Microeconomics: A Modern Approach (with InfoApps 2-Semester Printed Access Card)

Front Cover......Page 1
Title Page......Page 2
Copyright......Page 3
Brief Contents
......Page 5
Contents......Page 7
Preface......Page 19
About the Author......Page 26
SECTION 1 INTRODUCTION......Page 28
Microeconomics and Institutions......Page 30
Conventional Microeconomics......Page 32
The Emphasis of This Book......Page 34
Economic Models......Page 35
Testing Theories—Economics as an Experimental Science......Page 36
The Model Used in This Book and an Outline of the Chapters......Page 37
Three Fundamental Institutions......Page 41
Conclusion......Page 45
SECTION 2 PREFERENCES, UTILITIES, DEMANDS, AND UNCERTAINTY......Page 46
The Consumption Possibility Set......Page 49
Rationality......Page 52
The Economically Feasible Set......Page 54
Rationality and Choice......Page 57
Psychological Assumptions......Page 62
Conclusion......Page 65
Exercises and Problems......Page 66
3 UTILITIES—INDIFFERENCE CURVES......Page 68
Indifference Curves......Page 69
Optimal Consumption Bundles......Page 77
Revealed Preference......Page 83
Exercises and Problems......Page 87
4 DEMAND AND BEHAVIOR IN MARKETS......Page 91
Individual Maximization and Impersonal Markets......Page 92
The Problem of Consumer Choice......Page 93
Income Expansion Paths......Page 94
Inferior and Superior Goods......Page 97
Price-Consumption Paths......Page 99
Demand Curves......Page 101
Demand and Utility Functions......Page 102
Income and Substitution Effects......Page 105
Normal Goods and Downward-Sloping Demand Curves......Page 108
Giffen Goods and Upward-Sloping Demand Curves......Page 109
Compensated and Uncompensated Demand Curves......Page 111
Appendix A: The Demand Curve......Page 116
Exercises and Problems......Page 118
5 SOME APPLICATIONS OF CONSUMER DEMAND, AND WELFARE ANALYSIS......Page 120
Application 1: Work and Leisure......Page 121
Application 2: Crime and Punishment......Page 122
Measuring the Price Sensitivity of Demand......Page 126
The Slutsky Equation......Page 131
Properties of Demand Functions......Page 132
From Individual Demand to Market Demand......Page 136
Expenditure Functions......Page 138
Consumer Surplus......Page 139
Measures of Consumer Gain......Page 145
Price-Compensating Variations and Expenditure Functions......Page 147
Summary......Page 148
Appendix A: The Expenditure Function......Page 149
Exercises and Problems......Page 150
6 UNCERTAINTY AND THE EMERGENCE OF INSURANCE......Page 152
Representing Uncertainty by Probability Distributions......Page 153
Decision Making under Conditions of Uncertainty: Maximizing Expected Utility......Page 157
Maximizing Expected Utility: Cardinal Utility......Page 161
Utility Functions and Attitudes toward Risk......Page 164
The Desire to Buy Insurance: Risk Aversion......Page 170
Exercises and Problems......Page 172
7 UNCERTAINTY—APPLICATIONS AND CRITICISMS......Page 174
The Creation of Insurance and Insurance Markets......Page 175
Risk Pooling: The Growth of Insurance Companies......Page 178
How Could Expected Utility Be wrong?......Page 182
Summary......Page 188
Exercises and Problems......Page 189
SECTION 3 PRODUCTION AND COST......Page 190
Discovering Production......Page 192
The Production Function and Technology......Page 194
The Marginal Rate of Technical Substitution......Page 196
Describing Technologies......Page 198
Time Constraints......Page 202
Summary......Page 207
Appendix A: The Production Function......Page 208
Exercises and Problems......Page 210
How Costs Are Related to Output......Page 214
Special Technologies and Their Cost Functions......Page 223
Appendix A: The Cost Function......Page 233
Exercises and Problems......Page 235
Short-Run and Long-Run Cost Functions......Page 238
Exercises and Problems......Page 248
SECTION 4 DECISION THEORY–STATIC AND DYNAMIC DECISIONS......Page 250
11 GAME THEORY AND THE TOOLS OF STRATEGIC BUSINESS ANALYSIS......Page 252
Games of Strategy Defined......Page 254
Equilibria for Games......Page 262
Credible Threats......Page 279
Rationality and Equity......Page 283
Summary......Page 284
Appendix A: Games of Incomplete Information......Page 285
Appendix B: Repeated Games......Page 288
Exercises and Problems......Page 293
12 DECISION MAKING OVER TIME......Page 298
Discounting the Future......Page 299
Summary......Page 313
Exercises and Problems......Page 314
13 THE INTERNAL ORGANIZATION OF THE FIRM......Page 317
The Decision to Start a Firm......Page 318
Solutions to the Moral Hazard Problem of Workers Not Working......Page 321
Designing the Optimal Contract—Principal-Agent Problems......Page 334
Affirmative Action and Discrimination in the Workplace......Page 341
Summary......Page 344
Exercises and Problems......Page 345
SECTION 5 MARKETS AND MARKET STRUCTURES......Page 348
Competitive Markets in the Short Run......Page 350
Exercises and Problems......Page 367
The Long-Run Equilibrium for Identical Firms......Page 369
The Long-Run Equilibrium for Heterogeneous Firms......Page 371
Why Are Long-Run Competitive Equilibria So Good?......Page 376
Summary......Page 381
Appendix A: Two Welfare Propositions......Page 382
Exercises and Problems......Page 383
16 MARKET INSTITUTIONS AND AUCTIONS......Page 385
The Double Oral Auction and One-Sided Oral Auction Market Institutions......Page 387
Other Auction Institutions......Page 396
Summary......Page 402
Exercises and Problems......Page 403
17 THE AGE OF ENTREPRENEURSHIP: MONOPOLY......Page 405
Costs, Demand, and Profits......Page 406
Pricing and Quantity Decisions......Page 407
Optimal Price and Quantity Results......Page 412
Pricing and Profits......Page 418
Summary......Page 431
Appendix A: The Monopoly Problem......Page 434
Exercises and Problems......Page 436
18 NATURAL MONOPOLY AND THE ECONOMICS OF REGULATION......Page 441
The Costs of Market Entry......Page 442
The Need for Regulation......Page 453
Rate-of-Return and Price-Cap Regulation......Page 460
Other Regulatory Issues......Page 465
Conclusion......Page 468
Appendix A: The Allocation of Common Costs: Cross-Subsidization......Page 469
Appendix B: Franchise Monopoly......Page 472
Exercises and Problems......Page 474
19 THE WORLD OF OLIGOPOLY: PRELIMINARIES TO SUCCESSFUL ENTRY......Page 478
Production in a Nonnatural Monopoly Situation......Page 479
The Cournot Theory of Duopoly and Oligopoly......Page 481
Criticisms of the Cournot Theory: The Stackelberg Duopoly Model......Page 490
The Welfare Properties of Duopolistic Markets......Page 493
Criticisms of the Cournot Theory: The Bertrand Duopoly Model......Page 499
Collusive Duopoly......Page 503
Making Cartels Stable: The Kinked Demand Curve Conjecture......Page 505
The Edgeworth Model......Page 507
Appendix A: Nash Equilibrium in Duopoly......Page 509
Appendix B: Implicit Collusion and Repeated Games......Page 512
Exercises and Problems......Page 514
20 MARKET ENTRY AND THE EMERGENCE OF PERFECT COMPETITION......Page 520
Limit Pricing in the Bain, Modigliani, Sylos-Labini Model......Page 521
Criticisms of the Bain, Modigliani, Sylos-Labini Model: Subgame Perfection......Page 527
Entry Prevention, Overinvestment, and the Dixit-Spence Model......Page 531
Perfect Competition as the Limit of Successful Entry—When Entry Prevention Fails......Page 537
Appendix......Page 539
Exercises and Problems......Page 543
SECTION 6 WELFARE, EXCHANGE, AND GENERAL EQUILIBRIUM......Page 548
Harvesting and Gathering: The Need for Trade......Page 550
Constructing the Edgeworth Box and Finding Feasible Trades......Page 551
Finding Equilibrium Trades......Page 552
A Growing Population and the Core......Page 560
Summary......Page 571
Appendix A: The Shrinking of the Core......Page 572
Appendix B: Pareto Optima and the Contract Curve......Page 573
Appendix C: Competitive Equilibrium and Pareto Optimality......Page 574
Exercises and Problems......Page 575
The Free-Market Argument......Page 580
The Interventionist Argument......Page 591
Institutional Failure: Another Interventionist Argument......Page 597
Exercises and Problems......Page 600
SECTION 7 BREAKDOWNS AND MARKET FAILURE......Page 606
23 MORAL HAZARD AND ADVERSE SELECTION: INFORMATIONAL MARKET FAILURES......Page 608
Moral Hazard in the Insurance Industry......Page 609
Adverse Selection......Page 613
Moral Hazard and Adverse Selection: Expert Opinion in the Car Repair Business......Page 624
Summary......Page 630
Exercises and Problems......Page 631
24 EXTERNALITIES: THE FREE MARKET–INTERVENTIONIST BATTLE CONTINUES......Page 634
The Externality Problem Described......Page 636
The Effects of an Externality on Output......Page 637
Interventionist Solutions to the Externality Problem......Page 640
A Noninterventionist Solution to the Externality Problem: The Coasian Solution......Page 652
Appendix: Excess Production Under Externalities......Page 654
Exercises and Problems......Page 656
SECTION 8 INPUT MARKETS AND THE ORIGINS OF CLASS STRUGGLE......Page 658
25 PUBLIC GOODS, THE CONSEQUENCES OF STRATEGIC VOTING BEHAVIOR, AND THE ROLE OF GOVERNMENT......Page 660
Public Goods and the Free-Rider Problem Defined......Page 661
The Pareto-Optimal Conditions for an Economy with Public Goods......Page 664
The Lindahl Solution to the Public Goods Problem......Page 667
Theoretical Solutions to the Free-Rider Problem......Page 671
The Role of Government......Page 681
The Problem of Preference Aggregation: Arrow's Impossibility Theorem......Page 684
The Problem of Vote Manipulation......Page 688
The Government as Institutional Architect......Page 692
Rent Seeking—The Economics of Interest Groups......Page 695
Conclusion......Page 697
Exercises and Problems......Page 698
The Return on Labor......Page 701
Setting the Stage for Class Conflict......Page 708
The Return on Capital......Page 709
The Return on Land......Page 715
Resolving the Claims of Different Factors of Production: The Product Exhaustion Theorem......Page 716
Determining the Return on Labor in Markets that Are Less than Perfectly Competitive......Page 717
Summary......Page 726
Exercises and Problems......Page 727
Answers to Selected Exercises and Problems......Page 730
Glossary......Page 751
Index......Page 761