MicroEconomics 9th global edition by robert s pindyck

MicroEconomics 9th global edition by robert s pindyck MicroEconomics 9th global edition by robert s pindyck MicroEconomics 9th global edition by robert s pindyck MicroEconomics 9th global edition by robert s pindyck MicroEconomics 9th global edition by robert s pindyck MicroEconomics 9th global edition by robert s pindyck MicroEconomics 9th global edition by robert s pindyck MicroEconomics 9th global edition by robert s pindyck

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success in these courses Our new Math Review is accessible from the assignment manager and contains over 150 graphing, algebra, and calculus exercises for homework, quiz, and test use ALWAYS LEARNING MicroeconoMics ninth edition GLoBAL edition The Pearson series in economics Abel/Bernanke/Croushore† Macroeconomics* Acemoglu/Laibson/List† Economics* Bade/Parkin† Foundations of Economics* Berck/Helfand The Economics of the Environment Bierman/Fernandez Game Theory with Economic Applications Froyen Macroeconomics: Theories and Policies Klein Mathematical Methods for Economics Perloff/Brander Managerial Economics and Strategy* Fusfeld The Age of the Economist Krugman/Obstfeld/Melitz† International Economics: Theory & Policy* Pindyck/Rubinfeld† Microeconomics* Gerber† International Economics* Gordon Macroeconomics* † Greene Econometric Analysis Blanchard† Macroeconomics* Gregory/Stuart Russian and Soviet Economic Performance and Structure Boyer Principles of Transportation Economics 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Microeconomics* Microeconomics: Theory and Applications with Calculus* Visit www.myeconlab.com to learn more MicroeconoMics ninth edition GLoBAL edition RobeRt S Pindyck daniel l Rubinfeld Massachusetts Institute of Technology University of California, Berkeley Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Sao Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan Vice President, Business Publishing: Donna Battista Director of Portfolio Management: Adrienne D’Ambrosio Portfolio Manager: Ashley Bryan Associate Project Editor, Global Edition: Paromita Banerjee Editorial Assistant: Nicole Nedwidek Vice President, Product Marketing: Roxanne McCarley Director of Strategic Marketing: Brad Parkins Strategic Marketing Manager: Deborah Strickland Product Marketer: Tricia Murphy Field Marketing Manager: Ramona Elmer Field Marketing Assistant: Kristen Compton Product Marketing Assistant: Jessica Quazza Vice President, Production and Digital Studio, Arts and Business: Etain O’Dea Director of Production, Business: Jeff Holcomb Managing Producer, Business: Alison Kalil Content Producer, Global Edition: Pooja Aggarwal Manufacturing Controller, Global Edition: Kay Holman Content Producer: Mary Kate Murray Operations Specialist: Carol Melville Creative Director: Blair Brown Manager, Learning Tools: Brian Surette Managing Producer, Digital Studio, Arts and Business: Diane Lombardo Digital Studio Producer: Melissa Honig Digital Studio Producer: Alana Coles Digital Content Team Lead: Noel Lotz Digital Content Project Lead: Noel Lotz Media Production Manager, Global Edition: Vikram Kumar Full-Service Project Management and Composition: Integra Software Services Interior Design: Integra Software Services Cover Art: LeksusTuss/Shutterstock For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/ Acknowledgments of third-party content appear on page 768, which constitutes an extension of this copyright page PEARSON, ALWAYS LEARNING, and Pearson MyLab Economics® are exclusive trademarks owned by Pearson Education, Inc or its affiliates in the U.S and/or other countries Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2018 The rights of Robert Pindyck and Daniel Rubinfeld to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Microeconomics, 9th Edition, ISBN 978-0-13-418424-1 by Robert Pindyck and Daniel Rubinfeld, published by Pearson Education © 2018 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners ISBN 10: 1-292-21331-0 ISBN 13: 978-1-292-21331-6 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 Typeset in Palatino LT Pro by Integra-PDY IN Printed and bound by Vivar in Malaysia To our daughters, Maya, Talia, and Shira Sarah and Rachel abouT The auThors The authors, back again for a new edition, reflect on their years of successful textbook collaboration Pindyck is on the right and Rubinfeld on the left R evising a textbook every three or four years is hard work, and the last edition was well-liked by students “So why is our publisher pushing for a new edition?” the authors wondered “Were some of the examples becoming stale? Or might it have something to with the used book market?” Could be both In any case, here they are again, with a new edition that has substantial improvements and lots of new examples Robert S Pindyck is the Bank of Tokyo-Mitsubishi Ltd Professor of Economics and Finance in the Sloan School of Management at M.I.T Daniel L Rubinfeld is the Robert L Bridges Professor of Law and Professor of Economics Emeritus at the University of California, Berkeley, and Professor of Law at NYU Both received their Ph.D.s from M.I.T., Pindyck in 1971 and Rubinfeld in 1972 Professor Pindyck’s research and writing have covered a variety of topics in microeconomics, including the effects of uncertainty on firm behavior and market structure; the behavior of natural resource, commodity, and financial markets; environmental economics; and criteria for investment decisions Professor Rubinfeld, who served as chief economist at the Department of Justice in 1997 and 1998, is the author of a variety of articles relating to antitrust, competition policy, law and economics, law and statistics, and public economics Pindyck and Rubinfeld are also co-authors of Econometric Models and Economic Forecasts, another best-selling textbook that makes a perfect gift (birthdays, weddings, bar mitzvahs, you name it) for the man or woman who has everything (Buy several—bulk pricing is available.) These two authors are always looking for ways to earn some extra spending money, so they enrolled as human subjects in a double-blind test of a new hair restoration medication Rubinfeld strongly suspects that he is being given the placebo This is probably more than you want to know about these authors, but for further information, see their Web sites: http://web.mit.edu/rpindyck/www/ and https://www.law.berkeley.edu/our-faculty/faculty-profiles/daniel-rubinfeld/ brief conTenTs PArt one introduction: Markets and Prices 23 Preliminaries 25 The Basics of Supply and Demand 43 PArt two Producers, consumers, and competitive Markets 87 Consumer Behavior 89 Individual and Market Demand 131 Uncertainty and Consumer Behavior Production 179 209 The Cost of Production 237 Profit Maximization and Competitive Supply The Analysis of Competitive Markets 289 327 PArt three Market Structure and competitive Strategy 367 10 11 12 13 14 15 Market Power: Monopoly and Monopsony 369 Pricing with Market Power 413 Monopolistic Competition and Oligopoly Game Theory and Competitive Strategy Markets for Factor Inputs 465 501 543 Investment, Time, and Capital Markets 573 PArt Four information, Market failure, and the Role of Government 607 16 17 18 19 General Equilibrium and Economic Efficiency Markets with Asymmetric Information Externalities and Public Goods Behavioral Economics 609 645 675 713 Appendix: The Basics of Regression 735 Glossary 743 Answers to Selected Exercises 753 Photo Credits 768 Index 769 This page intentionally left blank www.downloadslide.com index 771 failure and, 638–640 government policies and, 327–333 incentive programs and, 345 market failure and, 333–335 minimum prices and, 338–342 perfectly competitive markets, 289–291 price supports and, 343–344 production quotas and, 344–348 supply in, 551–553 taxes or subsidies and, 355–362 welfare loss and, 334–335 Complementary goods, 46–47, 138–139 Complements, 46–47 Completely inelastic demand, 56, 57 Completeness, consumer preferences and, 92 Computers learning curve and, 274 price fixing, 406 production costs, 243 production costs of software, 243 wage inequality and, 568–569 Concentration ratio, 388n10 Condominiums, 293–294 Congleton, Roger D., 391n12 Constant-cost industries, 317–318, 320 Constant returns to scale, 232 Constrained optimization, 169–177 Consumer behavior See also Uncertainty, consumer behavior and assumptions and, 90–91 budget constraints and, 104–108 consumer choice and, 108–114 consumer preferences, 91–104 corner solutions and, 111–113 cost-of-living indexes and, 122–127 marginal utility and consumer choice, 117–122 price supports and, 342–343 revealed preference and, 114–117 steps and, 90 theory of, 89–91 trade-offs and, 26 Consumer choice, 108–114 Consumer expenditures price elasticity and, 146–149 in United States, 137–138 Consumer groups, creation of, 419–420 Consumer investment decisions, 592–593 Consumer preferences, 91–104 See also Consumer behavior basic assumptions about, 92 completeness and, 92 fairness and, 718–719 framing, 716 health care choices, 112–113 indifference curves and, 93–94 indifference maps and, 94–95 marginal rate of substitution and, 96–97 market baskets and, 91–92 more vs less and, 92 perfect substitutes and perfect complements and, 98–102 reference points and, 714–717 salience, 716–717 transitivity and, 92 Consumer Price Index (CPI), 34, 35, 37–38, 122, 126–127 Consumer satisfaction maximization, 108–110 Consumer surplus, 152–157 application of, 154–155 capturing, 414–415 change in, 329–330 competitive markets and, 328–333 demand and, 152–157 generalized, 153 Consumption decisions See also Bundling products bundled, 435 products sold separately, 435 Continental Airlines, 516 Contract curve, 620–621 Convenience stores advertising and, 446–447 markup pricing and, 384–385 Cooper, John C.B., 78n19 Cooperative games, 502–503 Cooperatives, 293–294 Cooter, Robert, 701n19 Cootner, Paul H., 68n11 Copper price of, 51–53, 74–76 supply and demand for, 67–68, 75, 307–308 Copyrights, 389 Corner solutions, 111–113 Corporate bonds prime rate versus, 488–489 rates and, 604 yields on, 580–581 Corporate takeovers, 660–661 Corts, Kenneth S., 249n5 Cost-benefit comparison, 656 Cost constraints, production and, 210 Cost curves, 246–250 Cost functions, 275–278 Cost minimization, 257–258 Cost-of-living adjustments, 124 Cost-of-living indexes, 122–127 chain weighting and, 126–127 ideal, 123–124 Laspeyres index, 124–125 Paasche index, 125–126 Cost-reducing innovation, 529–530 Costs See Long-run costs; Marginal costs; Production costs; Short-run costs Cost theory, duality in, 285 Coughlin, Cletus, 636n9 Coupons, economics of, 422–423 Cournot, Augustin, 472 Cournot equilibrium, 474–475, 478 Cournot model, 473, 506 equilibrium in, 474–475, 478 linear demand curve and, 475–477 reaction curves and, 473–474 Cournot-Nash equilibrium, 474–475, 506 Crago, Christine L., 613n2 Cramer, Gail L., 354n14 Crandall, Robert, 405 Crawfish fishing in Louisiana, 704–705 Crawford, Vincent P., 722n16 Credibility, 519–522 Credit card debt, 724–725 Credit market, adverse selection and, 649 Cremers, Martjin, 663n14 Crime deterrence, 184–185 Cross-price elasticity of demand, 57–58 Crude oil, price of, 77 Cubic cost function, 276 Customer preferences ordinal vs cardinal utility, 102 utility functions and, 101–102 Cyclical industries, 64–66 D Dahl, Carol, 66n10 Deadweight loss definition of, 331 from monopoly power, 390 from monopsony power, 400 taxes and, 357 Deaton, Angus, 120 Decision making, 183–184 Decision making biases, 719–726 Decreasing-cost industries, 319–320 Decreasing returns to scale, 232 Degree of economies of scope, 269–270 De La Torre Ugarte, Daniel G., 61n9 Dell, 30, 243 DellaVigna, Stefano, 713n1 Delta Air Lines, 241–242, 251–252 Demand See also Supply and demand competitive firms and, 295–297 consumer surplus and, 152–157 cyclical industries and, 64–66 durability and, 62–63 elasticity of, 146–149 income elasticities and, 63–64 short-run vs long-run elasticities, 62–70 speculative, 149–150 Demand curves, 45–47 See also Supply and demand; Individual demand competitive firms and, 295–297 complementary goods and, 46–47 individual demand curves, 133–134 market demand curves, 144–151 monopolies and, 377–378 shifting of, 46 substitute goods and, 46–47 Demand estimation, 159–163 demand relationship form and, 161–162 interview and experimental approaches to, 163 statistical approach to, 160–161 Demand for loanable funds, 602–603 Demand shifts, monopolies and, 377–378 www.downloadslide.com 772 index Demand theory, 169–177 Cobb-Douglas utility function and, 173–174 duality in consumer theory and, 174–175 equal margin principle, 171 income and substitution effects and, 175–177 marginal rate of substitution and, 171–172 marginal utility of income and, 172 method of Lagrange multipliers and, 170–171 utility maximization and, 169–170 Demeritt, Allison, 731n23 Department of Justice Antitrust Division, 403, 404, 406–407, 495–496 Depletable resources, 598–601 Deposits, refundable, 691–692 Depreciation, 251–252 Deregulation, 340–342 Derived demands, 544 Dermisi, Sofia, 54n6 Designer jeans, markup pricing, 385 Developed countries, labor productivity in, 223 Deviations, risk and, 181–183 Diaper wars, 529–530 Differentiated products, price competition and, 479–482 Diminishing marginal returns, 226 Diminishing marginal utility, 117 Direct marketing experiments, 163 Discount bonds, 603 Discount rate commercial banks and, 604 determination of, 583–584 real vs nominal, 585–586 risk-adjusted, 590 Discounts, quantity, 418 Discrimination, price See Price discrimination Diseconomies of scale, 263–264, 318 Diseconomies of scope, 268 Disequilibrium, market, 622 Disney Channel, 440 Disneyland, 428, 430 Disposable diaper industry capital investment in, 590–592 competition in, 529–530 DiTella, Raphael, 103n4 Diversifiable risk, 588 Diversification risk and, 190–191 stock market and, 191 Dividend yields for S&P 500, 203–204 Dixit, Avinash, 506n5, 530n18, 584n11 Dollar bill game, 503 Dominant firm model, 490–491 Dominant strategy, 504–505 Double marginalization, 453–457 Dranove, David, 196n9 Dreyfus, Mark K., 594n16 Duality, 174–175 Dube, Arindrajit, 563n7 Duopoly, 472, 476–478 DuPont, 687 Dur, Robert, 716n7 Durability demand and, 62–63 supply and, 67–70 Durable equipment consumption of, 64 investment in, 64–65 Dutch auction, 531, 532 DVD rentals, effect on movie theater tickets, 610–612 E eBay, 536–537 Economic efficiency bargaining and, 700–701 of competitive markets, 333–337, 623–624 equity and, 624–627 exchange and, 617, 637–638 free trade and, 632–637 market failure and, 638–640 monopolistic competition and, 468–469 output markets, 638 production and, 627–632, 638 production possibilities frontier, 628–629 Economic forecasting, 739–740 Economic inefficiency, moral hazard and, 659 Economic rent definition of, 314–315 factor markets and, 556–558 Economic theories, 27–28 Economies of scale, 263–265 barriers to entry and, 388–389 learning versus, 271–273 Economies of scope, 267–270 Edgeworth box, 617–618 Education See also College education benefits of, 656 net present value and, 595–596 public, 706 wage inequality and, 568–569 Effective yield, bond, 580–581 Efficiency, public goods and, 706–708 Efficiency wage theory, 669–671 Efficient allocations, 618–620 Effluent fees, 255–257 Egalitarian view of equity, 625–627 Eggs, cost of, 35–36, 50 Elasticity in supply and demand, 55–62 See also Price elasticity advertising and, 445–447 arc elasticity of demand, 58–62 consumer expenditures and, 146–149 cross-price elasticity of demand, 57–58 definition of, 55 income elasticity of demand, 56–58, 63–64 linear demand curve, 56 long-run, 321–322 monopolies and, 388 monopsony and, 399 oil and, 78–80 point vs arc elasticities, 58–62 price markup and, 384–385 short-run market and, 306–307 short-run vs long-run elasticities, 62–70 soft drinks and, 382 tax impact on, 358–359 Electric power, cost functions for, 277–278 Ellerman, A.D., 688n9 Ellerman, Denny, 688n9 Elliott, Kimberly Ann, 636n9 Ellis, Gregory M., 601n22 Elobeid, Amani, 612n1 Emissions cost-benefit study of controls on, 154–155 efficient levels of, 681 emissions trading and clean air, 687–689 marginal external costs of, 680 reducing GHG emissions, 697–699 standards vs fees and, 683–686 stock externalities and, 693–699 sulfur dioxide, 679–680 tradeable emissions permits, 686–688 Emissions fee, 682–686 Emissions standard, 682–686 Empirical estimation of demand, 159–163 Empty threats, 520 Endowment effect, 715 Energy efficiency, 259–261 through capital substitution for labor, 259–260 through technological change, 259–260 Energy Independence and Security Act (2007), 40 Energy Policy Act (2005), 612 Energy Security Act (1979), 613 Energy Tax Act (1978), 612 Engel curves, 136–138 English (or oral) auction, 531, 533 Enomoto, Carl E., 386n9 Entry and exit, competitive equilibrium and, 310, 312–314 Entry barriers competitive strategy and, 388–389 oligopolies and, 470–471 Entry deterrence, 524–530 Entry fees, 428–432 Equal marginal principle, 118, 171 Equilibrium, 47–48 asymmetric information and, 654–655 competitive, 311–314, 621–623 consumer, 621–623 Cournot equilibrium, 474–475, 478 dominant strategies and, 505 exchange efficiency and, 621–623 factor markets and, 556–559 www.downloadslide.com index 773 general analysis and, 609–616 labor market, 556–559 long-run, 311–314, 467–468 market changes and, 48–54 Nash equilibrium, 472, 480, 481, 482, 483, 506–512 oligopoly and, 471–472 short-run, 467–468 Stackelberg equilibrium, 506n6 supply and demand and, 47–48 Equilibrium price, 71 Equilibrium quantity, 71 Equitable allocations, 624–627 egalitarian view of, 625–626 market-oriented view of, 625–626 perfect competition and, 626–627 Rawlsian view of, 625–626 social welfare functions and, 625–626 utilitarian view of, 625–626 utility possibilities frontier and, 624–626 Espey, Molly, 66n10 Ethanol corn-based monopoly, 391 global market, 612–614 European antitrust laws, 404–405 European Merger Control Act, 404 European Union, 404–407 ex ante forecasts, 739–740 Excess demand, 81, 622–623 Excess supply, 622–623 Exchange economy, definition of, 616 Exchange efficiency, 616–624 advantages of trade and, 617 competitive equilibrium and, 621–623 contract curve and, 620–621 Edgeworth box and, 617–618 efficient allocations and, 618–620 Excise tax, effects on monopolies, 379 Executive compensation, 662–663 Exhaustible resources, 598–601 Expansion path, 257–259 Expansion strategy, 523–524 Expected payoff, 509 Expected returns, 198–199 Expected utility, 185 Expected value, 181 ex post forecasts, 739–740 Extensive form of a game, 517–518 Extent of market, 31–33 External costs, negative, 662–664 Externalities, 675–680 common property resources, 703–705 crawfish fishing in Louisiana, 704–705 emissions example, 679–680 marginal external benefit, 678 marginal external costs, 677 marginal social benefit, 678–679 marginal social costs, 677 market failure, 333–335, 640–641 municipal solid waste example, 692 negative externalities and inefficiency, 675–678 positive externalities and inefficiency, 678–680 property rights, 699–702 public goods, 705–709 recycling example, 689–693 stock, 693–699 F Facebook, 158–159 Factor inputs demand when one input is variable, 544–547 demand when several inputs are variable, 547–548 marginal revenue product, 544–545 market supply of, 553–555 supply to a firm, 551–553 Factor markets competitive, 543–559 economic rent and, 556–558 equilibrium in, 556–559 market demand curve and, 548–549 with monopoly power, 564–566 with monopsony power, 560–562 Factors of production, 212 Factory, net present value of, 584–585 Fair, Ray C., 555n3 Fairness, 718–719 Farber, Henry S., 721n14, 722n15 Farm Security and Rural Investment Act (2002), 347–348 Federal funds rate, 604 Federal Trade Commission Act (1914, amended 1938, 1995, 1997), 403, 404 Financial losses, competitive firm incurring, 299–300 Firm interactions, monopoly power and, 389 Firms, purpose of, 27, 211–212 See also Competitive firms First-degree price discrimination, 415–418 First mover advantage, 477–478 First-priced auction, 531, 533 Fisher, Franklin M., 68n11 Fishing industry common property resources and, 703–705 property rights and, 700–702 Fishman, Alan, 662 Fixed costs, 241–244 Fixed input, 213 Fixed-proportions production function, 228–229 Fixed-weight indexes, 125 Flows vs stocks, 574 Foley, Patricia, 75n15 Food, Conservation, and Energy Act (2008), 62, 348 Food cooperatives, 293 Food crisis cereal yields and world price of food, 221–222 index of world food production per capita, 221 Ford, Henry, 671 Ford Motor Company, 99–100, 110–111, 320, 401, 471, 495, 671 Formby, John P., 150n5 Fox, Merritt B., 661n9 Framing, 716 Frech, H.E., III, 120n12 Free entry and exit, perfect competition and, 290–291 Free riders, 708 Free trade, 632–637 comparative advantage and, 632–633 expanded possibilities frontier and, 633–634 gains from, 632–637 protectionism and, 636–637 Friedlaender, Ann F., 269n11 Friedman, James W., 506n5 Frijters, Paul, 103n5 Fudenberg, Drew, 506n5 Fuel efficiency standards, 40–41 Future cash flows, negative, 586 G Games, definition of, 501–502 Game theory, 501–541 See also Prisoners’ dilemma acquiring a company and, 504 auctions and, 530–538 bargaining strategy and, 522–523 battle of the sexes game, 511–512 beach location game, 507–508 commitment and credibility and, 519–522 dominant strategy and, 504–505 empty threats and, 520 entry deterrence and, 524–530 extensive form of a game and, 517–518 finite number of repetitions and, 513 infinitely repeated game, 513 matching pennies game, 510–511 maximin strategies and, 508–510 mixed strategies and, 510–512 moving first advantage and, 518–519 Nash equilibrium and, 506–512 noncooperative vs cooperative games, 502–503 product choice problem, 506–507 repeated games, 512–516 reputation and, 522 sequential games, 517–519 strategic decisions and, 501–504 tit-for-tat strategy, 512–514 winner’s curse and, 534 Garber, Alan M., 219n5 Gasoline demand for, 62–63, 66–67 long-run demand for, 151 prices and per capita consumption, 151 rationing of, 120–122 taxes on, 142–144, 360–362 www.downloadslide.com 774 index Gates, Bill, 406–407 GE Digital Energy, 515 General Electric, 65 General equilibrium analysis, 609–616 ”contagion” across world stock markets, 614–615 economic efficiency, 615–616 General Foods, 470 General Mills, 89 General Motors, 27, 65, 111, 197, 198, 209, 276, 320, 370, 401, 488, 495 Ghemawat, Pankaj, 523n12 Ghosh, Soumendra N., 386n9 Gibson, Robert C., 66n10 Giffen good, 142 Gillette, 431 Gillingham, Kenneth, 259n8 Glaister, Stephen, 66n10 Global warming See also Emissions reducing GHG emissions, 697–699 stock buildup and impact of pollutants, 694–697 Golden parachutes, 663 Gonik, Jacob, 669n19 Goodness of fit, 738–739 Google, 158–159, 407 Government intervention bank bailouts, 727 competitive markets and, 327–333 price controls, 80–82 price supports and, 343–344 Graham, Daniel, 66n10 Graham, David R., 341n7 Great Recession, 727 Greene, David L., 66n10 Greene, William H., 277n19 Greenhouse gases See Global warming Green Revolution, 60 Greenstone, Michael, 155n9 Griffin, James M., 78n19, 304n4 Gross domestic product (GDP), 64–65, 67 Grubb, Michael D., 724n17 Guarantees, product, 656–657 H Häagen-Dazs, 290 Hahn, Robert W., 687n7 Haisken-Denew, John P., 103n5 Hall, Robert E., 113n10 Halvorsen, Robert, 601n22 Hamermesh, Daniel, 657n7 Hamilton, James D., 77n18 Hansen, Julia L., 150n5 Happiness marginal utility and, 119–120 ordinal scale for, 103–104 Harrison, David, Jr., 708n25 Hauser, John, 481n5 Hausman, Jerry A., 594n15 Health care consumer choice of, 112–113 inefficiency in health care system, 640–641 market for human kidneys, 335–338 production function for, 219–221 rise in costs of, 37–38 value of information and, 195–196 Health club memberships, 725–726 Health insurance, 650–651 Herd behavior, 204, 721 Hersey Products, 515 Herzlinger, Regina E., 664n16 Hester, Gordon L., 687n7 Hewlett-Packard, 30, 243 Hicks, John, 176 Hicksian substitution effect, 176–177 Himmelberg, Charles, 721n13 Hochman, Eithan, 231n11 Hoff, Karla, 731n23 Hoffman-La Roche, 406 Holden, Reed, 301n3 Home Box Office, 440 Homogeneous products, price competition with, 478–479 Honda, 320, 495 Horizon Lines, 406 Horizontal integration, 453, 666 Horizontal summation of demand, 144–145 Hospitals, nonprofit, 664 Hossain, Tankim, 720n12 Hotelling, Harold, 599n21 Hotelling rule, 599n21 Housing cooperatives, 293–294 demand for, 149–150 long-run supply of, 323–324 selling a house, 717 title insurance, 193–194 Housing price bubbles, 727–730 Hufbauer, Gary Clyde, 636n9 Huffy, 32, 33 Human capital, 594–598 Human kidneys, market for, 335–338 Hybrid cars, 39–40 I IBM, 443 Ideal cost-of-living indexes, 123–124 Iger, Bob, 662 Imperfect price discrimination, 416–418 Import tariffs or quotas, 351–355 Incentive design, in integrated firms, 666–668 Incentive programs, 345 Income budget constraints and, 106 distribution of, 51 elasticities of demand, 56–58, 63–64 happiness and, 103–104 individual demand and, 134–135 risk aversion and, 188 from sales jobs, 181, 184 Income-consumption curve, 134–135 Income effects, 141–142, 175–177 Increasing-cost industries, 318–319, 320 Increasing returns to scale, 231–232, 277 Incremental profit, 416n3 Indifference curves consumer preferences and, 93–94 convexity, 97 investment risk and, 200–203 ordinal utility function and, 102 risk aversion and, 189 shape of, 95–96 utility functions and, 101–102 Indifference maps, 94–95 Individual demand, 132–139 See also Market demand; Network externalities Engel curves and, 136–138 Giffen good and, 142 income and substitution effects and, 139–144 income changes and, 134–135 individual demand curve and, 133–134 normal vs inferior goods and, 135–136 price changes and, 132, 133 substitutes and complements and, 138–139 Individual resource producer, production decisions by, 598–599 Industries, definition of, 30 Industry demand for labor, determining, 548–549 Inefficiency negative externalities and, 675–678 positive externalities and, 678–680 Inelastic demand, 146, 331 Inferior goods, 135–136, 141–142 Infinitely elastic demand, 56, 57 Infinitely repeated game, 513 Infiniti, 440 Inflation-adjusted returns, 198 Inflexibility, short-run production, 261–262 Information See also Asymmetric information market failure and, 334, 639 value of and risk, 194–196 Informational cascades, 728–730 Inglehart, Ronald, 103n6 Input choices, production and, 210 Input efficiency, 627–628 Input flexibility, 226 Input price changes, 303–305 Input substitution, 226–228 Insurance, 191–194 actuarial fairness and, 192–193 adverse selection and, 648–649 health, 650–651 law of large numbers and, 192 moral hazard and, 658–660 risk and, 192–193 title insurance, 193–194 Integrated firms, asymmetric information in, 666–668 Intercollegiate athletics, cartelization of, 494–495 www.downloadslide.com index 775 Interest rates credit cards and, 725 determination of, 602–604 present discounted value and, 575–577 variety of, 603–604 International Bauxite Association (IBA), 491 International Coffee Agreement (ICA), 69n12 International competition, strategic trade policy and, 527–530 International Competition Network, 405 International Council of Copper Exporting Countries (CIPEC), 493–494 International trade comparative advantage and, 632–633 expanded possibilities frontier and, 633–634 gains from, 632–637 protectionism and, 636–637 Internet auctions, 536–537 Internet bubble, 724, 726 Intertemporal price discrimination, 424–427 Intertemporal production decisions, 598–601 individual resource producers and, 598–599 market price behavior and, 599 resource production by monopolist, 600–601 user cost and, 600–601 Interviews, demand determination and, 163 Investment decisions, consumer, 592–593 Investment portfolio, risk and, 199–200 iPhone production, 635 Irvin, Thomas R., 680n3 Irwin, D.A., 274n15 Isocost line, 253 Isoelastic demand, 147–148 Isoquant maps, 225–226 Isoquants, 224–225 Isoutility curve, 101 J Jensen, Clarence W., 354n14 JetBlue, 516 Jet fuel, demand for, 550–551 Job market signaling, 654–656, 657 Johnson, D Gale, 354n14 Jolls, Christine, 716n8 Jones, Charles I., 113n10 Joskow, Paul, 688n9 Just, Richard E., 231n11 K Kahn, James R., 66n10 Kahneman, Daniel, 120, 714n2, 715n5, 720n11 Kao Soap Ltd., 481–482, 485 Kaplan, Daniel P., 341n7 Kaplan, Lewis, 536 Kaplow, Louis, 686n5 Kaserman, David L., 337n5 Katz, Lawrence, 568n10 Kessler, Daniel, 196n9 Killinger, Kerry, 662, 663nn13–14 Kimberly-Clark, 529–530, 590–592 Kinked demand curve model, 486–487 Klein, Benjamin, 443n19 Klenow, P.J., 274n15 Knetsch, Jack, 714n2, 715n5 Knight, Frank, 180n1 Knittel, Christopher, 151n6 Kohlhase, Janet E., 555n3 Kraft General Foods, 162 Krasker, William S., 664n16 Kreps, David M., 479n2, 511n7 Krishnamurti, Lakshman, 470n1 Krueger, Alan B., 563–564, 568n10 Krugman, Paul R., 527n14 L Labor curve average product of, 217–218 marginal product of, 217–218 Labor market asymmetric information in, 669–671 equilibrium in, 556–559 predicting requirements in, 273 productivity and, 221, 222–224 signaling in, 654–656, 657 Labor productivity, 222–224 Labor supply elasticities of, 555 for one-and two-earner households, 555 shifts in, 546–547 Lagrange multipliers, 170–171 Lagrangian function, 170–171 Land rent, 558 Langley, Sudchada, 59n8, 149n3 Laspeyres price index, 124–125 Law of diminishing marginal returns, 218–222 Law of large numbers, 192 Law of small numbers, 720–721 Learning curve changes in cost and, 270–274 economies of scale versus, 271–273 graphing of, 270–271 in practice, 273–274 Least-squares criterion, 736 Least-squares estimator, 737n2 Least-squares regression, 266 LED bulbs, 731–733 Lee, Jungmin, 657n7 Lee, William C., 120n12 Legal service auctioning, 536 Legal solutions, property rights and, 701–702 Lehn, Kenneth, 652n3 Leisure, 553–555 Lemons problem, 646–652 Lenovo, 30, 243 Leontief production function, 228–229 Lerner Index of Monopoly Power, 383–385 Lester, T William, 563n7 Levinsohn, James, 111n8 Lewbel, Arthur, 438n17 Lexus, 440 Lieberman, Marvin, 273n13 Lin, William, 61n9 Linear demand curves, 56 Linear regression, 735 Linear supply and demand curves, 56, 71–73, 147, 475–477 Linux, 402 List, John A., 716n6 Loanable funds, supply and demand of, 602–604 Loewenstein, George, 713n1, 715n3, 721n14 Long, M.W., 382n6 Long-run average cost curve, 262–263 Long-run competitive equilibrium, 313–314 accounting profit and, 311–312 economic profit and, 311–312 entry and exit and, 310, 312–314 firms having different costs and, 314 firms having identical costs and, 314 monopolistic competition and, 467–468 opportunity cost of land and, 314 zero economic profit and, 312 Long-run costs, 251–261 average costs, 262–263 choosing inputs and, 253–257 cost minimization with varying output levels and, 257–258 cost minimizing input choice and, 252–253 effluent fees and, 255–257 expansion path and, 257–259 isocost line and, 253 price of capital and, 252 relationship with short-run costs, 266–267 rental rate of capital and, 252–253 user cost of capital and, 251–252 Long-run elasticities, 62–70, 321–322 Long-run expansion path, 261–262 Long-run marginal cost curve, 263 Long-run producer surplus, 315–316 Long-run production, 213–214 Long-run profit maximization, 310–311 Long-run supply, 316–324 constant-cost industries and, 317–318, 320 decreasing-cost industries and, 319–320 elasticity and, 321–322 increasing-cost industries and, 318–319, 320 tax effects and, 320–321 Loss aversion, 715–716 Lost earnings, value of, 577–578 Lyft, 350, 528–529, 587 M MacAvoy, Paul W., 81n21 MacCrimmon, Kenneth R., 189n7 www.downloadslide.com 776 index MacCulloch, Robert, 103n4 Macroeconomics, definition of, 25–26 Macunovich, Diane J., 555n3 Madrian, Brigitte C., 731n23 Major league baseball asymmetric information and, 652 lemons in, 652 monopsony power and, 562–563 Malmendier, Ulrike, 725n18 Maloney, M.T., 687n8 Malthus, Thomas, 218, 221 Managerial incentives, 666–669 Manthy, Robert S., 52n4 Mantis, 33 Marginal benefit, 109 Marginal costs average-marginal relationship, 247–248 consumer choice and, 109 estimation of, 301–302 external, 677 monopolies and, 371–374 opportunity, 565 production and, 244–245 profit maximization and, 294–297 short-run, 246 Marginal expenditure, 395, 551, 558–559 Marginal products labor curve and, 217–218 production process and, 214–215 relationship with average products, 217–218 Marginal rate of substitution, 96–97, 134, 171–172 Marginal rate of technical substitution, 226–228, 254–255 Marginal rate of transformation, 628–629 Marginal revenue monopoly and, 370–371 one variable input and, 544–547 profit maximization and, 294–297, 371–374 several variable inputs and, 547–548 Marginal revenue product, 544–545 Marginal social cost, 677 Marginal utility consumer choice and, 117–122 of income, 172 utility maximization and, 169–170 Marginal value, 394–395 Market baskets (market bundles) budget line and, 105 consumer preferences and, 91–92 Market-clearing price, 47, 334–335 Market concentration, monopolies and, 388 Market data, fitting supply and demand curves to, 71–73 Market definition, 30, 31 Market demand, 144–151 coupons and rebates and, 423 curve of, 144, 548–549 elasticity of demand and, 146–149 from individual to market demand, 144–146 inelastic demand, 146 isoelastic demand, 147–148 Market failure, 333–335 correcting, 681–693 externalities and, 334, 640–641 incomplete information and, 639 lack of information and, 334 market power and, 639 public goods and, 640, 708 Marketing experiments, direct, 163 Market mechanism, supply and demand curve and, 43–44, 47–48 Market-oriented view of equity, 625–626 Market power, 370, 639 elasticities of demand for soft drinks, 382 production, price, and monopoly power, 383 vertical integration and, 453–457 Market price, 30–31 Market price behavior, 599 Markets competitive vs noncompetitive, 30 extent of, 31–33 nature of, 29–34 perfectly competitive, 30 role of, 27 Market signaling, asymmetric information and, 653–657 Market supply elasticity of, 306–307 short-run curves and, 305–310 Market value maximization, 292n1 Markup pricing, 384–385 Matching pennies game, 510–511 Maximin strategies, game theory and, 508–510 Mayer, Christopher, 721n13 McAfee, Preston, 530n18 McClennan, Mark, 196n9 McDonald’s, 441–442, 443, 650 McKean, Brian J., 687n7 McMillan, John, 531n19 Medical care See Health care Medicare, 650–651 Menell, Peter S., 692n13 Meng, Juanjuan, 722n16 Merck, 291 Mercurio Europeo, 491 Metals, supply of, 67–68 Metering demand, 443 Method of Lagrange multipliers, 170–171 Microeconomics definition of, 25–26 reasons to study, 39–41 themes of, 26–29 Microsoft Corporation, 243, 402, 406–407, 443, 536, 544, 581–583 Milgrom, Paul, 530n18 Military pay, 558–559 Miller, Jonathan, 294n2 Mineral resources, 51–53 Minimum cost, producing an output and, 254–255 Minimum prices, 338–342 Minimum wage history of, 36–37 teenage labor markets and, 563–564 unemployment and, 339 Miranda, Marie Lynn, 692n13 Mixed bundling, 436–440 Mixed strategies, game theory and, 510–512 Mobil Oil, 443 Models, 27–28 Mongoose, 33 Monopolistic competition, 466–470 definition of, 465, 466 economic efficiency and, 468–469 makings of, 466–467 perfect competition versus, 468–469 short and long run equilibrium and, 467–468 Monopoly, 370–380 See also Antitrust laws; Monopsony average and marginal revenue and, 370–371 bilateral monopoly, 400 cartels and, 491–496 deadweight loss and, 390 definition of, 369, 370 demand shifts and, 377–378 elasticity of market demand and, 388 factor markets and, 564–566 firm interactions and, 389 Lerner Index and, 383–385 measuring power of, 383–384 monopsony compared, 397 multiplant firms and, 379–380, 381 natural monopoly, 392–393 number of firms and, 388–389 output decisions and, 371–374 power of, 381–387 price regulation and, 391–392 pricing rule of thumb and, 375–376, 384 production with two plants, 381 regulation in practice and, 393–394 rent seeking and, 390–391 resource production by monopolist, 600–601 social costs of, 389–394 sources of power, 387–389 tax effects and, 378–379 unionized and nonunionized workers and, 566 wage rates and, 564–566 Monopsony, 394–397 bargaining power and, 562 buyer interaction and, 399 deadweight loss from, 400 definition of, 369, 370 elasticity of market supply and, 399 factor markets and, 560–562 marginal and averaged expenditure and, 560–562 www.downloadslide.com index 777 monopoly compared, 397 monopsonist buyer, 396 number of buyers and, 399 power and, 394 purchasing decisions and, 561 social costs of, 399–400 sources of power, 398–399 U.S manufacturing and, 401 Montero, J.P., 688n9 Moral hazard, 658–660 Morgan, John, 196n8, 720n12 Morkre, Morris E., 354n14 Morrison, S., 341n7 Movies bundling of, 433–434, 437 DVD rental effect on movie theater tickets, 610–612 Mueller, Michael J., 601n22 Multiplant firms, monopolies and, 379–380, 381 Multiple regression analysis, 735–741 demand for coal (example), 740–741 economic forecasting, 739–740 estimation, 736–737 example, 735 goodness of fit, 738–739 statistical tests, 737–738 Municipal solid waste regulation, 692 Mutual funds, diversification and, 191 Myers, Stewart, 588n13 N Nabisco, 162 Nagle, Thomas, 301n3 Narasimhan, Chakravarthi, 422n5 Nash, John, 472 Nash equilibrium, 472, 480, 481, 482, 483, 506–512 National Collegiate Athletic Association (NCAA), 494–495 National defense, 706 National Organ Transplantation Act (1984), 335, 336 Natural Gas Policy Act (1978), 81n21 Natural gas shortages, price controls and, 81–82, 332–333 Natural monopoly, 389, 392–393 Natural resource prices, 51–53 Negative externalities, 675–678 Negatively correlated variables, 191 Negative network externalities, 157–158 Neptune Water Meter Company, 515 Net present value capital investment decisions and, 583–587 of college education, 595–596 discount rates and, 590 interest rates and, 602–603 Netscape, 407 Network externalities, 155–159 bandwagon effect and, 156 Internet auctions and, 537 negative, 157–158 positive, 155–157 snob effect and, 157 Nevin, John R., 470n1 Nevo, Aviv, 422n5 Newell, Richard G., 259n8 New York taxicab supply, 322–323, 348–350, 587, 721–722 Nissan, 495 Noll, Roger, 562n5 Nominal discount rate, 585–586 Nominal prices, 34–38 Noncompetitive markets, 30 Nonconstant sum game, 502n2 Noncooperative games, 483–484, 502–503 Nondiversifiable risk, 198n13, 588–589 Nonexclusive goods, 705–706 Nonprice rationing, 120–122 Nonprofit hospitals, 664 Nonprofit organizations, 664 Nonrival goods, 705 Nonsystematic risk, 588n13 Nonunionized workers, monopoly power and, 566 Normal vs inferior goods, 135–136 Normative analysis, 28–29 North American Free Trade Agreement (NAFTA), 636 Northwest Airlines, 516 Northwestern University Law School, 240 No-shirking constraint curve, 670–671 Nuclear deterrence, analogy of, 526n13 O Office space, September 11 effects on, 53–54 Oi, Walter Y., 428n12 Oil market, upheaval in, 76–80 increasing-cost industry, 320 price elasticity estimates, 77 price of crude oil, 77 Saudi production cut, impact of, 79 Oligopoly, 470–478 Cournot model and, 472–475 definition of, 465, 466 dominant firm model and, 490–491 first mover advantage and, 477–478 kinked demand curve model and, 486–487 market equilibrium and, 471–472 Nash equilibrium and, 472 price competition, 478–482 prisoners’ dilemma and, 484–491 Stackelberg model and, 477–478 Oligopsony, 394 Olson, C Vincent, 341n7 One-earner households, labor supply and, 555 Online consumer electronics market, value of information in, 195 Online trading, 203–204 Opportunity costs of capital, 584 of land, 314 marginal cost and, 302 measuring, 238–239 Optimal strategy, definition of, 502 Optimization, constrained, 169–177 Ordinal utility function, 102 Organization of Petroleum Exporting Countries (OPEC), 30, 41, 66, 76–80, 491, 492–493, 599, 601 Organ Procurement and Transplantation Network (OPTN), 335 Orr, James, 54n5 Output decisions, monopolies and, 371–374 Output efficiency, 629–632 Output rule, 298 Overconfidence, 722–726 Over-optimism, 722 Over-precision, 723 Over-the-counter drugs, advertising expenditures and, 447 P Paasche index, 125–126 Pakes, Ariel, 111n8 Palmer, Karen, 259n8 Pan Am, 516 Parallel conduct, 402–403 Pareto, Vilfredo, 616 Pareto efficient allocation, 616, 625–626 Pareto inefficient allocation, 625–626 Parry, Ian, 66n10 Partial equilibrium analysis, 609–610 Patents, 389 Payment streams, valuing of, 576–577 Payoff definition of, 501–502 expected, 509 matrix, 483–485 risk and, 181 Peak-load pricing, 424, 426–427 Pearson Prentice Hall, 370 P/E ratio for S&P 500, 203–204 Perfect competition, equity and, 626–627 Perfect complements, 98–102 Perfectly competitive markets, 289–291 free entry and exit and, 290–291 price taking and, 290 product homogeneity and, 290 Perfectly elastic supply, 307 Perfectly inelastic supply, 307 Perfect price discrimination, 416 Perfect substitutes, 98–102, 228 Perpetuities, 579–580 Persian Gulf stability, 76–80 Petrin, Amil, 99n3 Petroleum products, short-run production of, 304–305 Peyer, Urs, 663n14 Pfizer, 291 Phelps Dodge, 75 Pillsbury, 423 www.downloadslide.com 778 index Pindyck, Robert S., 66n10, 78n19, 81n21, 384n8, 407, 495, 584n11, 601n22, 699n18, 735n1 Pizza, production costs of, 243–244, 300 Point elasticity of demand, 58–62 Polinsky, A Mitchell, 184n5 Pollution demand for clean air and, 708–709 emissions example, 679–680 emissions trading and clean air, 687–689 recycling and, 689–693 solid waste, 692 stock buildup and impact of, 694–697 value of clean air and, 154–155 Positive analysis, 28–29 Positive externalities, 678–680 Positively correlated variables, 191 Positive network externalities, 155–157 Potential interactions, 30 Predatory pricing, 403 Prediction accuracy, 28 Preemptive investment strategy, 523–524 Present discounted value, 575–577 Price caps, 394 Price changes budget constraints and, 106–108 individual demand and, 132 Price competition, 478–482 Bertrand model and, 478–479 choosing prices and, 480–481 with differentiated products, 479–482 with homogeneous products, 478–479 Price-consumption curve, 132–133 Price controls, 80–82, 329–333 Price discrimination, 415–424 See also Bundling consumer group creation and, 419–420 first-degree, 415–418 imperfect, 416–418 intertemporal, 424–427 peak-load pricing and, 424, 426–427 perfect, 416 relative prices and, 420–421 second-degree, 418, 419 third-degree, 418–421 two-part tariffs and, 428–432 Price elasticity See also Elasticity in supply and demand air travel and, 423–424 consumer expenditures and, 146–149 coupons and, 423 housing demand and, 149–150 Price elasticity of demand, 55 Price elasticity of supply, 58 Price fixing, 405–406 Price leadership, 487–488 Price minimums, 338–342 Price of capital, 252 Price of risk, 200 Price regulation, monopolies and, 391–392 Price rigidity, 486–487 Prices, role of, 27 Price setting, by dominant firm, 490–491 Price signaling, 487–488 Price supports, 342–350 consumers and, 342–343 government and, 343–344 import quotas and tariffs and, 351–355 producers and, 343 Price taking, 290, 295–297 Pricing, monopolies and, 375–376 Prilosec pricing, 376–377 Prime rate, 488–489, 604 Principal, 660 Principal-agent problem, 660–666 incentives and, 664–666 in private enterprises, 660–661 in public enterprises, 663–664 Prisoners’ dilemma, 484–491, 509–510 Prius, 39–40 Private proceedings, antitrust laws and, 404 Private-sector unionism, decline of, 566 Private-value auctions, 532–533, 535 Probabilities, subjective, 721 Probability, 180 Procter & Gamble, 466, 481–482, 485, 529–530, 590–592 Producer Price Index (PPI), 34, 122, 126 Producers, price supports and, 343 Producer surplus change in, 330–331 competitive markets and, 328–333 in long run, 315–316 profit versus, 309–310 short run, 308–310 Production See also Production costs cost constraints and, 210 decisions of firms and, 209–210 factors of, 209–210 firms and their production decisions, 210–214 flows (inputs and outputs), 213 function of, 212–213 health care, production function for, 219–221 input choices and, 210 measuring costs of, 237–245 production function, 212–213 returns to scale and, 231–234 short run vs long run, 213–214 technology and, 209–210, 212 Production choice problem, 521 Production costs accounting costs, 238 average costs, 244–245 Cobb-Douglas production function and, 285–287 cost functions and, 276–278 cost minimization and, 257–258 degree of economies of scope, 269–270 diseconomies of scope and, 268 duality in production and cost theory, 285 dynamic changes in costs, 270–274 economic costs, 238 economies and diseconomies of scale and, 263–265 economies of scope and, 267–270 energy reduction, 259–261 estimating and predicting of, 275–278 fixed costs, 241–244 learning curve and, 270–274 long-run and short-run relationship and, 266–267 long-run average costs and, 262–263 long-run costs, 251–261 marginal costs, 244–245 marginal rate of technical substitution, 226–228, 254–255 opportunity costs, 238–239 product transformation curves, 267–268 short-run costs, 245–250 short-run production inflexibility, 261–262 shutting down and, 241 sunk costs, 239–240 total costs, 241 variable costs, 241–242 Production decisions, intertemporal, 598–601 Production efficiency, 627–632 input efficiency, 627–628 marginal rate of transformation and, 628–629 output efficiency and, 629–630 output markets and, 631–632 Production possibilities frontier, 628–629 Production quotas, 344–348 Production technology, 209–210, 212 Production with one variable input (labor), 214–224 average and marginal products and, 214–215 average product of labor curve and, 217–218 labor productivity and, 222–224 law of diminishing marginal returns and, 218–222 marginal product of labor curve and, 217–218 product curve slopes and, 215–217 Production with two variable inputs, 224–231 diminishing marginal returns and, 226 fixed-proportions production function and, 228–229 input flexibility and, 226 isoquants and, 224–225 perfect substitutes and, 228 substitution among inputs and, 226–228 Products choice problem, 506–507 curve slopes, 215–217 differentiation, price competition and, 479–482 diversity, monopolistic competition and, 469 www.downloadslide.com index 779 homogeneity, perfect competition and, 290 transformation curves, 267–268 Profit maximization, 292–294 See also Competitive firms assumptions of, 292 choosing output in the long run, 310–316 highly competitive markets, 291 long run, 310–311 management cost considerations and, 301–302 marginal cost and revenue and, 294–297, 371–374 organizational forms and, 293 short-run by competitive firm, 297–299 Profits competitive equilibrium and, 311–314 producer surplus versus, 309–310 Property rights, 699–702 bargaining and economic efficiency, 700–701 legal solutions and, 701–702 Prospective sunk costs, 240, 242 Protectionism, 636–637 Public education, 706 Public goods, 705–709 definition of, 640 efficiency and, 706–708 market failure and, 708 nonexclusive goods, 705–706 private preferences for, 716–718 Public organizations, principal-agent problem and, 663–664 Public policy, behavioral economics and, 731–733 Publishing industry as concentrated oligopoly, 489–490 price discrimination and, 427 Purchasing decisions, with monopsony power, 561 Purchasing power, 107 Pure bundling, 436–440 Pure monopoly, 369, 381 Pure monopsony, 370, 399 Putnam, Howard, 405 Q Quadratic cost function, 276 Quality uncertainty, 646–652 Quantity discounts, 418 Quantity forcing, 457 Quigley, John M., 150n4, 324n11 R Rabin, Matthew, 713n1 Range of products, 31 Rapaport, Carol, 54n5 Raphael, Steven, 150n4, 324n11 Rate of return See Effective yield, bond Rate-of-return regulation, 393–394 Rationing, gasoline, 120–122 Rawls, John, 625n4 Rawlsian view of equity, 625–626 Raw material costs, 45 Reaction curves, Cournot equilibrium and, 473–474 Real discount rate, 585–586 Real prices, 34–38 Real returns, 198 Rebates, 143–144, 422–423 Recreation, revealed preference for, 116–117 Recycling, 689–693 Reference point, 714–717 Refundable deposits, 691–692 Regression See Multiple regression analysis Regression residual, 736 Regulation, monopolies and, 393–394 Regulatory lag, 394 Reich, Michael, 563n7 Reiley, David, Jr., 506n5 Relative prices, determination of, 420–421 Relative valuations, bundling and, 434–436 Rental rate of capital, 252–253 Rent-maximizing policy, 566 Rent seeking, 390–391 Repeated games, 512–516 Reputation, 522 Research and development (R&D), 679, 694 Reservation prices, 415, 434, 436 Reserve price, auctioning and, 532, 533 Resource depletion, 598–601 degrees of, 601 price of exhaustible resource, 600 Resource production, by monopolist, 600–601 Restaurants, pricing and, 441–442 Return, tradeoff with risk, 199–200 Return on assets, 197–199 Returns to scale, 231–234 constant, 232 decreasing, 232 description of, 233–234 increasing, 231–232 Revealed preference, 114–117 Revenue-sharing arrangements, 651 Rhone-Poulenc, 406 Ribarsky, Jennifer, 635n8 Ride share services, 350, 528–529, 587 Rigidity, price, 486–487 Risk See also Assets; Behavioral economics aversion to, 186–190 budget line and, 200 business executives and, 189–190 decision making and, 183–184 demand for risky assets, 196–204 description of, 180–185 diversification and, 190–191 expected value and, 181 indifference curves and, 200–203 information value and, 194–196 insurance and, 192–193 investment portfolio and, 199–200 investor’s choice problem and, 200–204 nondiversifiable risk, 198n13 pooling of, 649n2 preferences toward, 185–190 premiums, 186–188, 588 price of, 200 probability and, 180 reduction of, 190–196 risk loving, 186, 187 risk neutral, 186, 187 tradeoff with return, 199–200 variability and, 181–183 Risk adjustments, 587–592 Capital Asset Pricing Model and, 589–590 discount rate and, 590 diversifiable vs nondiversifiable risk, 588–589 Riskless (risk-free) assets, 197 Risky assets, 197–199 Roberts, Michael J., 149n3 Robinson-Patman Act (1936), 403 Rockwell International, 515 Rose, Nancy L., 341n7 Rose-Ackerman, Susan, 337n5 Rotemberg, Julio J., 488n10, 719n10 R-squared (R2), 739 Rubinfeld, Daniel L., 154n8, 162n13, 407–408, 495, 708n25, 735n1 Rule-of-thumb, 720 S S&P/Case-Shiller index, 727–728 Saft, Lester F., 443n19 Salaries See Wages Salathe, Larry, 59n8, 149n3 Sales jobs, income from, 181, 184 Salesperson incentives, 668–669 Salience, 716–717 Saloner, Garth, 488n10 Sample, 737 Sanford, Scott, 61n9 Sanger, David E., 348n9 Satterthwaite, Mark, 196n9 Saudi Arabia oil production, 78–80 Scale economies index (SCI), 276 Schaller, Bruce, 349n11 Scheinkman, Jose, 479n2 Schelling, Thomas, 526n13 Scherer, F.M., 32n4, 354n14 Schill, Michael H., 294n2 Schlenker, Wolfram, 149n3 Schmalensee, Richard L., 438n17, 688nn9–10 Scholten, Patrick, 196n8 Schwinn, 33 Sealed-bid auction, 531, 532, 533 Sea Star Line, 406 Secondary supply, 67 Second-degree price discrimination, 418, 419 Second-priced auction, 531, 533 Securities and Exchange Commission, 661 www.downloadslide.com 780 index September 11 terrorist attacks, 53–54 Sequential games, 517–519 Shavell, Steven, 184n5, 686n5 Sherman Act (1890), 402–403 Sherwin, Robert A., 32n3 Shields, Dennis, 61n9 Shields, Michael A., 103n5 Shirking model, 669–671 Shortage, price pressures and, 47–48 Short-run average cost curve (SAC), 262 Short-run costs, 245–250 average-marginal relationship, 247–248 cost curves and, 246–250 determinants of, 245–246 diminishing marginal returns and, 246 inflexibility and, 261–262 marginal costs and, 246 relationship with long-run costs, 266–267 total cost as a flow, 248–250 Short-run elasticities, 62–70 Short-run equilibrium, monopolistic competition and, 467–468 Short-run expansion path, 262 Short-run production, 213–214 Short-run profit maximization, 295, 297–299 Short-run supply curves, 305–310 Shubik, Martin, 503 Shut downs, 241, 299–300 Sibley, David S., 341n7 Signaling market, 653–657 price, 487–488 Simonsohn, Uri, 715n3 Sinai, Todd, 721n13 Single market price, 290 Skeath, Susan, 506n5, 530n18 Skinner, Jonathan, 219n5 Skinner, Robert, 61n9 Slutsky equation, 176 Small, Kenneth, 66n10 Smith, Adam, 623 Smith, Vernon, 715n4 Smith, W James, 150n5 Snob effect, 157 Snow shovel demand, 718 Social costs monopolies and, 389–394 monopsonies and, 399–400 Social rate of discount, 697 Social Security, cost-of-living indexes, 126 Social welfare functions, 625–626 Soft drinks, elasticities of demand for, 382 Software, production costs of, 243 Sotheby’s auction house, 536, 538 Southwest Airlines, 516 Specific taxes, effects of, 356–357 Spectrum auctions, 537 Speculative demand, 149–150 Spence, Michael, 653 Sprint, 431–432 Stackelberg equilibrium, 506n6 Stackelberg model, 477–478, 517, 518, 519 Standard deviation, 182 Standard error of forecast (SEF), 739 Standard error of the coefficient, 737 Standard error of the regression, 738 Standard of living, labor productivity and, 222–223 Statistical tests, 737–738 Stavins, Robert N., 688n10 Steel production, 255–257 Sterner, Thomas, 66n10 Stigler, George J., 32n3 Stiglitz, Joseph E., 669n20 Stock externalities, 693–699 Stockholder control, 660–661 Stock of capital, 223 Stocks and stock market ”contagion,” 614–615 diversification and, 191 investing in, 203–204 overconfidence and, 723–724 risk and, 197–199 small number bias, 721 stock prices in U.S and Europe, 615 Stocks vs flows, 574 Stollery, Kenneth R., 601n22 Strategic behavior, 701 Strategic decisions, gaming and, 501–504 Strategic trade policy, international competition and, 527–530 Strategy, defined, 502 Subjective probability, 180 Subsidies, effects of, 359 Substitute goods, 46–47, 138–139 Substitutes, 46–47 Substitution among inputs, 226–228 Substitution effects, 140–141, 175–177 Sugar quota, 353–355 Sulfur dioxide emissions, 679–680, 687–689 See also Emissions Sumner, Daniel A., 359n15 Sunk costs amortizing of, 242–243 definition of, 239–240 entry deterrence and fixed costs, 242–244, 525 Sunstein, Cass R., 716n8, 733n24 Supermarket chains advertising and, 446 markup pricing and, 384–385 Supply See also Supply and demand durability and, 67–70 elasticities of, 58 of loanable funds, 602–604 long-run, 316–324 restrictions, 344 supply curves, 44–45 variables affecting, 45 Supply and demand See also Elasticity in supply and demand changing market conditions and, 71–80 demand curves, 45–47 equilibrium and, 47–48 linear curves and, 71–73 market equilibrium changes and, 48–54 market mechanism and, 47–48 price controls and, 80–82 supply curves, 44–45 Surplus consumer, 152–157 market clearance and, 47–48 Systematic risk, 588n13 T Takeda Chemical Industries of Japan, 406 Taobao, 537 Tariffs import quotas and, 351–355 two-part tariffs, 428–432 world ethanol market and, 612–614 Tarr, David G., 354n14 Taubenslag, Nancy, 515n10 Taubman, Alfred, 538 Taxes effects of, 355–362 firm output and, 320–321 monopolies and, 378–379 specific, 356–357 transfer pricing and, 462–463 Tax-exempt status, 664 Taxicab supply, in New York, 322–323, 348–350, 587, 721–722 Technical efficiency, 627 Technical feasibility, 213 Technological change, 223 Technological improvements, effect of, 219 Technology, production, 209–210, 212 Teece, David J., 78n19 Teenage labor markets, minimum wage and, 563–564 Tesla, 265 Textbooks, costs of, 37–38, 244, 370, 489–490 Thaler, Richard, 714n2, 716n8, 721n14, 733n24 Theory of the firm, 27, 209–210, 212 Third-degree price discrimination, 418–421 Tirole, Jean, 506n5 Tit-for-tat strategy, 512–514 Title insurance, 193–194 Tokgoz, Simla, 612n1 Tollison, Robert D., 391n12 Toothbrushes, demand for, 381–382 Toothpaste market, 466 Total costs, 241, 248–250 Toyota Motor Corporation, 39–40, 320, 495 Trade, advantages of, 617 Tradeable emissions permits, 686–688 Trade-offs, optimal, 26–27 Transfer pricing with competitive outside market, 460–461 in integrated firm, 457–462 with noncompetitive outside market, 461–462 www.downloadslide.com index 781 no outside market and, 457–460 taxes and, 462–463 Transitivity, consumer preferences and, 92 Trapani, John M., 341n7 Treasury bills rates of, 603 risk and, 197–200 Treasury bond rate, 603–604 Treaty of the European Community, 404 Troubled Asset Relief Program (TARP), 190 Trucking industry, economies of scope in, 269–270 Tullock, Gordon, 391n12 Turner Broadcasting, 495 Tussing, Arlon R., 81n21 Tversky, Amos, 720n11 TWA, 516 Two-earner households, labor supply for, 555 Two-part tariff, 428–432 many consumers and, 429–431 single consumer and, 428 two consumers and, 429 Tying, 443 U Uber, 350, 528–529, 587 Ulen, Thomas, 701n19 Ultimatum game, 719 Uncertainty, consumer behavior and, 179–208 demand for risky assets, 196–204 investor’s choice problem, 200–204 preferences toward risk, 185–190 risk and, 180–185 risk reduction, 190–196 Unemployment, 670 Unequal probability outcomes, 183 Unilever, Ltd., 482, 485 Unionized workers decline of, 567 monopoly power and, 566–567 as percentage of total, 567 United Airlines, 516 Unit-elastic demand curve, 147 Usage fees, 428–432 Used car market, asymmetric information and, 646–648 User cost of capital, 251–252 User cost of production, 600–601 Utilitarian view of equity, 625–626 Utility, 100 Utility functions, 101–102, 169–170 Utility maximization, demand theory and, 169–170 Utility possibilities frontier, 624–626 V Value of complete information, 194–196 Variability, 181–183 Variable costs, 241–242 Variable profit, 415, 415n2, 416 Variance, calculating, 182 Verizon, 431–432, 537 Vertical integration, 453–463, 666 See also Bundling alternatives to, 456–457 market power and double marginalization, 453–457 purpose of, 453–457 transfer pricing and, 457–462 Videos, pricing of, 386–387 Vigna, Stefano, 725n18 Viscusi, W Kip, 594n16 Vodafone, 431–432 Voicu, Ioan, 294n2 Voillaard, Ben, 716n7 W Wages computer skills and, 568–569 discrimination in, 566 efficiency and, 669–671 inequality of, 51 monopoly power and, 564–566 substitution and income effects, 554 Wal-Mart, 523–524 The Walt Disney Company, 662 Walt Disney World, 430 Walton, Sam, 523 Wang, Charles C.Y., 663n15 Wang Chiang, Judy S., 269n11 Warranties, 656–657, 659–660 Washington Mutual, 662 Waste disposal, 689–693 Water meter industry, 515 Webb-Pomerene Act (1918), 403n18 Wehrung, Donald A., 189n7 Weitzman, Martin L., 601n22, 668n18, 699n18 Welch, I., 730n22 Welfare economics, 623 Welfare effects, 329 Welfare loss, 344 Westcott, Paul C., 61n9 Wetzstein, Michael E., 659n8 Wheat aggregate demand for, 148–149 market for, 59–62 price supports and, 346–348 production function for, 230–231 Whinston, Clifford, 341n7 Whitacre, Mark, 406n20 White, Lawrence J., 704n21 Williamson, Oliver, 212n3 Winner’s curse, 534 Wohlgenant, Michael K., 359n15 Wolfram, Catherine, 422n5 Wood, Geoffrey E., 636n9 Workers, trade-offs and, 26–27 World food production per capita, 221 X Xerox Corporation, 443, 657 Y Yandle, Bruce, 687n8 Yellen, Janet L., 669n20 Z Zavodny, Madeline, 563n7 Zero economic profit, 312, 316 Zero emissions policy, 694–697 Zilberman, David, 231n11 Zimmer, John, 529 www.downloadslide.com This page intentionally left blank www.downloadslide.com LIst of exampLes 1.1 The Market for Sweeteners 1.2 A Bicycle Is a Bicycle Or Is It? 1.3 The Price of Eggs and the Price of a College Education 35 6.1 The Authors Debate a Production Function for Health Care 219 1.4 The Authors Debate The Minimum Wage 36 6.2 Malthus and the Food Crisis 1.5 Health Care and College Textbooks 6.3 Labor Productivity and the Standard of Living 2.1 The Price of Eggs and the Price of a College Education Revisited 50 6.4 A Production Function for Wheat 2.2 Wage Inequality in the United States 51 2.3 The Long-Run Behavior of Natural Resource Prices 51 7.1 Choosing the Location for a New Law School Building 240 2.4 The Effects of 9/11 on the Supply and Demand for New York City Office Space 53 2.5 The Market for Wheat 2.6 The Demand for Gasoline and Automobiles 2.7 The Weather in Brazil and the Price of Coffee in New York 69 5.5 Doctors, Patients, and the Value of Information 32 5.6 Investing in the Stock Market 33 37 2.8 The Behavior of Copper Prices 2.9 Upheaval in the World Oil Market 203 221 66 74 2.10 Price Controls and Natural Gas Shortages 81 233 7.2 Sunk, Fixed, and Variable Costs: Computers, Software, and Pizzas 243 7.3 The Short-Run Cost of Aluminum Smelting 248 7.4 The Effect of Effluent Fees on Input Choices 255 7.5 Reducing the Use of Energy 7.6 Tesla’s Battery Costs 259 265 7.7 Economies of Scope in the Trucking Industry 7.8 The Learning Curve in Practice 76 223 230 6.5 Returns to Scale in the Carpet Industry 59 195 269 273 7.9 Cost Functions for Electric Power 277 8.1 Condominiums versus Cooperatives in New York City 293 3.1 Designing New Automobiles (I) 3.2 Can Money Buy Happiness? 3.3 Designing New Automobiles (II) 3.4 The Authors Argue About Health Care 112 8.3 Some Cost Considerations for Managers 3.5 A College Trust Fund 8.4 The Short-Run Production of Petroleum Products 304 3.6 Revealed Preference for Recreation 3.7 Marginal Utility and Happiness 4.1 Consumer Expenditures in the United States 137 4.2 The Effects of a Gasoline Tax 4.3 The Aggregate Demand for Wheat 4.4 The Demand for Housing 4.5 The Long-Run Demand for Gasoline 151 4.6 The Value of Clean Air 4.7 Facebook Versus Google Plus 4.8 The Demand for Ready-to-Eat Cereal 5.1 Deterring Crime 5.2 Business Executives and the Choice of Risk 5.3 The Value of Title Insurance When Buying a House 193 5.4 The Value of Information in an Online Consumer Electronics Market 195 99 103 8.2 The Short-Run Output Decision of an Aluminum Smelting Plant 300 110 114 301 8.5 The Short-Run World Supply of Copper 307 116 119 142 8.6 Constant-, Increasing-, and Decreasing-Cost Industries: Coffee, Oil, and Automobiles 320 8.7 The Supply of Taxicabs in New York 322 8.8 The Long-Run Supply of Housing 323 148 9.1 Price Controls and Natural Gas Shortages 149 9.2 The Market for Human Kidneys 9.3 Airline Regulation 154 9.5 Why Can’t I Find a Taxi? 162 9.6 The Sugar Quota 184 189 9.7 A Tax on Gasoline 335 340 9.4 Supporting the Price of Wheat 158 332 346 348 353 360 10.1 Astra-Merck Prices Prilosec 376 10.2 Elasticities of Demand for Soft Drinks 382 10.3 Markup Pricing: Supermarkets to Designer Jeans 384 10.4 The Pricing of Videos 386 www.downloadslide.com LIst of exampLes 10.5 Monopsony Power in U.S Manufacturing 10.6 A Phone Call about Prices 401 405 14.7 Wage Inequality Revisited 10.7 Go Directly to Jail Don’t Pass Go 405 10.9 The Authors Debate Merger Policy 407 11.1 The Economics of Coupons and Rebates 422 423 11.3 How to Price a Best-Selling Novel 11.4 Pricing Cellular Phone Service 568 15.1 The Value of Lost Earnings 10.8 The United States and the European Union versus Microsoft 406 11.2 Airline Fares 14.6 The Decline of Private-Sector Unionism 567 577 15.2 The Yields on Corporate Bonds 581 15.3 The Value of a New York City Taxi Medallion 587 15.4 Capital Investment in the Disposable Diaper Industry 590 15.5 Choosing an Air Conditioner and a New Car 593 427 15.6 Should You Go to Business School? 431 596 11.5 The Complete Dinner versus la Carte: A Restaurant’s Pricing Problem 441 15.7 How Depletable are Depletable Resources? 11.6 Advertising in Practice 16.2 “Contagion” across Stock Markets around the World 614 16.1 The Global Market for Ethanol 446 12.1 Monopolistic Competition in the Markets for Colas and Coffee 469 16.3 iPhone Production 601 612 635 12.2 A Pricing Problem for Procter & Gamble 481 16.4 The Costs and Benefits of Special Protection 636 12.3 Procter & Gamble in a Prisoners’ Dilemma 16.5 Inefficiency in the Health Care System 640 485 12.4 Price Leadership and Price Rigidity in Commercial Banking 488 12.5 The Prices of College Textbooks 489 495 13.1 Acquiring a Company 504 650 17.2 Lemons in Major League Baseball 17.3 Working into the Night 12.6 The Authors Debate the Cartelization of Intercollegiate Athletics 494 12.7 The Auto Parts Cartel 17.1 Medicare 652 657 17.4 Reducing Moral Hazard: Warranties of Animal Health 659 17.5 CEO Salaries 13.2 Oligopolistic Cooperation in the Water Meter Industry 515 662 17.6 Managers of Nonprofit Hospitals as Agents 17.7 Efficiency Wages at Ford Motor Company 13.3 Competition and Collusion in the Airline Industry 516 18.1 The Costs and Benefits of Sulfur Dioxide Emissions 679 13.4 Wal-Mart Stores’ Preemptive Investment Strategy 523 18.2 Emissions Trading and Clean Air 13.5 Industry Transformation: Uber and Lyft 13.6 Diaper Wars 18.3 Regulating Municipal Solid Wastes 528 529 13.8 Auctions in Practice 536 536 14.1 The Demand for Jet Fuel 697 558 14.4 Monopsony Power in the Market for Baseball Players 562 14.5 Teenage Labor Markets and the Minimum Wage 563 702 18.6 Crawfish Fishing in Louisiana 18.7 The Demand for Clean Air 550 14.2 Labor Supply for One- and Two-Earner Households 555 14.3 Pay in the Military 18.4 Global Warming 18.5 The Coase Theorem at Work 13.7 Auctioning Legal Services 687 19.1 Selling a House 704 708 717 19.2 New York City Taxicab Drivers 19.3 Credit Card Debt 721 724 19.4 Paying Not to Go to the Gym 725 19.5 The Housing Price Bubble (I) 727 19.6 The Housing Price Bubble (II) A.1 The Demand for Coal 740 729 692 664 671 www.downloadslide.com Practice, Engage, and Assess with MyLab Economicsđ Real-Time Data Analysis Exercises—Using current macro data to help students understand the impact of changes in economic variables, Real-Time Data Analysis Exercises communicate directly with the Federal Reserve Bank of St Louis’s FRED® site and update as new data are available • Current News Exercises—Every week, current microeconomic and macroeconomic news articles or videos, with accompanying exercises, are posted to MyEconLab Assignable and auto-graded, these multi-part exercises ask students to recognize and apply economic concepts to real-world events • Experiments—Flexible, easy-to-assign, auto-graded, and available in Single Player and Multiplayer versions, Experiments in MyEconLab make learning fun and engaging • Reporting Dashboard—View, analyze, and report learning outcomes clearly and easily Available via the Gradebook and fully mobile-ready, the Reporting Dashboard presents student performance data at the class, section, and program levels in an accessible, visual manner • LMS Integration—Link from any LMS platform to access assignments, rosters, and resources, and synchronize MyLab grades with your LMS gradebook For students, new direct, single sign-on provides access to all the personalized learning MyLab resources that make studying more efficient and effective • Mobile Ready—Students and instructors can access multimedia resources and complete assessments right at their fingertips, on any mobile device ALWAYS LEARNING ... when students need it most • Personalized Study Plan—Assists students in monitoring their own progress by offering them a customized study plan based on Homework, Quiz, and Test results Includes... Development Walters/Walters/Appel/ Callahan/Centanni/Maex/ O’Neill Econversations: Today s Students Discuss Today s Issues Williamson† Macroeconomics Perloff† Microeconomics* Microeconomics: Theory and... 238 Sunk Costs 239 Fixed Costs and Variable Costs 241 Fixed versus Sunk Costs 242 Marginal and Average Cost 244 7.2 Cost in the Short Run 245 The Determinants of Short-Run Cost 245 The Shapes of