Microeconomic Theory: Basic Principles and Extensions

Cover......Page 1
Brief Contents
......Page 11
Contents
......Page 13
Preface......Page 21
Part 1: Introduction......Page 25
1.1 Theoretical Models......Page 27
1.2 Verification Of Economic Models......Page 28
1.3 General Features Of Economic Models......Page 29
1.4 Structure Of Economic Models......Page 30
1.5 Development Of The Economic Theory Of Value......Page 33
1.6 Modern Developments......Page 42
Summary......Page 43
Suggestions For Further Reading......Page 44
2.1 Maximization Of A Function Of One Variable......Page 45
2.2 Functions Of Several Variables......Page 50
2.3 Maximization Of Functions Of Several Variables......Page 58
2.4 The Envelope Theorem......Page 60
2.5 Constrained Maximization......Page 64
2.6 Envelope Theorem In Constrained Maximization Problems......Page 69
2.7 Inequality Constraints......Page 70
2.8 Second-Order Conditions And Curvature......Page 72
2.9 Homogeneous Functions......Page 79
2.10 Integration......Page 82
2.11 Dynamic Optimization......Page 87
2.12 Mathematical Statistics......Page 91
Summary......Page 100
Problems......Page 101
Suggestions For Further Reading......Page 105
Extensions: Second-Order Conditions and Matrix Algebra......Page 106
Part 2: Choice And Demand......Page 111
3.1 Axioms Of Rational Choice......Page 113
3.2 Utility......Page 114
3.3 Trades And Substitution......Page 116
3.4 The Mathematics Of Indifference Curves......Page 123
3.5 Utility Functions For Specific Preferences......Page 126
3.6 The Many-Good Case......Page 130
Problems......Page 131
Suggestions For Further Reading......Page 134
Extensions: Special Preferences......Page 135
Chapter 4: Utility Maximization And Choice......Page 139
4.1 An Initial Survey......Page 140
4.2 The Two-Good Case: A Graphical Analysis......Page 141
4.3 The n-Good Case......Page 144
4.4 Indirect Utility Function......Page 150
4.5 The Lump Sum Principle......Page 151
4.6 Expenditure Minimization......Page 153
4.7 Properties Of Expenditure Functions......Page 156
Problems......Page 158
Suggestions For Further Reading......Page 161
Extensions: Budget Shares......Page 162
5.1 Demand Functions......Page 165
5.2 Changes In Income......Page 167
5.3 Changes In A Good’s Price......Page 169
5.4 The Individual’s Demand Curve......Page 172
5.5 Compensated (Hicksian) Demand Curves And Functions......Page 175
5.6 A Mathematical Development Of Response To Price Changes......Page 180
5.7 Demand Elasticities......Page 183
5.8 Consumer Surplus......Page 190
5.9 Revealed Preference And The Substitution Effect......Page 195
Problems......Page 197
Suggestions For Further Reading......Page 200
Extensions: Demand Concepts and the Evaluation of Price Indices......Page 202
6.1 The Two-Good Case......Page 207
6.2 Substitutes And Complements......Page 210
6.3 Net (Hicksian) Substitutes And Complements......Page 212
6.4 Substitutability With Many Goods......Page 213
6.5 Composite Commodities......Page 214
6.6 Home Production, Attributes Of Goods, And Implicit Prices......Page 217
Summary......Page 220
Problems......Page 221
Extensions: Simplifying Demand and Two-Stage Budgeting......Page 226
Part 3: Uncertainty And Strategy......Page 229
7.1 Mathematical Statistics......Page 231
7.2 Fair Gambles And The Expected Utility Hypothesis......Page 232
7.3 Expected Utility......Page 233
7.4 The Von Neumann–Morgenstern Theorem......Page 234
7.5 Risk Aversion......Page 236
7.6 Measuring Risk Aversion......Page 240
7.8 Insurance......Page 245
7.9 Diversification......Page 246
7.10 Flexibility......Page 247
7.11 Information......Page 254
7.12 The State-Preference Approach To Choice Under Uncertainty......Page 255
Summary......Page 261
Problems......Page 262
Suggestions For Further Reading......Page 265
Extensions: The Portfolio Problem......Page 266
8.1 Basic Concepts......Page 271
8.2 Prisoners’ Dilemma......Page 272
8.3 Nash Equilibrium......Page 274
8.4 Mixed Strategies......Page 280
8.5 Existence Of Equilibrium......Page 284
8.6 Continuum Of Actions......Page 285
8.7 Sequential Games......Page 287
8.8 Repeated Games......Page 294
8.10 Simultaneous Bayesian Games......Page 297
8.11 Signaling Games......Page 302
8.12 Experimental Games......Page 308
8.13 Evolutionary Games And Learning......Page 310
Problems......Page 311
Suggestions For Further Reading......Page 314
Extensions: Existence of Nash Equilibrium......Page 315
Part 4: Production And Supply......Page 319
9.1 Marginal Productivity......Page 321
9.2 Isoquant Maps And The Rate Of Technical Substitution......Page 324
9.3 Returns To Scale......Page 328
9.4 The Elasticity Of Substitution......Page 331
9.5 Four Simple Production Functions......Page 334
9.6 Technical Progress......Page 338
Summary......Page 342
Problems......Page 343
Suggestions For Further Reading......Page 345
Extensions: Many-Input Production Functions......Page 346
10.1 Definitions Of Costs......Page 349
10.2 Relationship Between Profit Maximization And Cost Minimization......Page 351
10.3 Cost-Minimizing Input Choices......Page 352
10.4 Cost Functions......Page 357
10.5 Shifts In Cost Curves......Page 361
10.6 Short-Run, Long-Run Distinction......Page 372
Summary......Page 380
Problems......Page 381
Extensions: The Translog Cost Function......Page 384
11.1 The Nature And Behavior Of Firms......Page 387
11.2 Profit Maximization......Page 389
11.3 Marginal Revenue......Page 391
11.4 Short-Run Supply By A Price-Taking Firm......Page 396
11.5 Profit Functions......Page 400
11.6 Profit Maximization And Input Demand......Page 405
Problems......Page 412
Suggestions For Further Reading......Page 416
Extensions: Boundaries of the Firm......Page 417
Part 5: Competitive Markets......Page 423
12.1 Market Demand......Page 425
12.3 Pricing In The Very Short Run......Page 429
12.4 Short-Run Price Determination......Page 431
12.5 Shifts In Supply And Demand Curves: A Graphical Analysis......Page 436
12.6 A Comparative Statics Model Of Market Equilibrium......Page 438
12.7 Long-Run Analysis......Page 442
12.8 Long-Run Equilibrium: Constant Cost Case......Page 443
12.9 Shape Of The Long-Run Supply Curve......Page 445
12.11 Comparative Statics Analysis Of Long-Run Equilibrium......Page 448
12.12 Producer Surplus In The Long Run......Page 452
12.13 Economic Efficiency And Applied Welfare Analysis......Page 455
12.14 Price Controls And Shortages......Page 458
12.15 Tax Incidence Analysis......Page 459
Problems......Page 464
Suggestions For Further Reading......Page 468
Extensions: Demand Aggregation and Estimation......Page 469
13.1 Perfectly Competitive Price System......Page 473
13.2 A Graphical Model Of General Equilibrium With Two Goods......Page 474
13.3 Comparative Statics Analysis......Page 484
13.4 General Equilibrium Modeling And Factor Prices......Page 486
13.5 A Mathematical Model Of Exchange......Page 488
13.6 A Mathematical Model Of Production And Exchange......Page 499
13.7 Computable General Equilibrium Models......Page 502
Summary......Page 506
Problems......Page 507
Suggestions For Further Reading......Page 510
Extensions: Computable General Equilibrium Models......Page 511
Part 6: Market Power......Page 513
14.1 Barriers To Entry......Page 515
14.2 Profit Maximization And Output Choice......Page 517
14.3 Misallocated Resources Under Monopoly......Page 522
14.4 Comparative Statics Analysis Of Monopoly......Page 525
14.5 Monopoly Product Quality......Page 526
14.6 Price Discrimination......Page 528
14.7 Price Discrimination Through Non-Uniform Schedules......Page 534
14.8 Regulation Of Monopoly......Page 537
14.9 Dynamic Views Of Monopoly......Page 540
Problems......Page 542
Suggestions For Further Reading......Page 546
Extensions: Optimal Linear Two-Part Tariffs......Page 547
15.1 Short-Run Decisions: Pricing And Output......Page 549
15.2 Bertrand Model......Page 551
15.3 Cournot Model......Page 552
15.4 Capacity Constraints......Page 558
15.5 Product Differentiation......Page 559
15.6 Tacit Collusion......Page 565
15.7 Longer-Run Decisions: Investment, Entry, And Exit......Page 569
15.8 Strategic Entry Deterrence......Page 574
15.9 Signaling......Page 576
15.10 How Many Firms Enter?......Page 579
15.11 Innovation......Page 583
Summary......Page 585
Problems......Page 586
Suggestions For Further Reading......Page 589
Extensions: Strategic Substitutes and Complements......Page 591
Part 7: Pricing In Input Markets......Page 597
16.1 Allocation Of Time......Page 599
16.2 A Mathematical Analysis Of Labor Supply......Page 602
16.3 Market Supply Curve For Labor......Page 606
16.4 Labor Market Equilibrium......Page 607
16.5 Wage Variation......Page 609
16.6 Monopsony In The Labor Market......Page 613
16.7 Labor Unions......Page 616
Problems......Page 619
Suggestions For Further Reading......Page 622
17.1 Capital And The Rate Of Return......Page 623
17.2 Determining The Rate Of Return......Page 625
17.3 Pricing Of Risky Assets......Page 632
17.4 The Firm’s Demand For Capital......Page 634
17.5 Present Discounted Value Criterion......Page 637
17.6 Natural Resource Pricing......Page 641
Problems......Page 644
Suggestions For Further Reading......Page 647
17a.1 Present Discounted Value......Page 649
17a.2 Continuous Time......Page 651
Part 8: Market Failure......Page 655
18.1 Complex Contracts As A Response To Asymmetric Information......Page 657
18.2 Principal-Agent Model......Page 659
18.3 Hidden Actions......Page 661
18.4 Owner-Manager Relationship......Page 662
18.5 Moral Hazard In Insurance......Page 666
18.6 Hidden Types......Page 671
18.7 Nonlinear Pricing......Page 672
18.8 Adverse Selection In Insurance......Page 682
18.9 Market Signaling......Page 689
18.10 Auctions......Page 691
Problems......Page 695
Suggestions For Further Reading......Page 698
Extensions: Using Experiments to Measure Asymmetric-Information Problems......Page 699
19.1 Defining Externalities......Page 707
19.2 Externalities And Allocative Inefficiency......Page 709
19.3 Partial-Equilibrium Model Of Externalities......Page 713
19.4 Solutions To Negative Externality Problems......Page 715
19.5 Attributes Of Public Goods......Page 719
19.6 Public Goods And Resource Allocation......Page 721
19.7 Lindahl Pricing Of Public Goods......Page 725
19.8 Voting And Resource Allocation......Page 728
19.9 A Simple Political Model......Page 730
19.10 Voting Mechanisms......Page 733
Summary......Page 734
Problems......Page 735
Suggestions For Further Reading......Page 737
Extensions: Pollution Abatement......Page 739
Brief Answers to Queries......Page 741
Solutions to Odd-Numbered Problems......Page 751
Glossary of Frequently Used Terms......Page 765
Index......Page 773