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Abstract
For all Intermediate Microeconomics courses at the undergraduate or graduate level.
Microeconomics has become a market leader because Perloff presents theory in the context of real, data-driven examples, and then develops intuition through his hallmark Solved Problems. Students gain a practical perspective, seeing how models connect to real-world decisions being made in today’s firms and policy debates.
The Seventh Edition is substantially updated and modified based on the extremely helpful suggestions of faculty and students who used the first six editions. Every chapter is thoroughly revised and includes new or updated examples and applications.
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Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover | Cover | ||
| Title Page | 3 | ||
| Copyright Page | 4 | ||
| Supplements | 20 | ||
| Acknowledgments | 20 | ||
| Contents | 6 | ||
| Preface | 14 | ||
| Chapter 1 Introduction | 25 | ||
| 1.1 Microeconomics: The Allocation of Scarce Resources | 25 | ||
| Trade-Offs | 26 | ||
| Who Makes the Decisions | 26 | ||
| Prices Determine Allocations | 26 | ||
| 1.2 Models | 27 | ||
| APPLICATION Income Threshold Model and China | 27 | ||
| Simplifications by Assumption | 27 | ||
| Testing Theories | 28 | ||
| Positive Versus Normative | 29 | ||
| 1.3 Uses of Microeconomic Models | 30 | ||
| Summary | 31 | ||
| Chapter 2 Supply and Demand | 32 | ||
| CHALLENGE Quantities and Prices of Genetically Modified Foods | 32 | ||
| 2.1 Demand | 33 | ||
| The Demand Curve | 34 | ||
| APPLICATION Calorie Counting at Starbucks | 37 | ||
| The Demand Function | 38 | ||
| Solved Problem 2.1 | 39 | ||
| Summing Demand Curves | 40 | ||
| APPLICATION Aggregating Corn Demand Curves | 40 | ||
| 2.2 Supply | 41 | ||
| The Supply Curve | 41 | ||
| The Supply Function | 43 | ||
| Summing Supply Curves | 44 | ||
| Effects of Government Import Policies on Supply Curves | 44 | ||
| Solved Problem 2.2 | 45 | ||
| 2.3 Market Equilibrium | 46 | ||
| Using a Graph to Determine the Equilibrium | 46 | ||
| Using Math to Determine the Equilibrium | 46 | ||
| Forces That Drive the Market to Equilibrium | 47 | ||
| 2.4 Shocking the Equilibrium | 48 | ||
| Effects of a Shift in the Demand Curve | 48 | ||
| Solved Problem 2.3 | 49 | ||
| Effects of a Shift in the Supply Curve | 50 | ||
| 2.5 Equilibrium Effects of Government Interventions | 50 | ||
| Policies That Shift Supply Curves | 51 | ||
| APPLICATION Occupational Licensing | 51 | ||
| Solved Problem 2.4 | 52 | ||
| Policies That Cause Demand to Differ from Supply | 53 | ||
| APPLICATION Price Controls Kill | 55 | ||
| Solved Problem 2.5 | 57 | ||
| Why Supply Need Not Equal Demand | 57 | ||
| 2.6 When to Use the Supply-and-Demand Model | 58 | ||
| CHALLENGE SOLUTION Quantities and Prices of Genetically Modified Foods | 59 | ||
| Summary | 60 | ||
| Questions | 61 | ||
| Chapter 3 Applying the Supply-and-Demand Model | 66 | ||
| CHALLENGE Who Pays the Gasoline Tax? | 66 | ||
| 3.1 How Shapes of Supply and Demand Curves Matter | 67 | ||
| 3.2 Sensitivity of the Quantity Demanded to Price | 68 | ||
| Price Elasticity of Demand | 69 | ||
| Solved Problem 3.1 | 70 | ||
| Elasticity Along the Demand Curve | 70 | ||
| Demand Elasticity and Revenue | 73 | ||
| Solved Problem 3.2 | 73 | ||
| APPLICATION Do Farmers Benefit from a Major Drought? | 74 | ||
| Demand Elasticities over Time | 75 | ||
| Other Demand Elasticities | 75 | ||
| 3.3 Sensitivity of the Quantity Supplied to Price | 77 | ||
| Elasticity of Supply | 77 | ||
| Elasticity Along the Supply Curve | 78 | ||
| Supply Elasticities over Time | 79 | ||
| APPLICATION Oil Drilling in the Arctic National Wildlife Refuge | 79 | ||
| Solved Problem 3.3 | 80 | ||
| 3.4 Effects of a Sales Tax | 82 | ||
| Equilibrium Effects of a Specific Tax | 82 | ||
| The Equilibrium Is the Same No Matter Who Is Taxed | 84 | ||
| Solved Problem 3.4 | 84 | ||
| Firms and Customers Share the Burden of the Tax | 85 | ||
| APPLICATION Taxes to Prevent Obesity | 86 | ||
| Solved Problem 3.5 | 87 | ||
| Ad Valorem and Specific Taxes Have Similar Effects | 87 | ||
| Solved Problem 3.6 | 88 | ||
| Subsidies | 89 | ||
| APPLICATION The Ethanol Subsidy | 90 | ||
| CHALLENGE SOLUTION Who Pays the Gasoline Tax? | 90 | ||
| Summary | 91 | ||
| Questions | 92 | ||
| Chapter 4 Consumer Choice | 96 | ||
| CHALLENGE Why Americans Buy More E-Books Than Do Germans | 96 | ||
| 4.1 Preferences | 98 | ||
| Properties of Consumer Preferences | 98 | ||
| APPLICATION You Can’t Have Too Much Money | 99 | ||
| Preference Maps | 100 | ||
| Solved Problem 4.1 | 102 | ||
| APPLICATION Indifference Curves Between Food and Clothing | 106 | ||
| 4.2 Utility | 106 | ||
| Utility Function | 106 | ||
| Ordinal Preferences | 107 | ||
| Utility and Indifference Curves | 107 | ||
| Marginal Utility | 109 | ||
| Utility and Marginal Rates of Substitution | 110 | ||
| 4.3 Budget Constraint | 110 | ||
| Slope of the Budget Constraint | 112 | ||
| Solved Problem 4.2 | 112 | ||
| Effect of a Change in Price on the Opportunity Set | 113 | ||
| Effect of a Change in Income on the Opportunity Set | 114 | ||
| Solved Problem 4.3 | 114 | ||
| 4.4 Constrained Consumer Choice | 114 | ||
| The Consumer’s Optimal Bundle | 115 | ||
| APPLICATION Substituting Alcohol for Marijuana | 116 | ||
| Solved Problem 4.4 | 117 | ||
| Optimal Bundles on Convex Sections of Indifference Curves | 118 | ||
| Buying Where More Is Better | 119 | ||
| Food Stamps | 120 | ||
| APPLICATION Benefiting from Food Stamps | 122 | ||
| 4.5 Behavioral Economics | 122 | ||
| Tests of Transitivity | 122 | ||
| Endowment Effect | 123 | ||
| APPLICATION Opt In Versus Opt Out | 124 | ||
| Salience and Bounded Rationality | 124 | ||
| APPLICATION Unaware of Taxes | 125 | ||
| CHALLENGE SOLUTION Why Americans Buy More E-Books Than Do Germans | 125 | ||
| Summary | 126 | ||
| Questions | 127 | ||
| Chapter 5 Applying Consumer Theory | 131 | ||
| CHALLENGE Per-Hour Versus Lump-Sum Childcare Subsidies | 131 | ||
| 5.1 Deriving Demand Curves | 132 | ||
| Indifference Curves and a Rotating Budget Line | 133 | ||
| Price-Consumption Curve | 134 | ||
| APPLICATION Smoking Versus Eating and Phoning | 135 | ||
| The Demand Curve Corresponds to the Price-Consumption Curve | 136 | ||
| Solved Problem 5.1 | 136 | ||
| 5.2 How Changes in Income Shift Demand Curves | 137 | ||
| Effects of a Rise in Income | 137 | ||
| Solved Problem 5.2 | 139 | ||
| Consumer Theory and Income Elasticities | 140 | ||
| APPLICATION Fast-Food Engel Curve | 143 | ||
| 5.3 Effects of a Price Change | 144 | ||
| Income and Substitution Effects with a Normal Good | 144 | ||
| Solved Problem 5.3 | 146 | ||
| Solved Problem 5.4 | 147 | ||
| APPLICATION Shipping the Good Stuff Away | 148 | ||
| Income and Substitution Effects with an Inferior Good | 148 | ||
| Solved Problem 5.5 | 149 | ||
| Compensating Variation and Equivalent Variation | 150 | ||
| APPLICATION What’s the Value of Using the Internet? | 150 | ||
| 5.4 Cost-of-Living Adjustments | 150 | ||
| Inflation Indexes | 151 | ||
| Effects of Inflation Adjustments | 153 | ||
| APPLICATION Paying Employees to Relocate | 154 | ||
| 5.5 Deriving Labor Supply Curves | 156 | ||
| Labor-Leisure Choice | 156 | ||
| Income and Substitution Effects | 159 | ||
| Solved Problem 5.6 | 160 | ||
| Shape of the Labor Supply Curve | 161 | ||
| APPLICATION Working After Winning the Lottery | 162 | ||
| Income Tax Rates and Labor Supply | 163 | ||
| CHALLENGE SOLUTION Per-Hour Versus Lump-Sum Childcare Subsidies | 165 | ||
| Summary | 166 | ||
| Questions | 167 | ||
| Chapter 6 Firms and Production | 171 | ||
| CHALLENGE Labor Productivity During Recessions | 171 | ||
| 6.1 The Ownership and Management of Firms | 172 | ||
| Private, Public, and Nonprofit Firms | 172 | ||
| APPLICATION Chinese State-Owned Enterprises | 173 | ||
| The Ownership of For-Profit Firms | 173 | ||
| The Management of Firms | 174 | ||
| What Owners Want | 174 | ||
| 6.2 Production Function | 175 | ||
| 6.3 Short-Run Production | 177 | ||
| Total Product | 177 | ||
| Marginal Product of Labor | 178 | ||
| Solved Problem 6.1 | 178 | ||
| Average Product of Labor | 179 | ||
| Graphing the Product Curves | 179 | ||
| Law of Diminishing Marginal Returns | 181 | ||
| APPLICATION Malthus and the Green Revolution | 182 | ||
| 6.4 Long-Run Production | 183 | ||
| Isoquants | 184 | ||
| APPLICATION A Semiconductor Integrated Circuit Isoquant | 186 | ||
| Substituting Inputs | 187 | ||
| Solved Problem 6.2 | 189 | ||
| 6.5 Returns to Scale | 190 | ||
| Constant, Increasing, and Decreasing Returns to Scale | 190 | ||
| Solved Problem 6.3 | 191 | ||
| APPLICATION Returns to Scale in Various Industries | 192 | ||
| Varying Returns to Scale | 193 | ||
| 6.6 Productivity and Technical Change | 195 | ||
| Relative Productivity | 195 | ||
| APPLICATION A Good Boss Raises Productivity | 195 | ||
| Innovations | 195 | ||
| APPLICATION Tata Nano’s Technical and Organizational Innovations | 197 | ||
| CHALLENGE SOLUTION Labor Productivity During Recessions | 197 | ||
| Summary | 199 | ||
| Questions | 199 | ||
| Chapter 7 Costs | 203 | ||
| CHALLENGE Technology Choice at Home Versus Abroad | 203 | ||
| 7.1 The Nature of Costs | 204 | ||
| Opportunity Costs | 204 | ||
| APPLICATION The Opportunity Cost of an MBA | 205 | ||
| Solved Problem 7 .1 | 205 | ||
| Costs of Durable Inputs | 206 | ||
| Sunk Costs | 207 | ||
| 7.2 Short-Run Costs | 207 | ||
| Short-Run Cost Measures | 208 | ||
| Short-Run Cost Curves | 210 | ||
| Production Functions and the Shape of Cost Curves | 211 | ||
| APPLICATION Short-Run Cost Curves for a Beer Manufacturer | 214 | ||
| Effects of Taxes on Costs | 215 | ||
| Solved Problem 7 .2 | 216 | ||
| Short-Run Cost Summary | 217 | ||
| 7.3 Long-Run Costs | 217 | ||
| All Costs Are Avoidable in the Long Run | 217 | ||
| Minimizing Cost | 217 | ||
| Isocost Line | 218 | ||
| Combining Cost and Production Information | 220 | ||
| Solved Problem 7 .3 | 222 | ||
| Factor Price Changes | 223 | ||
| Solved Problem 7 .4 | 223 | ||
| The Long-Run Expansion Path and the Long-Run Cost Function | 224 | ||
| Solved Problem 7 .5 | 226 | ||
| The Shape of Long-Run Cost Curves | 226 | ||
| APPLICATION Economies of Scale in Nuclear Power Plants | 229 | ||
| Estimating Cost Curves Versus Introspection | 230 | ||
| 7.4 Lower Costs in the Long Run | 230 | ||
| Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves | 231 | ||
| APPLICATION Long-Run Cost Curves in Beer Manufacturing | 232 | ||
| APPLICATION Choosing an Inkjet or a Laser Printer | 232 | ||
| Short-Run and Long-Run Expansion Paths | 233 | ||
| The Learning Curve | 233 | ||
| APPLICATION Learning by Drilling | 235 | ||
| 7.5 Cost of Producing Multiple Goods | 236 | ||
| APPLICATION Economies of Scope | 237 | ||
| CHALLENGE SOLUTION Technology Choice at Home Versus Abroad | 238 | ||
| Summary | 239 | ||
| Questions | 240 | ||
| Chapter 8 Competitive Firms and Markets | 244 | ||
| CHALLENGE The Rising Cost of Keeping On Truckin’ | 244 | ||
| 8.1 Perfect Competition | 245 | ||
| Price Taking | 245 | ||
| Why the Firm’s Demand Curve Is Horizontal | 246 | ||
| Deviations from Perfect Competition | 247 | ||
| Derivation of a Competitive Firm’s Demand Curve | 248 | ||
| Solved Problem 8.1 | 249 | ||
| Why We Study Perfect Competition | 250 | ||
| 8.2 Profit Maximization | 250 | ||
| Profit | 250 | ||
| Two Steps to Maximizing Profit | 251 | ||
| 8.3 Competition in the Short Run | 254 | ||
| Short-Run Output Decision | 255 | ||
| Solved Problem 8.2 | 257 | ||
| Short-Run Shutdown Decision | 258 | ||
| APPLICATION Oil, Oil Sands, and Oil Shale Shutdowns | 260 | ||
| Solved Problem 8.3 | 261 | ||
| Short-Run Firm Supply Curve | 261 | ||
| Short-Run Market Supply Curve | 262 | ||
| Short-Run Competitive Equilibrium | 264 | ||
| Solved Problem 8.4 | 266 | ||
| 8.4 Competition in the Long Run | 267 | ||
| Long-Run Competitive Profit Maximization | 267 | ||
| Long-Run Firm Supply Curve | 267 | ||
| APPLICATION The Size of Ethanol Processing Plants | 268 | ||
| Long-Run Market Supply Curve | 268 | ||
| APPLICATION Fast-Food Firms’ Entry in Russia | 269 | ||
| APPLICATION Upward-Sloping Long-Run Supply Curve for Cotton | 272 | ||
| APPLICATION Reformulated Gasoline Supply Curves | 276 | ||
| Solved Problem 8.5 | 277 | ||
| Long-Run Competitive Equilibrium | 278 | ||
| CHALLENGE SOLUTION The Rising Cost of Keeping On Truckin’ | 279 | ||
| Summary | 280 | ||
| Questions | 281 | ||
| Chapter 9 Applying the Competitive Model | 286 | ||
| CHALLENGE “Big Dry” Water Restrictions | 286 | ||
| 9.1 Zero Profit for Competitive Firms in the Long Run | 287 | ||
| Zero Long-Run Profit with Free Entry | 287 | ||
| Zero Long-Run Profit When Entry Is Limited | 288 | ||
| APPLICATION Tiger Woods’ Rent | 290 | ||
| The Need to Maximize Profit | 290 | ||
| 9.2 Consumer Welfare | 291 | ||
| Measuring Consumer Welfare Using a Demand Curve | 291 | ||
| APPLICATION Willingness to Pay and Consumer Surplus on eBay | 293 | ||
| Effect of a Price Change on Consumer Surplus | 294 | ||
| APPLICATION Goods with a Large Consumer Surplus Loss from Price Increases | 295 | ||
| Solved Problem 9.1 | 296 | ||
| 9.3 Producer Welfare | 297 | ||
| Measuring Producer Surplus Using a Supply Curve | 297 | ||
| Using Producer Surplus | 298 | ||
| Solved Problem 9.2 | 299 | ||
| Competition Maximizes Welfare | 300 | ||
| Solved Problem 9.3 | 302 | ||
| APPLICATION Deadweight Loss of Christmas Presents | 303 | ||
| 9.5 Policies That Shift Supply and Demand Curves | 304 | ||
| Restricting the Number of Firms | 305 | ||
| APPLICATION Licensing Cabs | 307 | ||
| Raising Entry and Exit Costs | 308 | ||
| 9.6 Policies That Create a Wedge Between Supply and Demand | 309 | ||
| Welfare Effects of a Sales Tax | 309 | ||
| APPLICATION The Deadweight Cost of Raising Gasoline Tax Revenue | 310 | ||
| Solved Problem 9.4 | 311 | ||
| Welfare Effects of a Subsidy | 312 | ||
| Solved Problem 9.5 | 312 | ||
| Welfare Effects of a Price Floor | 313 | ||
| Solved Problem 9.6 | 315 | ||
| APPLICATION How Big Are Farm Subsidies and Who Gets Them? | 316 | ||
| Welfare Effects of a Price Ceiling | 317 | ||
| Solved Problem 9.7 | 318 | ||
| APPLICATION The Social Cost of a Natural Gas Price Ceiling | 319 | ||
| 9.7 Comparing Both Types of Policies: Imports | 319 | ||
| Free Trade Versus a Ban on Imports | 320 | ||
| Free Trade Versus a Tariff | 321 | ||
| Free Trade Versus a Quota | 323 | ||
| APPLICATION The Chicken Tax Trade War | 324 | ||
| Rent Seeking | 324 | ||
| CHALLENGE SOLUTION “Big Dry” Water Restrictions | 325 | ||
| Summary | 327 | ||
| Questions | 327 | ||
| Chapter 10 Gener al Equilibrium and Economic Welfare | 332 | ||
| CHALLENGE Anti-Price Gouging Laws | 332 | ||
| 10.1 General Equilibrium | 334 | ||
| Feedback Between Competitive Markets | 335 | ||
| Solved Problem 10.1 | 337 | ||
| Minimum Wages with Incomplete Coverage | 338 | ||
| Solved Problem 10.2 | 340 | ||
| APPLICATION Urban Flight | 341 | ||
| 10.2 Trading Between Two People | 341 | ||
| Endowments | 341 | ||
| Mutually Beneficial Trades | 343 | ||
| Solved Problem 10.3 | 345 | ||
| Bargaining Ability | 345 | ||
| 10.3 Competitive Exchange | 345 | ||
| Competitive Equilibrium | 346 | ||
| The Efficiency of Competition | 347 | ||
| Obtaining Any Efficient Allocation Using Competition | 347 | ||
| 10.4 Production and Trading | 348 | ||
| Comparative Advantage | 348 | ||
| Solved Problem 10.4 | 350 | ||
| Efficient Product Mix | 352 | ||
| Competition | 352 | ||
| 10.5 Efficiency and Equity | 354 | ||
| Role of the Government | 354 | ||
| APPLICATION The Wealth and Income of the 1% | 355 | ||
| Efficiency | 356 | ||
| Equity | 358 | ||
| APPLICATION How You Vote Matters | 360 | ||
| Efficiency Versus Equity | 362 | ||
| CHALLENGE SOLUTION Anti-Price Gouging Laws | 363 | ||
| Summary | 364 | ||
| Questions | 365 | ||
| Chapter 11 Monopoly | 368 | ||
| CHALLENGE Brand-Name and Generic Drugs | 368 | ||
| 11.1 Monopoly Profit Maximization | 370 | ||
| Marginal Revenue | 370 | ||
| Solved Problem 11.1 | 372 | ||
| Choosing Price or Quantity | 374 | ||
| Graphical Approach | 375 | ||
| Mathematical Approach | 376 | ||
| APPLICATION Apple’s iPad | 377 | ||
| Solved Problem 11.2 | 377 | ||
| Effects of a Shift of the Demand Curve | 378 | ||
| 11.2 Market Power | 379 | ||
| Market Power and the Shape of the Demand Curve | 379 | ||
| APPLICATION Cable Cars and Profit Maximization | 381 | ||
| Lerner Index | 382 | ||
| Solved Problem 11.3 | 382 | ||
| Sources of Market Power | 382 | ||
| 11.3 Market Failure Due to Monopoly Pricing | 383 | ||
| Solved Problem 11.4 | 385 | ||
| 11.4 Causes of Monopoly | 386 | ||
| Cost-Based Monopoly | 386 | ||
| Solved Problem 11.5 | 388 | ||
| Government Creation of a Monopoly | 388 | ||
| APPLICATION Botox Patent Monopoly | 390 | ||
| 11.5 Government Actions That Reduce Market Power | 391 | ||
| Regulating Monopolies | 391 | ||
| Solved Problem 11.6 | 394 | ||
| APPLICATION Natural Gas Regulation | 395 | ||
| Increasing Competition | 396 | ||
| APPLICATION Generic Competition for Apple’s iPod | 397 | ||
| Solved Problem 11.7 | 397 | ||
| 11.6 Networks, Dynamics, and Behavioral Economics | 398 | ||
| Network Externalities | 399 | ||
| Network Externalities and Behavioral Economics | 399 | ||
| Network Externalities as an Explanation for Monopolies | 400 | ||
| APPLICATION Critical Mass and eBay | 400 | ||
| A Two-Period Monopoly Model | 401 | ||
| CHALLENGE SOLUTION Brand-Name and Generic Drugs | 402 | ||
| Summary | 403 | ||
| Questions | 403 | ||
| Chapter 12 Pricing and Advertising | 408 | ||
| CHALLENGE Sale Prices | 408 | ||
| 12.1 Conditions for Price Discrimination | 410 | ||
| Why Price Discrimination Pays | 410 | ||
| APPLICATION Disneyland Pricing | 412 | ||
| Which Firms Can Price Discriminate | 412 | ||
| Preventing Resale | 413 | ||
| APPLICATION Preventing Resale of Designer Bags | 414 | ||
| Not All Price Differences Are Price Discrimination | 414 | ||
| Types of Price Discrimination | 414 | ||
| 12.2 Perfect Price Discrimination | 415 | ||
| How a Firm Perfectly Price Discriminates | 415 | ||
| APPLICATION Google Uses Bidding for Ads to Price Discriminate | 416 | ||
| Perfect Price Discrimination Is Efficient but Harms Some Consumers | 417 | ||
| APPLICATION Botox Revisited | 419 | ||
| Solved Problem 12.1 | 420 | ||
| Transaction Costs and Perfect Price Discrimination | 420 | ||
| 12.3 Group Price Discrimination | 420 | ||
| APPLICATION Warner Brothers Sets Prices for a Harry Potter DVD | 421 | ||
| Group Price Discrimination with Two Groups | 421 | ||
| Solved Problem 12.2 | 422 | ||
| APPLICATION Reselling Textbooks | 423 | ||
| Solved Problem 12.3 | 424 | ||
| Identifying Groups | 426 | ||
| APPLICATION Buying Discounts | 426 | ||
| Welfare Effects of Group Price Discrimination | 427 | ||
| 12.4 Nonlinear Price Discrimination | 428 | ||
| 12.5 Two-Part Pricing | 430 | ||
| Two-Part Pricing with Identical Customers | 431 | ||
| Two-Part Pricing with Nonidentical Consumers | 432 | ||
| APPLICATION iTunes for a Song | 434 | ||
| 12.6 Tie-In Sales | 434 | ||
| Requirement Tie-In Sale | 434 | ||
| APPLICATION Ties That Bind | 435 | ||
| Bundling | 435 | ||
| Solved Problem 12.4 | 437 | ||
| 12.7 Advertising | 438 | ||
| The Decision Whether to Advertise | 438 | ||
| How Much to Advertise | 439 | ||
| APPLICATION Super Bowl Commercials | 440 | ||
| CHALLENGE SOLUTION Sale Prices | 441 | ||
| Summary | 442 | ||
| Questions | 443 | ||
| Chapter 13 Oligopoly and Monopolistic Competition | 448 | ||
| CHALLENGE Government Aircraft Subsidies | 448 | ||
| 13.1 Market Structures | 450 | ||
| 13.2 Cartels | 451 | ||
| Why Cartels Form | 451 | ||
| Laws Against Cartels | 453 | ||
| APPLICATION Catwalk Cartel | 455 | ||
| Why Cartels Fail | 456 | ||
| Maintaining Cartels | 456 | ||
| APPLICATION Casket Entry | 457 | ||
| Mergers | 458 | ||
| APPLICATION Hospital Mergers: Market Power Versus Efficiency | 458 | ||
| 13.3 Cournot Oligopoly | 459 | ||
| The Duopoly Nash-Cournot Equilibrium | 460 | ||
| An Airlines Market Example | 460 | ||
| Equilibrium, Elasticity, and the Number of Firms | 464 | ||
| APPLICATION Mobile Number Portability | 466 | ||
| Nonidentical Firms | 466 | ||
| Solved Problem 13.1 | 467 | ||
| Solved Problem 13.2 | 469 | ||
| APPLICATION Bottled Water | 470 | ||
| 13.4 Stackelberg Oligopoly | 471 | ||
| Graphical Model | 471 | ||
| Solved Problem 13.3 | 473 | ||
| Why Moving Sequentially Is Essential | 474 | ||
| Comparison of Competitive, Stackelberg, Cournot, and Collusive Equilibria | 474 | ||
| 13.5 Bertrand Oligopoly | 475 | ||
| Identical Products | 476 | ||
| Differentiated Products | 477 | ||
| APPLICATION Welfare Gain from More Toilet Paper | 479 | ||
| 13.6 Monopolistic Competition | 480 | ||
| APPLICATION Monopolistically Competitive Food Truck Market | 480 | ||
| Equilibrium | 481 | ||
| Solved Problem 13.4 | 482 | ||
| Fixed Costs and the Number of Firms | 482 | ||
| Solved Problem 13.5 | 484 | ||
| APPLICATION Zoning Laws as a Barrier to Entry by Hotel Chains | 484 | ||
| CHALLENGE SOLUTION Government Aircraft Subsidies | 485 | ||
| Summary | 486 | ||
| Questions | 487 | ||
| Chapter 14 Game Theory | 492 | ||
| CHALLENGE Competing E-book Standards | 492 | ||
| 14.1 Static Games | 494 | ||
| Normal-Form Games | 494 | ||
| Predicting a Game’s Outcome | 495 | ||
| Multiple Nash Equilibria, No Nash Equilibrium, and Mixed Strategies | 498 | ||
| APPLICATION Tough Love | 501 | ||
| Solved Problem 14.1 | 501 | ||
| Cooperation | 502 | ||
| APPLICATION Strategic Advertising | 503 | ||
| 14.2 Repeated Dynamic Games | 504 | ||
| Strategies and Actions in Dynamic Games | 505 | ||
| Cooperation in a Repeated Prisoner’s Dilemma Game | 505 | ||
| Solved Problem 14.2 | 507 | ||
| 14.3 Sequential Dynamic Games | 507 | ||
| Game Tree | 507 | ||
| Subgame Perfect Nash Equilibrium | 508 | ||
| Credibility | 510 | ||
| Dynamic Entry Game | 511 | ||
| APPLICATION Dominant Airlines | 512 | ||
| Solved Problem 14.3 | 513 | ||
| 14.4 Auctions | 514 | ||
| Elements of Auctions | 515 | ||
| Bidding Strategies in Private-Value Auctions | 516 | ||
| Winner’s Curse | 517 | ||
| APPLICATION Bidder’s Curse | 518 | ||
| 14.5 Behavioral Game Theory | 518 | ||
| APPLICATION GM’s Ultimatum | 519 | ||
| CHALLENGE SOLUTION Competing E-book Standards | 520 | ||
| Summary | 521 | ||
| Questions | 522 | ||
| Chapter 15 Factor Markets | 529 | ||
| CHALLENGE Athletes’ Salaries and Ticket Prices | 529 | ||
| 15.1 Competitive Factor Market | 530 | ||
| Short-Run Factor Demand of a Firm | 531 | ||
| Solved Problem 15.1 | 533 | ||
| Solved Problem 15.2 | 534 | ||
| Long-Run Factor Demand | 535 | ||
| Factor Market Demand | 536 | ||
| Competitive Factor Market Equilibrium | 538 | ||
| 15.2 Effects of Monopolies on Factor Markets | 539 | ||
| Market Structure and Factor Demands | 539 | ||
| A Model of Market Power in Input and Output Markets | 540 | ||
| APPLICATION Unions and Profits | 543 | ||
| Solved Problem 15.3 | 544 | ||
| 15.3 Monopsony | 545 | ||
| Monopsony Profit Maximization | 545 | ||
| APPLICATION Walmart’s Monopsony Power | 547 | ||
| Welfare Effects of Monopsony | 548 | ||
| Solved Problem 15.4 | 549 | ||
| CHALLENGE SOLUTION Athletes’ Salaries and Ticket Prices | 549 | ||
| Summary | 550 | ||
| Questions | 551 | ||
| Chapter 16 Interest Rates, Investments, and Capital Markets | 554 | ||
| CHALLENGE Should You Go to College? | 554 | ||
| 16.1 Comparing Money Today to Money in the Future | 555 | ||
| Interest Rates | 555 | ||
| Using Interest Rates to Connect the Present and Future | 558 | ||
| APPLICATION Power of Compounding | 558 | ||
| Stream of Payments | 560 | ||
| Solved Problem 16.1 | 561 | ||
| APPLICATION Saving for Retirement | 562 | ||
| Inflation and Discounting | 563 | ||
| APPLICATION Winning the Lottery | 564 | ||
| 16.2 Choices over Time | 565 | ||
| Investing | 565 | ||
| Solved Problem 16.2 | 567 | ||
| Solved Problem 16.3 | 568 | ||
| Rate of Return on Bonds | 568 | ||
| Behavioral Economics: Time-Varying Discounting | 569 | ||
| APPLICATION Falling Discount Rates and Self-Control | 570 | ||
| 16.3 Exhaustible Resources | 570 | ||
| When to Sell an Exhaustible Resource | 571 | ||
| Price of a Scarce Exhaustible Resource | 571 | ||
| APPLICATION Redwood Trees | 574 | ||
| Why Price May Be Constant or Fall | 575 | ||
| 16.4 Capital Markets, Interest Rates, and Investments | 577 | ||
| Solved Problem 16.4 | 578 | ||
| CHALLENGE SOLUTION Should You Go to College? | 579 | ||
| Summary | 581 | ||
| Questions | 581 | ||
| Chapter 17 Uncertainty | 585 | ||
| CHALLENGE BP and Limited Liability | 585 | ||
| 17.1 Assessing Risk | 587 | ||
| Probability | 587 | ||
| Expected Value | 589 | ||
| Solved Problem 17 .1 | 589 | ||
| Variance and Standard Deviation | 590 | ||
| 17.2 Attitudes Toward Risk | 591 | ||
| Expected Utility | 591 | ||
| Risk Aversion | 592 | ||
| Solved Problem 17 .2 | 594 | ||
| APPLICATION Stocks’ Risk Premium | 595 | ||
| Risk Neutrality | 596 | ||
| Risk Preference | 597 | ||
| APPLICATION Gambling | 597 | ||
| 17.3 Reducing Risk | 598 | ||
| Obtain Information | 599 | ||
| Diversify | 599 | ||
| APPLICATION Diversifying Retirement Funds | 601 | ||
| Buy Insurance | 601 | ||
| Solved Problem 17 .3 | 602 | ||
| APPLICATION Flight Insurance | 604 | ||
| APPLICATION Limited Insurance for Natural Disasters | 605 | ||
| 17.4 Investing Under Uncertainty | 606 | ||
| Risk-Neutral Investing | 606 | ||
| Risk-Averse Investing | 606 | ||
| Solved Problem 17 .4 | 607 | ||
| 17.5 Behavioral Economics of Uncertainty | 608 | ||
| Biased Assessment of Probabilities | 608 | ||
| APPLICATION Biased Estimates | 609 | ||
| Violations of Expected Utility Theory | 610 | ||
| Prospect Theory | 611 | ||
| CHALLENGE SOLUTION BP and Limited Liability | 613 | ||
| Summary | 614 | ||
| Questions | 615 | ||
| Chapter 18 Externalities , Open-Access, and Public Goods | 619 | ||
| CHALLENGE Trade and Pollution | 619 | ||
| 18.1 Externalities | 620 | ||
| APPLICATION Negative Externalities from Spam | 621 | ||
| 18.2 The Inefficiency of Competition with Externalities | 621 | ||
| 18.3 Regulating Externalities | 624 | ||
| APPLICATION Pulp and Paper Mill Pollution and Regulation | 626 | ||
| Solved Problem 18.1 | 627 | ||
| APPLICATION Why Tax Drivers | 627 | ||
| Benefits Versus Costs from Controlling Pollution | 628 | ||
| APPLICATION Protecting Babies | 628 | ||
| 18.4 Market Structure and Externalities | 629 | ||
| Monopoly and Externalities | 629 | ||
| Monopoly Versus Competitive Welfare with Externalities | 630 | ||
| Solved Problem 18.2 | 630 | ||
| Taxing Externalities in Noncompetitive Markets | 631 | ||
| 18.5 Allocating Property Rights to Reduce Externalities | 631 | ||
| Coase Theorem | 631 | ||
| APPLICATION Buying a Town | 633 | ||
| Markets for Pollution | 633 | ||
| APPLICATION Acid Rain Program | 634 | ||
| Markets for Positive Externalities | 634 | ||
| 18.6 Rivalry and Exclusion | 634 | ||
| Open-Access Common Property | 635 | ||
| Club Goods | 636 | ||
| APPLICATION Piracy | 637 | ||
| Public Goods | 637 | ||
| Solved Problem 18.3 | 638 | ||
| APPLICATION Radiohead’s “Public Good” Experiment | 639 | ||
| APPLICATION What’s Their Beef? | 640 | ||
| CHALLENGE SOLUTION Trade and Pollution | 641 | ||
| Summary | 643 | ||
| Questions | 644 | ||
| Chapter 19 Asymmetric Information | 647 | ||
| CHALLENGE Dying to Work | 647 | ||
| 19.1 Adverse Selection | 649 | ||
| Adverse Selection in Insurance Markets | 650 | ||
| Products of Unknown Quality | 650 | ||
| Solved Problem 19.1 | 653 | ||
| Solved Problem 19.2 | 653 | ||
| 19.2 Reducing Adverse Selection | 654 | ||
| Restricting Opportunistic Behavior | 654 | ||
| Equalizing Information | 655 | ||
| APPLICATION Changing a Firm’s Name | 656 | ||
| APPLICATION Adverse Selection on eBay Motors | 657 | ||
| 19.3 Price Discrimination Due to False Beliefs About Quality | 658 | ||
| APPLICATION Reducing Consumers’ Information | 659 | ||
| 19.4 Market Power from Price Ignorance | 660 | ||
| Tourist-Trap Model | 660 | ||
| Solved Problem 19.3 | 662 | ||
| Advertising and Prices | 662 | ||
| 19.5 Problems Arising from Ignorance When Hiring | 662 | ||
| Cheap Talk | 663 | ||
| Education as a Signal | 664 | ||
| Solved Problem 19.4 | 666 | ||
| Screening in Hiring | 668 | ||
| CHALLENGE SOLUTION Dying to Work | 670 | ||
| Summary | 671 | ||
| Questions | 672 | ||
| Chapter 20 Contracts and Moral Hazards | 675 | ||
| CHALLENGE Changing Bankers’ Incentives | 675 | ||
| 20.1 The Principal-Agent Problem | 677 | ||
| Efficiency | 678 | ||
| Symmetric Information | 678 | ||
| Asymmetric Information | 679 | ||
| APPLICATION Selfless or Selfish Doctors? | 680 | ||
| Solved Problem 20.1 | 681 | ||
| 20.2 Using Contracts to Reduce Moral Hazard | 681 | ||
| Fixed-Fee Contracts | 682 | ||
| Contingent Contracts | 683 | ||
| Solved Problem 20.2 | 683 | ||
| Solved Problem 20.3 | 685 | ||
| Solved Problem 20.4 | 687 | ||
| APPLICATION Contracts and Productivity in Agriculture | 688 | ||
| Choosing the Best Contract | 688 | ||
| APPLICATION Music Contracts: Changing Their Tunes | 689 | ||
| 20.3 Monitoring to Reduce Moral Hazard | 690 | ||
| Bonding | 691 | ||
| Solved Problem 20.5 | 692 | ||
| Deferred Payments | 693 | ||
| Efficiency Wages | 693 | ||
| Monitoring Outcomes | 694 | ||
| APPLICATION Abusing Leased Cars | 695 | ||
| 20.4 Checks on Principals | 695 | ||
| APPLICATION Layoffs Versus Pay Cuts | 696 | ||
| 20.5 Contract Choice | 698 | ||
| CHALLENGE SOLUTION Changing Bankers’ Incentives | 699 | ||
| Summary | 700 | ||
| Questions | 701 | ||
| Chapter Appendixes | 705 | ||
| Appendix 2A: Regressions | 705 | ||
| Appendix 3A: Effects of a Specific Tax on Equilibrium | 707 | ||
| Appendix 4A: Utility and Indifference Curves | 708 | ||
| Appendix 4B: Maximizing Utility | 710 | ||
| Appendix 5A: The Slutsky Equation | 712 | ||
| Appendix 5B: Labor-Leisure Model | 713 | ||
| Appendix 6A: Properties of Marginal and Average Product Curves | 714 | ||
| Appendix 6B: The Slope of an Isoquant | 714 | ||
| Appendix 6C: Cobb-Douglas Production Function | 714 | ||
| Appendix 7A: Minimum of the Average Cost Curve | 715 | ||
| Appendix 7B: Japanese Beer Manufacturer’s Short-Run Cost Curves | 715 | ||
| Appendix 7C: Minimizing Cost | 716 | ||
| Appendix 8A: The Elasticity of the Residual Demand Curve | 718 | ||
| Appendix 8B: Profit Maximization | 719 | ||
| Appendix 9A: Demand Elasticities and Surplus | 719 | ||
| Appendix 11A: Relationship Between a Linear Demand Curve and Its Marginal Revenue Curve | 720 | ||
| Appendix 11B: Incidence of a Specific Tax on a Monopoly | 720 | ||
| Appendix 12A: Perfect Price Discrimination | 721 | ||
| Appendix 12B: Group Price Discrimination | 722 | ||
| Appendix 12C: Block Pricing | 722 | ||
| Appendix 12D: Two-Part Pricing | 723 | ||
| Appendix 12E: Profit-Maximizing Advertising and Production | 723 | ||
| Appendix 13A: Nash-Cournot Equilibrium | 724 | ||
| Appendix 13B: Nash-Stackelberg Equilibrium | 726 | ||
| Appendix 13C: Nash-Bertrand Equilibrium | 727 | ||
| Appendix 15A: Factor Demands | 728 | ||
| Appendix 15B: Monopsony | 729 | ||
| Appendix 16A: Perpetuity | 730 | ||
| Appendix 18A: Welfare Effects of Pollution in a Competitive Market | 730 | ||
| Appendix 20A: Nonshirking Condition | 732 | ||
| Answers to Selected Questions and Problems | 733 | ||
| Sources for Challenges and Applications | 750 | ||
| References | 760 | ||
| Definitions | 768 | ||
| Index | 773 | ||
| A | 773 | ||
| B | 774 | ||
| C | 775 | ||
| D | 778 | ||
| E | 779 | ||
| F | 781 | ||
| G | 782 | ||
| H | 783 | ||
| I | 783 | ||
| L | 784 | ||
| M | 786 | ||
| N | 788 | ||
| O | 789 | ||
| P | 790 | ||
| Q | 793 | ||
| R | 793 | ||
| S | 794 | ||
| T | 797 | ||
| U | 798 | ||
| V | 798 | ||
| W | 798 | ||
| Z | 799 | ||
| Credits | 800 |