 Calculating the Elasticity of Substitution from a Production Function ......Page 249
6.4 Returns to Scale for a Cobb–Douglas Production Function ......Page 258
6.5 Technological Progress ......Page 261
What’s Behind the Self-Service Revolution?......Page 271
Opportunity Cost ......Page 273
Economic versus Accounting Costs ......Page 276
Sunk (Unavoidable) versus Nonsunk (Avoidable) Costs ......Page 277
Long Run versus Short Run ......Page 279
The Long-Run Cost-Minimization Problem ......Page 280
Isocost Lines ......Page 281
Graphical Characterization of the Solution to the Long-Run Cost-Minimization Problem ......Page 282
7.2 Finding an Interior Cost-Minimization Optimum ......Page 284
Comparative Statics Analysis of Changes in Input Prices ......Page 286
Comparative Statics Analysis of Changes in Output ......Page 290
Summarizing the Comparative Statics Analysis: The Input Demand Curves ......Page 291
7.4 Deriving the Input Demand Curves from a Production Function ......Page 293
7.4 Short-Run Cost Minimization ......Page 295
Characterizing Costs in the Short Run ......Page 296
Cost Minimization in the Short Run ......Page 298
Comparative Statics: Short-Run Input Demand versus Long-Run Input Demand ......Page 299
7.5 Short-Run Cost Minimization with One Fixed Input ......Page 300
Appendix Advanced Topics in Cost Minimization......Page 307
7.1 Using the Cost Concepts for a College Campus Business ......Page 278
7.3 Finding a Corner Point Solution with Perfect Substitutes ......Page 285
7.6 Short-Run Cost Minimization with Two Variable Inputs ......Page 301
How Can HiSense Get a Handle on Costs?......Page 311
Long-Run Total Cost Curve ......Page 313
How Does the Long-Run Total Cost Curve Shift When Input Prices Change? ......Page 315
Long-Run Average and Marginal Cost Curves ......Page 318
Short-Run Total Cost Curve ......Page 328
8.3 Deriving a Short-Run Total Cost Curve ......Page 329
Short-Run Average and Marginal Cost Curves ......Page 331
Relationships Between the Long-Run and the Short-Run Average and Marginal Cost Curves ......Page 332
When Are Long-Run and Short-Run Average and Marginal Costs Equal, and When Are They Not? ......Page 333
Economies of Scope ......Page 336
Economies of Experience: The Experience Curve ......Page 339
8.4 Estimating Cost Functions ......Page 341
Translog Cost Function ......Page 342
Appendix Shephard’s Lemma and Duality......Page 349
8.1 Finding the Long-Run Total Cost Curve from a Production Function ......Page 314
8.2 Deriving Long-Run Average and Marginal Cost Curves from a Long-Run Total Cost Curve ......Page 320
8.4 The Relationship Between Short-Run and Long-Run Average Cost Curves ......Page 334
A Rose Is a Rose Is a Rose......Page 353
9.1 What Is Perfect Competition? ......Page 355
Economic Profit versus Accounting Profit ......Page 358
The Profit-Maximizing Output Choice for a Price-Taking Firm ......Page 360
The Price-Taking Firm’s Short-Run Cost Structure ......Page 363
Short-Run Supply Curve for a Price-Taking Firm When All Fixed Costs Are Sunk ......Page 365
9.1 Deriving the Short-Run Supply Curve for a Price-Taking Firm ......Page 367
Short-Run Market Supply Curve ......Page 371
Short-Run Perfectly Competitive Equilibrium ......Page 374
9.3 Short-Run Market Equilibrium ......Page 375
Long-Run Output and Plant-Size Adjustments by Established Firms ......Page 378
The Firm’s Long-Run Supply Curve ......Page 379
Free Entry and Long-Run Perfectly Competitive Equilibrium ......Page 380
9.4 Calculating a Long-Run Equilibrium ......Page 382
Constant-Cost, Increasing-Cost, and Decreasing-Cost Industries ......Page 384
What Does Perfect Competition Teach Us? ......Page 392
Economic Rent ......Page 393
Producer Surplus ......Page 396
Economic Profit, Producer Surplus, Economic Rent ......Page 402
Appendix Profit Maximization Implies Cost Minimization......Page 410
9.2 Deriving the Short-Run Supply Curve for a Price-Taking Firm with Some Nonsunk Fixed Costs ......Page 369
9.5 Calculating Producer Surplus ......Page 401
Is Support a Good Thing?......Page 412
10.1 The Invisible Hand, Excise Taxes and Subsidies ......Page 414
The Invisible Hand ......Page 415
Excise Taxes ......Page 416
Incidence of a Tax ......Page 420
Subsidies ......Page 424
10.2 Impact of a Subsidy ......Page 426
Price Ceilings ......Page 427
Price Floors ......Page 434
10.3 Production Quotas ......Page 439
10.5 Comparing the Impact of an Excise Tax, a Price Floor, and a Production Quota ......Page 443
Government Purchase Programs ......Page 444
Quotas ......Page 448
Tariffs ......Page 451
10.1 Impact of an Excise Tax ......Page 419
10.3 Impact of a Price Ceiling ......Page 433
10.4 Impact of a Price Floor ......Page 438
10.6 Effects of an Import Tariff ......Page 454
Why Do Firms Play Monopoly?......Page 464
The Profit-Maximization Condition ......Page 466
A Closer Look at Marginal Revenue: Marginal Units and Inframarginal Units ......Page 470
Average Revenue and Marginal Revenue ......Page 471
11.1 Marginal and Average Revenue for a Linear Demand Curve ......Page 473
11.2 Applying the Monopolist’s Profit-Maximization Condition ......Page 475
Price Elasticity of Demand and the Profit-Maximizing Price ......Page 476
Marginal Revenue and Price Elasticity of Demand ......Page 477
11.3 Computing the Optimal Monopoly Price for a Constant Elasticity Demand Curve ......Page 479
11.4 Computing the Optimal Monopoly Price for a Linear Demand Curve ......Page 480
The IEPR Applies Not Only to Monopolists ......Page 482
Quantifying Market Power: The Lerner Index ......Page 483
Shifts in Market Demand ......Page 484
Shifts in Marginal Cost ......Page 487
Output Choice with Two Plants ......Page 489
11.6 Determining the Optimal Output, Price, and Division of Production for a Multiplant Monopolist ......Page 491
11.7 Determining the Optimal Output and Price for a Monopolist Serving Two Markets ......Page 492
The Monopoly Equilibrium Differs from the Perfectly Competitive Equilibrium ......Page 495
11.6 Why Do Monopoly Markets Exist? ......Page 497
Natural Monopoly ......Page 498
Barriers to Entry ......Page 499
The Monopsonist’s Profit-Maximization Condition ......Page 501
An Inverse Elasticity Pricing Rule for Monopsony ......Page 503
11.9 Applying the Inverse Elasticity Rule for a Monopsonist ......Page 504
11.5 Computing the Optimal Price Using the Monopoly Midpoint Rule ......Page 486
11.8 Applying the Monopsonist’s Profit-Maximization Condition ......Page 502
Why Did Your Carpet or Your Airline Ticket Cost So Much Less Than Mine?......Page 511
12.1 Capturing Surplus ......Page 513
12.2 First-Degree Price Discrimination: Making the Most from Each Consumer ......Page 516
Block Pricing ......Page 521
Subscription and Usage Charges ......Page 524
Two Different Segments, Two Different Prices ......Page 527
Screening ......Page 530
Third-Degree Price Discrimination with Capacity Constraints ......Page 532
Implementing the Scheme of Price Discrimination: Building “Fences” ......Page 534
12.5 Tying (Tie-In Sales) ......Page 538
Bundling ......Page 539
Mixed Bundling ......Page 541
12.6 Advertising ......Page 522
12.1 Capturing Surplus: Uniform Pricing versus First-Degree Price Discrimination ......Page 518
12.2 Where Is the Marginal Revenue Curve with First-Degree Price Discrimination? ......Page 519
12.3 Increasing Profits with a Block Tariff ......Page 523
12.4 Third-Degree Price Discrimination in Railroad Transport ......Page 529
12.5 Third-Degree Price Discrimination for Airline Tickets ......Page 531
12.6 Price Discrimination Subject to Capacity Constraints ......Page 533
12.7 Markup and Advertising-to-Sales Ratio ......Page 546
Is Competition Always the Same? If Not, Why Not?......Page 554
13.1 Describing and Measuring Market Structure ......Page 556
The Cournot Model of Oligopoly ......Page 559
The Bertrand Model of Oligopoly ......Page 567
Why Are the Cournot and Bertrand Equilibria Different? ......Page 569
The Stackelberg Model of Oligopoly ......Page 570
13.3 Dominant Firm Markets ......Page 572
What Is Product Differentiation? ......Page 575
Bertrand Price Competition with Horizontally Differentiated Products ......Page 578
Short-Run and Long-Run Equilibrium in Monopolistically Competitive Markets ......Page 584
Do Prices Fall When More Firms Enter? ......Page 586
Appendix The Cournot Equilibrium and the Inverse Elasticity Pricing Rule......Page 596
13.1 Computing a Cournot Equilibrium ......Page 562
13.2 Computing the Cournot Equilibrium for Two or More Firms with Linear Demand ......Page 566
13.3 Computing the Equilibrium in the Dominant Firm Model ......Page 574
13.4 Computing a Bertrand Equilibrium with Horizontally Differentiated Products ......Page 582
What’s in a Game?......Page 597
A Simple Game ......Page 599
The Prisoners’ Dilemma ......Page 600
Dominant and Dominated Strategies ......Page 601
Games with More Than One Nash Equilibrium ......Page 605
14.2 Finding All of the Nash Equilibria in a Game ......Page 608
14.2 The Repeated Prisoners’ Dilemma ......Page 610
Analyzing Sequential-Move Games ......Page 616
The Strategic Value of Limiting One’s Options ......Page 619
14.1 Finding the Nash Equilibrium: Coke versus Pepsi ......Page 604
14.3 An Entry Game ......Page 618
Risky Business?......Page 630
Lotteries and Probabilities ......Page 632
Variance ......Page 634
Utility Functions and Risk Preferences ......Page 637
15.1 Computing the Expected Utility for Two Lotteries for a Risk-Averse Decision Maker ......Page 640
Risk Premium ......Page 643
15.3 Computing the Risk Premium from a Utility Function ......Page 646
Asymmetric Information in Insurance Markets: Moral Hazard and Adverse Selection ......Page 649
Decision Tree Basics ......Page 655
Decision Trees with a Sequence of Decisions ......Page 657
The Value of Information ......Page 659
15.5 Auctions ......Page 661
Types of Auctions and Bidding Environments ......Page 662
Auctions When Bidders Have Private Values ......Page 663
Auctions When Bidders Have Common Values: The Winner’s Curse ......Page 667
15.2 Computing the Expected Utility for Two Lotteries: Risk-Neutral and Risk-Loving Decision Makers ......Page 642
15.4 The Willingness to Pay for Insurance ......Page 647
15.5 Verifying the Nash Equilibrium in a First-Price Sealed-Bid Auction with Private Values ......Page 664
How Do Gasoline Taxes Affect the Economy?......Page 676
16.1 General Equilibrium Analysis: Two Markets ......Page 678
16.1 Finding the Prices at a General Equilibrium with Two Markets ......Page 682
The General Equilibrium in Our Simple Economy ......Page 688
Walras’ Law ......Page 692
16.3 General Equilibrium Analysis: Comparative Statics ......Page 693
What Is Economic Efficiency? ......Page 697
Exchange Efficiency ......Page 698
Input Efficiency ......Page 704
Substitution Efficiency ......Page 706
Pulling the Analysis Together: The Fundamental Theorems of Welfare Economics ......Page 709
Free Trade Is Mutually Beneficial ......Page 710
Comparative Advantage ......Page 714
Appendix Deriving the Demand and Supply Curves for General Equilibrium in Figure 16.9 and Learning-by-Doing Exercise 16.2......Page 720
16.2 Finding the Conditions for a General Equilibrium with Four Markets ......Page 691
16.3 Checking the Conditions for Exchange Efficiency ......Page 702
When Does the Invisible Hand Fail?......Page 725
17.1 Introduction ......Page 727
17.2 Externalities ......Page 728
Negative Externalities and Economic Efficiency ......Page 730
Positive Externalities and Economic Efficiency ......Page 744
Property Rights and the Coase Theorem ......Page 748
17.3 Public Goods ......Page 750
Efficient Provision of a Public Good ......Page 751
The Free-Rider Problem ......Page 754
17.1 The Efficient Amount of Pollution ......Page 733
17.2 Emissions Fee ......Page 736
17.3 The Coase Theorem ......Page 749
17.4 Optimal Provision of a Public Good ......Page 753
A.1 Functional Relationships......Page 761
A.2 What is a “Margin”?......Page 764
A.3 Derivatives......Page 766
A.4 How to Find a Derivative......Page 767
A.5 Maximization and Minimization Problems......Page 771
A.6 Multivariable Functions......Page 773
A.7 Constrained Optimization......Page 776
A.8 Lagrange Multipliers......Page 778
Summary......Page 779
Solutions to Selected Problems......Page 781
Glossary......Page 803
Index......Page 811