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Principles of Microeconomics 10Th Edition the Pearson Series In TENTH EDITION Principles of Economics The Pearson Series in Economics Abel/Bernanke/Croushore Hartwick/Olewiler Parkin Macroeconomics* The Economics of Natural Resource Use Economics* Bade/Parkin Heilbroner/Milberg Perloff Foundations of Economics* The Making of the Economic Society Microeconomics* Berck/Helfand Heyne/Boettke/Prychitko Microeconomics: Theory and Applications The Economics of the Environment The Economic Way of Thinking with Calculus* Bierman/Fernandez Hoffman/Averett Perman/Common/McGilvray/Ma Game Theory with Economic Applications Women and the Economy: Family, Work, Natural Resources and Environmental Blanchard and Pay Economics Macroeconomics* Holt Phelps Blau/Ferber/Winkler Markets, Games and Strategic Behavior Health Economics The Economics of Women, Men and Work Hubbard/O’Brien Pindyck/Rubinfeld Boardman/Greenberg/Vining/ Economics* Microeconomics* Weimer Money, Banking, and the Financial System* Riddell/Shackelford/Stamos/ Cost-Benefit Analysis Hughes/Cain Schneider Boyer American Economic History Economics: A Tool for Critically Understanding Society Principles of Transportation Economics Husted/Melvin Branson International Economics Ritter/Silber/Udell Macroeconomic Theory and Policy Principles of Money, Banking & Financial Jehle/Reny Markets* Brock/Adams Advanced Microeconomic Theory The Structure of American Industry Roberts Johnson-Lans The Choice: A Fable of Free Trade and Bruce A Health Economics Primer Protection Public Finance and the American Economy Keat/Young Rohlf Carlton/Perloff Managerial Economics Introduction to Economic Reasoning Modern Industrial Organization Klein Ruffin/Gregory Case/Fair/Oster Mathematical Methods for Economics Principles of Economics Principles of Economics* Krugman/Obstfeld/Melitz Sargent Caves/Frankel/Jones International Economics: Theory & Policy* Rational Expectations and Inflation World Trade and Payments: An Introduction Laidler Sawyer/Sprinkle Chapman The Demand for Money International Economics Environmental Economics: Theory, Leeds/von Allmen Application, and Policy Scherer The Economics of Sports Industry Structure, Strategy, and Public Cooter/Ulen Leeds/von Allmen/Schiming Policy Law & Economics Economics* Schiller Downs Lipsey/Ragan/Storer The Economics of Poverty and An Economic Theory of Democracy Economics* Discrimination Ehrenberg/Smith Lynn Sherman Modern Labor Economics Economic Development: Theory and Practice Market Regulation Ekelund/Ressler/Tollison for a Divided World Silberberg Economics* Miller Principles of Microeconomics Farnham Economics Today* Stock/Watson Economics for Managers Understanding Modern Economics Introduction to Econometrics Folland/Goodman/Stano Miller/Benjamin Introduction to Econometrics, Brief Edition The Economics of Health and Health Care The Economics of Macro Issues Studenmund Fort Miller/Benjamin/North Using Econometrics: A Practical Guide Sports Economics The Economics of Public Issues Tietenberg/Lewis Froyen Mills/Hamilton Environmental and Natural Resource Macroeconomics Urban Economics Economics Fusfeld Mishkin Environmental Economics and Policy The Age of the Economist The Economics of Money, Banking, and Todaro/Smith Gerber Financial Markets* Economic Development International Economics* The Economics of Money, Banking, and Waldman Gordon Financial Markets, Business School Edition* Microeconomics Macroeconomics* Macroeconomics: Policy and Practice* Waldman/Jensen Greene Murray Industrial Organization: Theory and Econometric Analysis Econometrics: A Modern Introduction Practice Gregory Nafziger Weil Essentials of Economics The Economics of Developing Countries Economic Growth Gregory/Stuart O’Sullivan/Sheffrin/Perez Williamson Russian and Soviet Economic Performance Economics: Principles, Applications Macroeconomics and Structure and Tools* * denotes titles Log onto www.myeconlab.com to learn more. TENTH EDITION Principles of Economics Karl E. Case Wellesley College Ray C. Fair Yale University Sharon M. Oster Yale University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Dedicated To Professor Richard A. Musgrave and Professor Robert M. Solow and Professor Richard Caves Editor in Chief: Donna Battista Image Manager: Rachel Youdelman AVP/Executive Editor: David Alexander Photo Researcher: Diahanne Lucas Dowridge Editorial Project Managers: Melissa Pellerano, Lindsey Full-Service Project Management/Composition: GEX Sloan Publishing Services Editorial Assistant: Megan Cadigan Typeface: 10/12 Minion AVP/Executive Marketing Manager: Lori DeShazo Text Permission Project Supervisor: Michael Joyce Marketing Assistant: Kimberly Lovato Director of Media: Susan Schoenberg Managing Editor: Nancy Fenton Content Lead, MyEconLab: Noel Lotz Senior Production Project Manager: Nancy Freihofer Senior Media Producer: Melissa Honig Senior Manufacturing Buyer: Carol Melville Supplements Production Coordinator: Alison Eusden Senior Art Director: Jonathan Boylan Printer/Binder: Courier, Kendallville Cover Design: Jonathan Boylan Cover Printer: Lehigh Phoenix Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text. Copyright © 2012, 2009, 2007, 2004, 2003, Pearson Education, Inc. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 501 Boylston Street, Suite 900, Boston, MA 02116, fax your request to 617 671-3447, or e-mail at www.pearsoned.com/legal/permission.htm. Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks. Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps. Library of Congress Cataloging-in-Publication Data Case, Karl E. Principles of economics / Karl E. Case, Ray C. Fair, Sharon M. Oster. — 10th ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-13-255291-2 ISBN-10: 0-13-255291-4 1. Economics. I. Fair, Ray C. II. Oster, Sharon M. III. Title. HB171.5.C3123 2012 330—dc22 2010049925 10 9 8 7 6 5 4 3 2 1 ISBN 13: 978-0-13-255291-2 ISBN 10: 0-13-255291-4 About the Authors Karl E. Case is Professor of Economics Emeritus at Wellesley College where he has taught for 34 years and served several tours of duty as Department Chair. He is a Senior Fellow at the Joint Center for Housing Studies at Harvard University and a founding partner in the real estate research firm of Fiserv Case Shiller Weiss, which produces the S&P Case-Shiller Index of home prices. He serves as a member of the Index Advisory Committee of Standard and Poor’s, and along with Ray Fair he serves on the Academic Advisory Board of the Federal Reserve Bank of Boston. Before coming to Wellesley, he served as Head Tutor in Economics (director of undergradu- ate studies) at Harvard, where he won the Allyn Young Teaching Prize. He was Associate Editor of the Journal of Economic Perspectives and the Journal of Economic Education, and he was a member of the AEA’s Committee on Economic Education. Professor Case received his B.A. from Miami University in 1968; spent three years on active duty in the Army, and received his Ph.D. in Economics from Harvard University in 1976. Professor Case’s research has been in the areas of real estate, housing, and public finance. He is author or coauthor of five books, including Principles of Economics, Economics and Tax Policy, and Property Taxation: The Need for Reform, and he has published numerous articles in profes- sional journals. For the last 25 years, his research has focused on real estate markets and prices. He has authored numerous professional articles, many of which attempt to isolate the causes and consequences of boom and bust cycles and their relationship to regional and national economic performance. Ray C. Fair is Professor of Economics at Yale University. He is a member of the Cowles Foundation at Yale and a Fellow of the Econometric Society. He received a B.A. in Economics from Fresno State College in 1964 and a Ph.D. in Economics from MIT in 1968. He taught at Princeton University from 1968 to 1974 and has been at Yale since 1974. Professor Fair’s research has primarily been in the areas of macroeconomics and econometrics, with particular emphasis on macroeconometric model building. He also has done work in the areas of finance, voting behavior, and aging in sports. His publications include Specification, Estimation, and Analysis of Macroeconometric Models (Harvard Press, 1984); Testing Macroeconometric Models (Harvard Press, 1994); and Estimating How the Macroeconomy Works (Harvard Press, 2004). Professor Fair has taught introductory and intermediate macroeconomics at Yale. He has also taught graduate courses in macroeconomic theory and macroeconometrics. Professor Fair’s U.S. and multicountry models are available for use on the Internet free of charge. The address is http://fairmodel.econ.yale.edu. Many teachers have found that having stu-
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