ContentsNOT FOR SALE Preface xiii CHAPTER 3 The Behavior of Consumers 45 3.1 Tastes 45 CHAPTER 1 Indifference Curves 45 Supply, Demand, Marginal Values 48 and Equilibrium 1 More on Indifference Curves 53 1.1 Demand 1 3.2 The Budget Line and the Demand versus Quantity Consumer’s Choice 53 Demanded 1 The Budget Line 54 Demand Curves 2 The Consumer’s Choice 56 Changes in Demand 3 Market Demand 7 3.3 Applications of Indifference The Shape of the Demand Curve 7 Curves 59 The Wide Scope of Economics 10 Standards of Living 59 The Least Bad Tax 64 1.2 Supply 10 Summary 69 Supply versus Quantity Supplied 10 Author Commentary 69 1.3 Equilibrium 13 Review Questions 70 The Equilibrium Point 13 Numerical Exercises 70 Changes in the Equilibrium Point 15 Problem Set 71 Summary 23 Appendix to Chapter 3 77 Author Commentary 24 Cardinal Utility 77 Review Questions 25 The Consumer’s Optimum 79 Numerical Exercises 25 Problem Set 26 CHAPTER 4 Consumers in the Marketplace 81 CHAPTER 2 4.1 Changes in Income 81 Prices, Costs, and the Gains Changes in Income and Changes in the from Trade 31 Budget Line 81 Changes in Income and Changes in the 2.1 Prices 31 Optimum Point 82 Absolute versus Relative Prices 32 The Engel Curve 84 Some Applications 34 4.2 Changes in Price 85 2.2 Costs, Efficiency, and Gains from Changes in Price and Changes in the Trade 35 Budget Line 85 Costs and Efficiency 35 Changes in Price and Changes in the Optimum Point 86 Specialization and the Gains from Trade 37 The Demand Curve 88 Why People Trade 39 4.3 Income and Substitution Summary 41 Effects 90 Author Commentary 41 Two Effects of a Price Increase 90 Review Question 41 Why Demand Curves Slope Numerical Exercises 42 Downward 94 Problem Set 42 The Compensated Demand Curve 99 vi 45185_00_fm_pi-xxii.indd vi 14/07/10 7:49 AM CONTENTS NOT FOR SALE vii 4.4 Elasticities 100 Short-Run Average Cost versus Income Elasticity of Demand 100 Long-Run Average Cost 163 Price Elasticity of Demand 102 Summary 164 Summary 105 Author Commentary 165 Author Commentary 106 Review Questions 165 Review Questions 106 Numerical Exercises 166 Numerical Exercises 107 Problem Set 167 Problem Set 109 CHAPTER 7 CHAPTER 5 Competition 171 The Behavior of Firms 115 7.1 The Competitive Firm 171 5.1 Weighing Costs and Revenue 173 The Firm’s Supply Decision 174 Benefits 116 Shutdowns 177 A Farmer’s Problem 116 The Elasticity of Supply 180 The Equimarginal Principle 120 7.2 The Competitive Industry in the 5.2 Firms in the Marketplace 121 Revenue 122 Short Run 180 Defining the Short Run 180 Costs 125 The Competitive Industry’s Short-Run Summary 131 Supply Curve 181 Author Commentary 131 Supply, Demand, and Equilibrium 182 Review Questions 131 Competitive Equilibrium 182 Numerical Exercises 132 The Industry’s Costs 185 Problem Set 133 7.3 The Competitive Firm in the Long Run 186 CHAPTER 6 Long-Run Marginal Cost and Production and Costs 137 Supply 186 Profit and the Exit Decision 186 6.1 Production and Costs in the The Firm’s Long-Run Supply Short Run 137 Curve 188 The Total, Marginal, and Average Products of Labor 138 7.4 The Competitive Industry in the Costs in the Short Run 141 Long Run 189 The Long-Run Supply Curve 190 6.2 Production and Costs in the Equilibrium 193 Long Run 147 Changes in Equilibrium 195 Isoquants 147 Application: The Government as a Choosing a Production Process 151 Supplier 198 The Long-Run Cost Curves 154 Some Lessons Learned 199 Returns to Scale and the Shape of the Long-Run Cost Curves 157 7.5 Relaxing the Assumptions 199 The Break-Even Price 200 6.3 Relations Between the Short Run Constant-Cost Industries 201 and the Long Run 159 Increasing-Cost Industries 201 From Isoquants to Short-Run Total Decreasing-Cost Industries 203 Cost 159 Equilibrium 204 From Isoquants to Long-Run Total Cost 160 7.6 Applications 204 Short-Run Total Cost versus Long-Run Removing a Rent Control 204 Total Cost 161 A Tax on Motel Rooms 207 A Multitude of Short Runs 162 Tipping the Busboy 208 45185_00_fm_pi-xxii.indd vii 14/07/10 7:49 AM viii NOTCONTENTS FOR SALE 7.7 Using the Competitive Model 209 9.2 Asymmetric Information 297 Summary 211 Signaling: Should Colleges Be Author Commentary 212 Outlawed? 297 Review Questions 212 Adverse Selection and the Market for Lemons 300 Numerical Exercises 213 Moral Hazard 302 Problem Set 217 Principal–Agent Problems 303 A Theory of Unemployment 306 CHAPTER 8 Welfare Economics and the Gains 9.3 Financial Markets 308 Efficient Markets for Financial from Trade 223 Securities 308 8.1 Measuring the Gains from Stock Market Crashes 310 Trade 224 Summary 311 Consumers’ and Producers’ Author Commentary 311 Surplus 224 Review Questions 311 8.2 The Efficiency Criterion 233 Problem Set 312 Consumers’ Surplus and the Efficiency Criterion 234 Understanding Deadweight Loss 238 CHAPTER 10 Other Normative Criteria 241 Monopoly 317 8.3 Examples and Applications 242 Subsidies 242 10.1 Price and Output under Price Ceilings 244 Monopoly 318 Tariffs 247 Monopoly Pricing 318 Theories of Value 252 Elasticity and Marginal Revenue 319 8.4 General Equilibrium and the Measuring Monopoly Invisible Hand 254 Power 320 The Fundamental Theorem of Welfare Welfare 323 Economics 255 Monopoly and Public Policy 324 An Edgeworth Box Economy 257 General Equilibrium with 10.2 Sources of Monopoly Production 260 Power 328 Summary 265 Natural Monopoly 328 Author Commentary 266 Patents 330 Review Questions 266 The History of Photography: Patents in Problem Set 267 the Public Domain 331 Appendix to Chapter 8 275 Resource Monopolies 332 Normative Criteria 275 Economies of Scope 332 Some Normative Criteria 276 Legal Barriers to Entry 332 Optimal Population 280 Author Commentary 281 10.3 Price Discrimination 333 First-Degree Price Discrimination 334 Third-Degree Price Discrimination 336 CHAPTER 9 Two-Part Tariffs 345 Knowledge and Information 283 Summary 348 9.1 The Informational Content of Author Commentary 349 Prices 283 Review Questions 349 Prices and Information 283 Numerical Exercises 350 The Costs of Misallocation 288 Problem Set 351 45185_00_fm_pi-xxii.indd viii 14/07/10 7:49 AM CONTENTS NOT FOR SALE ix CHAPTER 11 Pareto Optima versus Nash Market Power, Collusion, Equilibria 410 and Oligopoly 357 12.2 Sequential Games 411 An Oligopoly Problem 411 11.1 Acquiring Market Power 358 Summary 413 Mergers 358 Author Commentary 414 Horizontal Integration 358 Problem Set 414 Vertical Integration 361 Predatory Pricing 363 Resale Price Maintenance 365 CHAPTER 13 11.2 Collusion and the Prisoner’s External Costs and Benefits 417 Dilemma: An Introduction to 13.1 The Problem of Pollution 417 Game Theory 369 Private Costs, Social Costs, and Game Theory and the Prisoner’s Externalities 417 Dilemma 370 Government Policies 420 The Prisoner’s Dilemma and the Breakdown of Cartels 373 13.2 The Coase Theorem 424 The Doctor and the Confectioner 425 11.3 Regulation 377 The Coase Theorem 427 Examples of Regulation 377 The Coase Theorem in the What Can Regulators Regulate? 382 Marketplace 429 Creative Response and Unexpected External Benefits 432 Consequences 382 Income Effects and the Coase Positive Theories of Regulation 384 Theorem 433 11.4 Oligopoly 385 13.3 Transactions Costs 436 Contestable Markets 385 Trains, Sparks, and Crops 436 Oligopoly with a Fixed Number The Reciprocal Nature of the of Firms 387 Problem 438 11.5 Monopolistic Competition and Sources of Transactions Costs 439 Product Differentiation 390 13.4 The Law and Economics 443 Monopolistic Competition 390 The Law of Torts 443 The Economics of Location 392 A Positive Theory of the Common Summary 392 Law 446 Author Commentary 393 Normative Theories of the Common Review Questions 393 Law 448 Numerical Exercises 394 Optimal Systems of Law 449 Problem Set 396 Summary 449 Author Commentary 450 Review Questions 450 CHAPTER 12 Problem Set 451 The Theory of Games 399 CHAPTER 14 12.1 Game Matrices 399 Pigs in a Box 399 Common Property and Public The Prisoner’s Dilemma Revisited 401 Goods 459 Pigs in a Box Revisited 402 The Copycat Game 405 14.1 The Tragedy of the Nash Equilibrium as a Solution Commons 459 Concept 405 The Springfield Aquarium 459 Mixed Strategies 407 It Can Pay to Be Different 463 Pareto Optima 408 Common Property 465 45185_00_fm_pi-xxii.indd ix 14/07/10 7:49 AM x NOTCONTENTS FOR SALE 14.2 Public Goods 467 16.2 Labor Market Equilibrium 509 Some Market Failures 467 Changes in Nonlabor Income 510 The Provision of Public Goods 468 Changes in Productivity 510 The Role of Government 469 16.3 Differences in Wages 514 Schemes for Eliciting Information 471 Human Capital 514 Reaching the Efficient Outcome 471 Compensating Differentials 515 Summary 472 Access to Capital 516 Review Questions 473 Numerical Exercises 473 16.4 Discrimination 517 Problem Set 473 Theories of Discrimination 518 Wage Differences Due to Worker Preferences 519 CHAPTER 15 Human Capital Inheritance 519 The Demand for Factors of Summary 520 Review Questions 521 Production 477 Problem Set 521 15.1 The Firm’s Demand for Factors in the Short Run 477 CHAPTER 17 The Marginal Revenue Product of Labor 477 Allocating Goods Over The Algebra of Profit Maximization 479 Time 525 The Effect of Plant Size 482 17.1 Bonds and Interest Rates 525 15.2 The Firm’s Demand for Factors Relative Prices, Interest Rates, and in the Long Run 483 Present Values 526 Constructing the Long-Run Labor Bonds Denominated in Dollars 529 Demand Curve 483 Default Risk 530 Substitution and Scale Effects 485 17.2 Applications 531 Relationships Between the Short Run Valuing a Productive Asset 531 and the Long Run 488 Valuing Durable Commodities: