Preface | p. xix |

The Market | |

Constructing a Model | p. 1 |

Optimization and Equilibrium | p. 3 |

The Demand Curve | p. 3 |

The Supply Curve | p. 5 |

Market Equilibrium | p. 7 |

Comparative Statics | p. 9 |

Other Ways to Allocate Apartments | p. 11 |

The Discriminating Monopolist | |

The Ordinary Monopolist | |

Rent Control | |

Which Way Is Best? | p. 14 |

Pareto Efficiency | p. 15 |

Comparing Ways to Allocate Apartments | p. 16 |

Equilibrium in the Long Run | p. 17 |

Summary | p. 18 |

Review Questions | p. 19 |

Budget Constraint | |

The Budget Constraint | p. 20 |

Two Goods Are Often Enough | p. 21 |

Properties of the Budget Set | p. 22 |

How the Budget Line Changes | p. 24 |

The Numeraire | p. 26 |

Taxes, Subsidies, and Rationing | p. 26 |

Example: The Food Stamp Program Budget Line Changes | p. 31 |

Summary | p. 31 |

Review Questions | p. 32 |

Preferences | |

Consumer Preferences | p. 34 |

Assumptions about Preferences | p. 35 |

Indifference Curves | p. 36 |

Examples of Preferences | p. 37 |

Perfect Substitutes | |

Perfect Complements | |

Bads | |

Neutrals | |

Satiation | |

Discrete Goods | |

Well-Behaved Preferences | p. 44 |

The Marginal Rate of Substitution | p. 48 |

Other Interpretations of the MRS | p. 50 |

Behavior of the MRS | p. 51 |

Summary | p. 52 |

Review Questions | p. 52 |

Utility | |

Cardinal Utility | p. 57 |

Constructing a Utility Function | p. 58 |

Some Examples of Utility Functions | p. 59 |

Example: Indifference Curves from Utility Perfect Substitutes | |

Perfect Complements | |

Quasilinear Preferences | |

Cobb-Douglas Preferences | |

Marginal Utility | p. 65 |

Marginal Utility and MRS | p. 66 |

Utility for Commuting | p. 67 |

Summary | p. 69 |

Review Questions | p. 70 |

Appendix | p. 70 |

Example: Cobb-Douglas Preferences | |

Choice | |

Optimal Choice | p. 73 |

Consumer Demand | p. 78 |

Some Examples | p. 78 |

Perfect Substitutes | |

Perfect Complements | |

Neutrals and Bads | |

Discrete Goods | |

Concave Preferences | |

Cobb-Douglas Preferences | |

Estimating Utility Functions | p. 83 |

Implications of the MRS Condition | p. 85 |

Choosing Taxes | p. 87 |

Summary | p. 89 |

Review Questions | p. 89 |

Appendix | p. 90 |

Example: Cobb-Douglas Demand Functions | |

Demand | |

Normal and Inferior Goods | p. 96 |

Income Offer Curves and Engel Curves | p. 97 |

Some Examples | p. 99 |

Perfect Substitutes | |

Perfect Complements | |

Cobb-Douglas Preferences | |

Homothetic Preferences | |

Quasilinear Preferences | |

Ordinary Goods and Giffen Goods | p. 104 |

The Price Offer Curve and the Demand Curve | p. 106 |

Some Examples | p. 107 |

Perfect Substitutes | |

Perfect Complements | |

A Discrete Good | |

Substitutes and Complements | p. 111 |

The Inverse Demand Function | p. 112 |

Summary | p. 114 |

Review Questions | p. 115 |

Appendix | p. 116 |

Revealed Preference | |

The Idea of Revealed Preference | p. 119 |

From Revealed Preference to Preference | p. 120 |

Recovering Preferences | p. 122 |

The Weak Axiom of Revealed Preference | p. 124 |

Checking WARP | p. 125 |

The Strong Axiom of Revealed Preference | p. 128 |

How to Check SARP | p. 129 |

Index Numbers | p. 130 |

Price Indices | p. 132 |

Example: Indexing Social Security Payments Summary | p. 135 |

Review Questions | p. 135 |

Slutsky Equation | |

The Substitution Effect | p. 137 |

Example: Calculating the Substitution Effect The Income Effect | p. 141 |

Example: Calculating the Income Effect Sign of the Substitution Effect | p. 142 |

The Total Change in Demand | p. 143 |

Rates of Change | p. 144 |

The Law of Demand | p. 147 |

Examples of Income and Substitution Effects | p. 147 |

Example: Rebating a Tax Another Substitution Effect | p. 151 |

Compensated Demand Curves | p. 154 |

Summary | p. 154 |

Review Questions | p. 155 |

Appendix | p. 155 |

Example: Rebating a Small Tax | |

Buying and Selling | |

Net and Gross Demands | p. 158 |

The Budget Constraint | p. 159 |

Changing the Endowment | p. 161 |

Price Changes | p. 162 |

Offer Curves and Demand Curves | p. 165 |

The Slutsky Equation Revisited | p. 166 |

Use of the Slutsky Equation | p. 170 |

Example: Calculating the Endowment Income Effect Labor Supply | p. 171 |

The Budget Constraint | |

Comparative Statics of Labor Supply | p. 172 |

Example: Overtime and the Supply of Labor Summary | p. 176 |

Review Questions | p. 177 |

Appendix | p. 177 |

Intertemporal Choice | |

The Budget Constraint | p. 180 |

Preferences for Consumption | p. 183 |

Comparative Statics | p. 184 |

The Slutsky Equation and Intertemporal Choice | p. 185 |

Inflation | p. 187 |

Present Value: A Closer Look | p. 189 |

Analyzing Present Value for Several Periods | p. 191 |

Use of Present Value | p. 192 |

Example: Valuing a Stream of Payments Example: The True Cost of a Credit Card Bonds | p. 195 |

Example: Installment Loans Taxes | p. 197 |

Example: Scholarships and Savings Choice of the Interest Rate | p. 198 |

Summary | p. 199 |

Review Questions | p. 199 |

Asset Markets | |

Rates of Return | p. 200 |

Arbitrage and Present Value | p. 202 |

Adjustments for Differences among Assets | p. 202 |

Assets with Consumption Returns | p. 203 |

Taxation of Asset Returns | p. 204 |

Applications | p. 205 |

Depletable Resources | |

When to Cut a Forest | |

Example: Gasoline Prices during the Gulf War Financial Institutions | p. 209 |

Summary | p. 210 |

Review Questions | p. 211 |

Appendix | p. 211 |

Uncertainty | |

Contingent Consumption | p. 213 |

Utility Functions and Probabilities | p. 217 |

Example: Some Examples of Utility Functions Expected Utility | p. 218 |

Why Expected Utility Is Reasonable | p. 219 |

Risk Aversion | p. 221 |

Example: The Demand for Insurance Diversification | p. 225 |

Risk Spreading | p. 225 |

Role of the Stock Market | p. 226 |

Summary | p. 227 |

Review Questions | p. 227 |

Appendix | p. 228 |

Example: The Effect of Taxation on Investment in Risky Assets | |

Risky Assets | |

Mean-Variance Utility | p. 231 |

Measuring Risk | p. 236 |

Equilibrium in a Market for Risky Assets | p. 238 |

How Returns Adjust | p. 239 |

Example: Ranking Mutual Funds Summary | p. 243 |

Review Questions | p. 243 |

Consumer's Surplus | |

Demand for a Discrete Good | p. 245 |

Constructing Utility from Demand | p. 246 |

Other Interpretations of Consumer's Surplus | p. 247 |

From Consumer's Surplus to Consumers' Surplus | p. 248 |

Approximating a Continuous Demand | p. 248 |

Quasilinear Utility | p. 248 |

Interpreting the Change in Consumer's Surplus | p. 249 |

Example: The Change in Consumer's Surplus Compensating and Equivalent Variation | p. 251 |

Example: Compensating and Equivalent Variations Example: Compensating and Equivalent Variation for Quasilinear Preferences Producer's Surplus | p. 255 |

Calculating Gains and Losses | p. 257 |

Summary | p. 258 |

Review Questions | p. 259 |

Appendix | p. 259 |

Example: A Few Demand Functions Example: CV, EV, and Consumer's Surplus | |

Market Demand | |

From Individual to Market Demand | p. 262 |

The Inverse Demand Function | p. 264 |

Example: Adding Up "Linear" Demand Curves Discrete Goods | p. 265 |

The Extensive and the Intensive Margin | p. 265 |

Elasticity | p. 266 |

Example: The Elasticity of a Linear Demand Curve Elasticity and Demand | p. 268 |

Elasticity and Revenue | p. 269 |

Example: Strikes and Profits Constant Elasticity Demands | p. 272 |

Elasticity and Marginal Revenue | p. 273 |

Example: Setting a Price Marginal Revenue Curves | p. 275 |

Income Elasticity | p. 276 |

Summary | p. 277 |

Review Questions | p. 278 |

Appendix | p. 279 |

Example: The Laffer Curve Example: Another Expression for Elasticity | |

Equilibrium | |

Supply | p. 285 |

Market Equilibrium | p. 285 |

Two Special Cases | p. 286 |

Inverse Demand and Supply Curves | p. 287 |

Example: Equilibrium with Linear Curves Comparative Statics | p. 289 |

Example: Shifting Both Curves Taxes | p. 290 |

Example: Taxation with Linear Demand and Supply Passing Along a Tax | p. 294 |

The Deadweight Loss of a Tax | p. 296 |

Example: The Market for Loans Example: Food Subsidies Pareto Efficiency | p. 302 |

Example: Waiting in Line Summary | p. 304 |

Review Questions | p. 305 |

Auctions | |

Classification of Auctions | p. 307 |

Bidding Rules | |

Auction Design | p. 308 |

Problems with Auctions | p. 311 |

The Winner's Curse | p. 312 |

Summary | p. 312 |

Review Questions | p. 313 |

Technology | |

Inputs and Outputs | p. 314 |

Describing Technological Constraints | p. 315 |

Examples of Technology | p. 316 |

Fixed Proportions | |

Perfect Substitutes | |

Cobb-Douglas | |

Properties of Technology | p. 318 |

The Marginal Product | p. 320 |

The Technical Rate of Substitution | p. 320 |

Diminishing Marginal Product | p. 321 |

Diminishing Technical Rate of Substitution | p. 321 |

The Long Run and the Short Run | p. 322 |

Returns to Scale | p. 322 |

Summary | p. 324 |

Review Questions | p. 325 |

Profit Maximization | |

Profits | p. 326 |

The Organization of Firms | p. 328 |

Profits and Stock Market Value | p. 328 |

Fixed and Variable Factors | p. 330 |

Short-Run Profit Maximization | p. 330 |

Comparative Statics | p. 332 |

Profit Maximization in the Long Run | p. 333 |

Inverse Factor Demand Curves | p. 334 |

Profit Maximization and Returns to Scale | p. 335 |

Revealed Profitability | p. 336 |

Example: How Do Farmers React to Price Supports? Cost Minimization | p. 340 |

Summary | p. 340 |

Review Questions | p. 341 |

Appendix | p. 342 |

Cost Minimization | |

Cost Minimization | p. 344 |

Example: Minimizing Costs for Specific Technologies Revealed Cost Minimization | p. 348 |

Returns to Scale and the Cost Function | p. 349 |

Long-Run and Short-Run Costs | p. 351 |

Fixed and Quasi-Fixed Costs | p. 353 |

Sunk Costs | p. 353 |

Summary | p. 354 |

Review Questions | p. 354 |

Appendix | p. 355 |

Cost Curves | |

Average Costs | p. 358 |

Marginal Costs | p. 360 |

Marginal Costs and Variable Costs | p. 362 |

Example: Specific Cost Curves Example: Marginal Cost Curves for Two Plants Long-Run Costs | p. 366 |

Discrete Levels of Plant Size | p. 368 |

Long-Run Marginal Costs | p. 370 |

Summary | p. 371 |

Review Questions | p. 372 |

Appendix | p. 372 |

Firm Supply | |

Market Environments | p. 374 |

Pure Competition | p. 375 |

The Supply Decision of a Competitive Firm | p. 377 |

An Exception | p. 379 |

Another Exception | p. 380 |

Example: Pricing Operating Systems The Inverse Supply Function | p. 382 |

Profits and Producer's Surplus | p. 382 |

Example: The Supply Curve for a Specific Cost Function The Long-Run Supply Curve of a Firm | p. 386 |

Long-Run Constant Average Costs | p. 388 |

Summary | p. 389 |

Review Questions | p. 390 |

Appendix | p. 390 |

Industry Supply | |

Short-Run Industry Supply | p. 392 |

Industry Equilibrium in the Short Run | p. 393 |

Industry Equilibrium in the Long Run | p. 394 |

The Long-Run Supply Curve | p. 396 |

Example: Taxation in the Long Run and in the Short Run The Meaning of Zero profits | p. 400 |

Fixed Factors and Economic Rent | p. 401 |

Example: Taxi Licenses in New York City Economic Rent | p. 401 |

Rental Rates and Prices | p. 405 |

Example: Liquor Licenses The Politics of Rent | p. 406 |

Example: Farming the Government Energy Policy | p. 408 |

Two-Tiered Oil Pricing | |

Price Controls | |

The Entitlement Program | |

Summary | p. 412 |

Review Questions | p. 413 |

Monopoly | |

Maximizing Profits | p. 415 |

Linear Demand Curve and Monopoly | p. 416 |

Markup Pricing | p. 418 |

Example: The Impact of Taxes on a Monopolist Inefficiency of Monopoly | p. 420 |

Deadweight Loss of Monopoly | p. 425 |

Example: The Optimal Life of a Patent Natural Monopoly | p. 425 |

What Causes Monopolies? | p. 427 |

Example: Diamonds Are Forever Example: Pooling in Auction Markets Summary | p. 430 |

Review Questions | p. 431 |

Appendix | p. 432 |

Monopoly Behavior | |

Price Discrimination | p. 434 |

First-Degree Price Discrimination | p. 434 |

Second-Degree Price Discrimination | p. 436 |

Example: Price Discrimination in Airfares Third-Degree Price Discrimination | p. 440 |

Example: Linear Demand Curves Example: Calculating Optimal Price Discrimination Example: Price Discrimination in Acade mic Journals Bundling | p. 444 |

Example: Software Suites Two-Part Tariffs | p. 446 |

Monopolistic Competition | p. 448 |

A Location Model of Product Differentiation | p. 451 |

Product Differentiation | p. 453 |

More Vendors | p. 453 |

Summary | p. 454 |

Review Questions | p. 455 |

Factor Markets | |

Monopoly in the Output Market | p. 456 |

Monopsony | p. 459 |

Example: The Minimum Wage Upstream and Downstream Monopolies | p. 463 |

Summary | p. 465 |

Review Questions | p. 466 |

Appendix | p. 466 |

Oligopoly | |

Choosing a Strategy | p. 469 |

Quantity Leadership | p. 469 |

The Follower's Problem | |

The Leader's Problem | |

Price Leadership | p. 475 |

Comparing Price Leadership and Quantity Leadership | p. 477 |

Simultaneous Quantity Setting | p. 477 |

An Example of Cournot Equilibrium | p. 479 |

Adjustment to Equilibrium | p. 481 |

Many Firms in Cournot Equilibrium | p. 481 |

Simultaneous Price Setting | p. 482 |

Collusion | p. 483 |

Punishment Strategies | p. 486 |

Example: Price Matching and Competition Example: Voluntary Export RestraintsComparison of the Solutions | p. 489 |

Summary | p. 490 |

Review Questions | p. 491 |

Game Theory | |

The Payoff Matrix of a Game | p. 492 |

Nash Equilibrium | p. 494 |

Mixed Strategies | p. 495 |

The Prisoner's Dilemma | p. 496 |

Repeated Games | p. 498 |

Enforcing a Cartel | p. 499 |

Example: Tit for Tat in Airline Pricing Sequential Games | p. 501 |

A Game of Entry Deterrence | p. 503 |

Summary | p. 505 |

Review Questions | p. 505 |

Exchange | |

The Edgeworth Box | p. 508 |

Trade | p. 510 |

Pareto Efficient Allocations | p. 511 |

Market Trade | p. 513 |

The Algebra of Equilibrium | p. 515 |

Walras' Law | p. 517 |

Relative Prices | p. 518 |

Example: An Algebraic Example of Equilibrium The Existence of Equilibrium | p. 520 |

Equilibrium and Efficiency | p. 521 |

The Algebra of Efficiency | p. 522 |

Example: Monopoly in the Edgeworth Box Efficiency and Equilibrium | p. 525 |

Implications of the First Welfare Theorem | p. 527 |

Implications of the Second Welfare Theorem | p. 529 |

Summary | p. 531 |

Review Questions | p. 532 |

Appendix | p. 532 |

Production | |

The Robinson Crusoe Economy | p. 534 |

Crusoe, Inc. | p. 536 |

The Firm | p. 537 |

Robinson's Problem | p. 538 |

Putting Them Together | p. 538 |

Different Technologies | p. 540 |

Production and the First Welfare Theorem | p. 542 |

Production and the Second Welfare Theorem | p. 543 |

Production Possibilities | p. 543 |

Comparative Advantage | p. 545 |

Pareto Efficiency | p. 547 |

Castaways, Inc. | p. 549 |

Robinson and Friday as Consumers | p. 551 |

Decentralized Resource Allocation | p. 552 |

Summary | p. 553 |

Review Questions | p. 553 |

Appendix | p. 554 |

Welfare | |

Aggregation of Preferences | p. 557 |

Social Welfare Functions | p. 559 |

Welfare Maximization | p. 561 |

Individualistic Social Welfare Functions | p. 563 |

Fair Allocations | p. 564 |

Envy and Equity | p. 565 |

Summary | p. 567 |

Review Questions | p. 567 |

Appendix | p. 568 |

Externalities | |

Smokers and Nonsmokers | p. 570 |

Quasilinear Preferences and the Coase Theorem | p. 573 |

Production Externalities | p. 575 |

Example: Pollution Vouchers Interpretation of the Conditions | p. 580 |

Market Signals | p. 583 |

The Tragedy of the Commons | p. 583 |

Example: Overfishing Automobile Pollution | p. 587 |

Summary | p. 588 |

Review Questions | p. 589 |

Law and Economics | |

Crime and Punishment | p. 590 |

Qualifications | p. 593 |

Liability Law | p. 598 |

Bilateral Accidents | p. 596 |

Treble Damages in Antitrust Law | p. 598 |

Seeking to Be Damaged | |

Which Model Is Right? | p. 601 |

Summary | p. 601 |

Review Questions | p. 601 |

Information Technology | |

Systems Competition | p. 603 |

Lock-In | p. 603 |

A Model of Competition with Switching Costs | |

Network Externalities | p. 606 |

Markets with Network Externalities | p. 606 |

Market Dynamics | p. 608 |

Example: Network Externalities in Computer Software Implications of Network Externalities | p. 611 |

Rights Management | p. 612 |

Example: Video Rental Sharing Intellectual Property | p. 614 |

Summary | p. 616 |

Review Questions | p. 616 |

Public Goods | |

When to Provide a Public Good? | p. 618 |

Private Provision of the Public Good | p. 622 |

Free Riding | p. 622 |

Different Levels of the Public Good | p. 624 |

Quasilinear Preferences and Public Goods | p. 626 |

Example: Pollution Revisited The Free Rider Problem | p. 628 |

Comparison to Private Goods | p. 630 |

Voting | p. 631 |

Example: Agenda Manipulation Demand Revelation | p. 634 |

Example: An Example of the Clarke Tax Problems with the Clarke Tax | p. 638 |

Summary | p. 639 |

Review Questions | p. 639 |

Appendix | p. 640 |

Asymmetric Information | |

The Market for Lemons | p. 642 |

Quality Choice | p. 643 |

Choosing the Quality | |

Adverse Selection | p. 645 |

Moral Hazard | p. 647 |

Moral Hazard and Adverse Selection | p. 648 |

Signaling | p. 649 |

Example: The Sheepskin Effect Incentives | p. 653 |

Example: Voting Rights in the Corporation Example: Chinese Economic Reforms Asymmetric Information | p. 658 |

Example: Monitoring Costs Example: The Grameen Bank Summary | p. 661 |

Review Questions | p. 662 |

Mathematical Appendix | |

Functions | p. 1 |

Graphs | p. 2 |

Properties of Functions | p. 2 |

Inverse Functions | p. 3 |

Equations and Identities | p. 3 |

Linear Functions | p. 4 |

Changes and Rates of Change | p. 4 |

Slopes and Intercepts | p. 5 |

Absolute Values and Logarithms | p. 6 |

Derivatives | p. 6 |

Second Derivatives | p. 7 |

The Product Rule and the Chain Rule | p. 8 |

Partial Derivatives | p. 8 |

Optimization | p. 9 |

Constrained Optimization | p. 10 |

Answers | p. 11 |

Index | p. 31 |

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