CONTENTS
1 The Market
Constructing a Model = 1
Optimization and Equilibrium = 3
The Demand Curve = 3
The Supply Curve = 5
Market Equilibrium = 7
Comparative Statics = 9
Other Ways to Allocate Apartments = 11
The Discriminating Monopolist : The Ordinary Monopolist : Rent Control Which Way Is Best? = 14
Pareto Efficiency = 15
Comparing Ways to Allocate Apartments = 16
Equilibrium in the Long Run = 17
Summary = 18
Review Questions = 19
2 Budget Constraint
The Budget Constraint = 20
Two Goods Are Often Enough = 21
Properties of the Budget Set = 22
How the Budget Line Changes = 24
The Numeraire = 26
Taxes, Subsidies, and Rationing = 26
Example : The Food Stamp Program Budget Line Changes = 31
Summary = 31
Review Questions = 32
3 Preferences
Consumer Preferences = 34
Assumptions about Preferences = 35
Indifference Curves = 36
Examples of Preferences = 37
Perfect Substitutes : Perfect Complements : Bads : Neutrals : Satiation : Discrete Goods : Well-Behaved Preferences = 44
The Marginal Rate of Substitution = 48
Other Interpretations of the MRS = 50
Behavior of the MRS = 51
Summary = 52
Review Questions = 52
4 Utility
Cardinal Utility = 57
Constructing a Utility Function = 58
Some Examples of Utility Functions = 59
Example : Indifference Curves from Utility Perfect Substitutes : Perfect Complements : Quasilinear Preferences :
Cobb-Douglas Preferences : Marginal Utility = 65
Marginal Utility and MRS = 66
Utility for Commuting = 67
Summary = 69
Review Questions = 70
Appendix = 70
Example : Cobb-Douglas Preferences
5 Choice
Optimal Choice = 73
Consumer Demand = 78
Some Examples = 78
Perfect Substitutes : Perfect Complements : Neutrals and Bads : Discrete Goods : Concave Preferences : Cobb-Douglas
Preferences
Estimating Utility Functions = 83
Implications of the MRS Condition = 85
Choosing Taxes = 86
Summary = 89
Review Questions = 88
Appendix = 90
Example : Cobb-Douglas Demand Functions
6 Demand
Normal and Inferior Goods = 96
Income Offer Curves and Engel Curves = 97
Some Examples = 99
Perfect Substitutes : Perfect Complements : Cobb-Douglas Preferences : Homothetic Preferences : Quasilinear Preferences : Ordinary Goods and Giffen Goods 103
The Offer Curve and the Demand Curve = 106
Some Examples = 107
Perfect Substitutes : Perfect Complements : A Discrete Good : Substitutes and Complements = 111
The Inverse Demand Curve = 112
Summary = 114
Review Questions = 115
Appendix = 115
7 Revealed Preference
The Idea of Revealed Preference = 118
From Revealed Preference to Preference = 118
Recovering Preferences = 121
The Weak Axiom of Revealed Preference = 123
Checking WARP = 124
The Strong Axiom of Revealed Preference = 127
How to Check SARP = 128
Index Numbers = 129
Price Indices = 131
Example : Indexing Social Security Payments Summary = 133
Review Questions = 134
8 Slutsky Equation
The Substitution Effect = 136
Example : Calculating the Substitution Effect The Income Effect = 140
Example : Calculating the Income Effect Sign of the Substitution Effect = 141
The Total Change in Demand = 142
Rates of Change = 143
The Law of Demand = 146
Examples of Income and Substitution Effects = 146
Examples : Rebating a Tax Another Substitution Effect = 150
Compensated Demand Curves = 153
Summary = 153
Review Questions = 154
Appendix = 154
Example : Rebating a Small Tax
9 Buying and Selling
Net and Gross Demands = 157
The Budget Constraint = 158
Changing the Endowment = 160
Price Changes = 161
Offer Curves and Demand Curves = 164
The Slutsky Equation Revisited = 166
Use of the Slutsky Equation = 168
Example : Calculating the Endowment Income Effect Labor Supply = 170
The Budget Constraint : Comparative Statics of Labor Supply = 171
Example : Overtime and the Supply of Labor Summary = 175
Review Questions = 176
Appendix = 176
10 Intertemporal Choice
The Budget Constraint = 179
Preferences for Consumption = 182
Comparative Statics = 183
The Slutsky Equation and Intertemporal Choice = 184
Inflation = 186
Present Value : A Closer Look = 188
Analyzing Present Value for Several Periods = 189
Use of Present Value = 190
Example : Valuing a Stream of Payments
Example : The True Cost of a Credit Card Bonds = 194
Example : Installment Loans Taxes = 196
Example : Scholarships and Savings Choice of the Interest Rate = 197
Summary = 188
Review Questions = 198
11 Asset Markets
Rates of Return = 199
Arbitrage and Present Value = 201
Adjustments for Differences among Assets = 201
Assets with Consumption Returns = 202
Taxation of Asset Returns = 203
Applications = 204
Depletable Resources : When to Cut a Forest : Example : Gasoline Prices during the Gulf War Financial Institutions = 208
Summary = 208
Review Questions = 210
Appendix = 210
12 Uncertainty
Contingent Consumption = 212
Utility Functions and Probabilities = 216
Example Some Examples of Utility Functions Expected Utility = 217
Why Expected Utility Is Reasonable = 218
Risk Aversion = 220
Example : The Demand for Insurance Diversification = 224
Risk Spreading = 224
Role of the Stock Market = 226
Summary = 226
Review Questions = 226
Appendix = 227
Example : The Effect of Taxation on Investment in Risky Assets
13 Risky Assets
Mean-Variance Utility = 230
Measuring Risk = 235
Equilibrium in a Market for Risky Assess = 237
How Returns Adjust = 238
Example : Ranking Mutual Funds Summary = 242
Review Questions = 242
14 Consumer's Surplus
Demand for a Discrete Good = 244
Constructing Utility from Demand = 245
Other Interpretations of Consumer's Surplus = 246
From Consumer's Surplus to Consumers' Surplus = 247
Approximating a Continuous Demand = 247
Quasilinear Utility = 247
Interpreting the Change in Consumer's Surplus = 248
Example : The Change in Consumer's Surplus Compensating and Equivalent Variation = 250
Example : Compensating and Equivalent Variations
Example : Compensating and Equivalent Variation for Quasilinear Preferences Producer's Surplus = 254
Calculating Gains and Losses = 256
Summary = 257
Review Questions = 258
Appendix = 258
Example : A Few DemandFunctions
Example : CV, EV, and Consumer's Surplus
15 Market Demand
From Individual to Market Demand = 261
The Inverse Demand Curve = 263
Example : Adding Up "Linear" Demand Curves Discrete Goods = 264
The Extensive and the Intensive Margin = 264
Elasticity = 265
Example : The Elasticity of a Linear Demand Curve Elasticity and Demand = 267
Elasticity and Revenue = 268
Example : Strikes and Profits Constant Elasticity Demands = 271
Elasticity and Marginal Revenue = 272
Example : Setting a Price Marginal Revenue Curves = 274
Summary = 275
Review Questions = 276
Appendix = 276
Example : The Laffer Curve
Example : Another Expression for Elasticity
16 Equilibrium
Supply = 282
Market Equilibrium = 282
Two Special Cases = 283
Inverse Demand and Supply Curves = 284
Example : Equilibrium with Linear Curves Comparative Statics = 286
Example : Shifting Both Curves Taxes = 287
Example : Taxation with Linear Demand and Supply Passing Along a Tax = 291
The Deadweight Loss of a Tax = 293
Example : The Market for Loans Example : Foot Subsidies Pareto Efficiency = 299
Example : Waiting in Line Summary = 301
Review Questions = 302
17 Technology
Inputs and Outputs = 303
Describing Technological Constraints = 304
Examples of Technology = 305
Fixed Proportions : Perfect Substitutes : Cobb-Douglas : Properties of Technology = 307
The Marginal Product = 308
The Technical Rate of Substitution = 309
Diminishing Marginal Product = 310
Diminishing Technical Rate of Substitution = 310
The Long Run and the Short Run = 311
Returns to Scale = 311
Summary = 313
Review Questions = 314
18 Profit Maximization
Profits = 316
The Organization of Firms = 317
Profits and Stock Market Value = 317
Fixed and Variable Factors = 319
Short-Run Profit Maximization = 319
Comparative Statics = 321
Profit Maximization in the Long Run = 322
Inverse Factor Demand Curves = 323
Profit Maximization and Returns to Scale = 324
Revealed Profitability = 325
Example : How Do Farmers React to Price Supports? Cost Minimization = 329
Summary = 329
Review Questions = 380
Appendix = 331
19 Cost Minimization
Cost Minimization = 333
Example : Minimizing Costs for Specific Technologies Revealed Cost Minimization = 337
Returns to Scale and the Cost Function = 338
Long-Run and Short-Run Costs = 340
Fixed and Quasi-Fixed Costs = 342
Summary = 342
Review Questions = 342
Appendix = 343
20 Cost Curves
Average Costs = 346
Marginal Costs = 348
Marginal Costs and Variable Costs = 350
Example : Specific Cost Curves
Example : Marginal Cost Curves for Two Plants Long-Run Costs = 354
Discrete Levels of Plant Size = 357
Long-Run Marginal Costs = 358
Summary = 359
Review Questions = 360
Appendix = 360
21 Firm Supply
Market Environments = 362
Pure Competition = 363
The Supply Decision of a Competitive Firm = 366
An Exception = 367
Another Exception = 368
The Inverse Supply Curve = 368
Profits and Producer's Surplus = 369
Example : The Supply Curve for a Specific Cost Function
The Long-Run Supply Curve of a Firm = 374
Long-Run Constant Average Costs = 376
Summary = 377
Review Questions = 377
Appendix = 378
22 Industry Supply
Short-Run Industry Supply = 379
Industry Equilibrium in the Short Run = 380
Industry Equilibrium in the Long Run = 381
The Long-Run Supply Curve = 383
Example : Taxation in Long Run and in Short Run The Meaning of Zero Profits = 387
Fixed Factors and Economic Rent = 388
Economic Rent = 390
Rental Rates and Prices = 391
The Politics of Rent = 392
Example : Farming the Government Energy Policy = 393
Two-Tiered Oil Pricing : Price Controls : The Entitlement Program
Summary = 398
Review Questions = 398
23 Monopoly
Maximizing Profits = 400
Linear Demand Curve and Monopoly = 401
Markup Pricing = 403
Example : The Impact of Taxes on a Monopolist Inefficiency of Monopoly = 405
Deadweight Loss of Monopoly = 407
Example : The Optimal Life of a Patent Natural Monopoly = 410
What Causes Monopolies? = 412
Example : Diamonds Are Forever Summary = 414
Review Questions = 415
Appendix = 416
Example : Value Taxes and Quantity Taxes
24 Monopoly Behavior
Price Discrimination = 420
First-Degree Price Discrimination = 420
Second-Degree Price Discrimination = 421
Third-Degree Price Discrimination = 422
Example : Linear DemandCurves
Example : Calculating Optimal Price Discrimination
Example : Price Discrimination in Academic Journals Two-Part Tariffs = 426
Monopolistic Competition = 427
Example : A Location Model of Product Differentiation Product Differentiation = 433
Summary = 433
Review Questions = 434
25 Factor Markets
Monopoly in the Output Market = 435
Monopsony = 438
Example : The Minimum Wage Upstream and Downstream Monopolies = 442
Summary = 444
Review Questions = 445
Appendix = 445
26Oligopoly
Choosing a Strategy = 448
Quantity Leadership = 448
The Follower's Problem : The Leader's Problem : Price Leadership = 454
Comparing Price Leadership and Quantity Leadership = 456
Simultaneous Quantity Setting = 456
An Example of Cournot Equilibrium = 458
Adjustment to Equilibrium = 460
Many Firms in Cournot Equilibrium = 460
Simultaneous Price Setting = 461
Collusion = 462
Example : Price Matching and Competition
Example : Voluntary Export Restraints Comparison of the Solutions = 467
Summary = 467
Review Questions = 468
27 Game Theory
The Payoff Matrix of a Game = 469
Nash Equilibrium = 47l
Mixed Strategies = 472
The Prisoner's Dilemma = 473
Repeated Games = 475
Enforcing a Cartel = 476
Sequential Games = 477
A Game of Entry Deterrence = 479
Summary = 481
Review Questions = 481
28 Exchange
The Edgeworth Box = 484
Trade = 486
Pareto Efficient Allocations = 487
Market Trade = 489
The Algebra of Equilibrium = 491
Walras' Law = 493
Relative Prices = 494
Example : An Algebraic Example of Equilibrium The Existence of Equilibrium = 496
Equilibrium and Efficiency = 497
The Algebra of Efficiency = 498
Example : Monopoly in the Edgeworth Box Efficiency and Equilibrium = 501
Implications of the First Welfare Theorem = 503
Implications of the Second Welfare Theorem = 505
Summary = 507
Review Questions = 508
Appendix = 508
29 Production
The Robinson Crusoe Economy = 510
Crusoe, Inc. = 512
The Firm = 513
Robinson's Problem = 514
Putting Them Together = 515
Different Technologies = 516
Production and the First Welfare Theorem = 518
Production and the Second Welfare Theorem = 519
Production Possibilities = 519
Comparative Advantage = 521
Pareto Efficiency = 523
Castaways, Inc. = 525
Robinson and Friday as Consumers = 527
Decentralized Resource Allocation = 528
Summary = 528
Review Questions = 529
Appendix = 530
30 Welfare
Aggregation of Preferences = 533
Social Welfare Functions = 535
Welfare Maximization = 537
Individualistic Social Welfare Functions = 539
Fair Allocations = 540
Envy and Equity = 541
Summary = 543
Review Questions = 543
Appendix = 544
31 Externalities
Smokers and Nonsmokers = 546
Quasilinear Preferences and the Coase Theorem = 549
Production Externalities = 551
Example : Pollution Vouchers Interpretation of the Conditions = 556
Market Signals = 559
The Tragedy of the Commons = 559
Example : Overfishing Automobile Pollution = 563
Summery = 564
Review Questions = 565
32 Law and Economics
Crime and Punishment = 566
Qualifications = 569
Liability Law = 570
Bilateral Accidents = 572
Treble Damages in Antitrust Law = 574
Seeking to Be Damaged : Which Model Is Right? = 577
Summary = 577
Review Questions = 577
33 Public Goods
When to Provide a Public Good? = 579
Private Provision of the Public Good = 583
Free Riding = 584
Different Levels of the Public Good = 585
Quasilinear Preferences and Public Goods = 587
Example : Pollution Revisited The Free Rider Problem = 589
Comparison to Private Goods = 591
Voting = 592
Example : Agenda Manipulation Demand Revelation = 595
Example : An Example of the Clarke Tax Problems with the Clarke Tax = 599
Summary = 600
Review Questions = 600
Appendix = 601
34 Information
The Market for Lemons = 603
Quality Choice = 604
Choosing the Quality : Adverse Selection = 606
Moral Harvard = 608
Moral Hazard and Adverse Selection = 609
Signaling = 610
Example : The Sheepskin Effect Incentives = 614
Example : Voting Rights in the Corporation
Example : Chinese Economic Reforms Asymmetric Information = 619
Example : Monitoring Costs
Example : The Grameen Bank Summary = 622
Review Questions = 623
35 Mathematical Appendix
Functions = Al
Graphs = A2
Properties of Functions = A2
Inverse Functions = A3
Equations and Identities = A3
Linear Functions = A4
Changes and Rates of Change = A4
Slopes and Intercepts = A6
Absolute Values and Logarithms = A6
Derivatives = A6
Second Derivatives = A7
The Product Rule and the Chain Rule = A8
Partial Derivatives = A8
Optimization = A8
Constrained Optimization = A10
Answers = All
Index = A29
