Ebook Microeconomics (8th edition): Part 2

(BQ) Part 1 book Microeconomics has contents: The analysis of competitive markets, pricing with market power, monopolistic competition and oligopoly, game theory and competitive strategy, markets for factor inputs, general equilibrium and economic efficiency,...and other contents.

C H A P T E R The Analysis of Competitive Markets CHAPTER OUTLINE 9.1 Evaluating the Gains and I n Chapter 2, we saw how supply and demand curves can help us describe and understand the behavior of competitive markets In Chapters to 8, we saw how these curves are derived and what determines their shapes Building on this foundation, we return to supply–demand analysis and show how it can be applied to a wide variety of economic problems—problems that might concern a consumer faced with a purchasing decision, a firm faced with a long-range planning problem, or a government agency that has to design a policy and evaluate its likely impact We begin by showing how consumer and producer surplus can be used to study the welfare effects of a government policy—in other words, who gains and who loses from the policy, and by how much We also use consumer and producer surplus to demonstrate the efficiency of a competitive market—why the equilibrium price and quantity in a competitive market maximizes the aggregate economic welfare of producers and consumers Then we apply supply–demand analysis to a variety of problems Because very few markets in the United States have been untouched by government interventions of one kind or another, most of the problems that we will study deal with the effects of such interventions Our objective is not simply to solve these problems, but to show you how to use the tools of economic analysis to deal with them and others like them on your own We hope that by working through the examples we provide, you will see how to calculate the response of markets to changing economic conditions or government policies and to evaluate the resulting gains and losses to consumers and producers Losses from Government Policies—Consumer and Producer Surplus 317 9.2 The Efficiency of a Competitive Market 323 9.3 Minimum Prices 328 9.4 Price Supports and Production Quotas 332 9.5 Import Quotas and Tariffs 340 9.6 The Impact of a Tax or Subsidy 345 LIST OF EXAMPLES 9.1 Price Controls and Natural Gas Shortages 322 9.2 The Market for Human Kidneys 325 9.3 Airline Regulation 330 9.1 Evaluating the Gains and Losses from Government Policies— Consumer and Producer Surplus 9.4 Supporting the Price of Wheat 335 9.5 Why Can’t I Find a Taxi? 338 9.6 The Sugar Quota We saw at the end of Chapter that a government-imposed price ceiling causes the quantity of a good demanded to rise (at the lower price, consumers want to buy more) and the quantity supplied to fall (producers are not willing to supply as much at the lower price) The result 342 9.7 A Tax on Gasoline 349 317 318 PART • Producers, Consumers, and Competitive Markets In §2.7, we explain that under price controls, the price of a product can be no higher than a maximum allowable ceiling price is a shortage—i.e., excess demand Of course, those consumers who can still buy the good will be better off because they will now pay less (Presumably, this was the objective of the policy in the first place.) But if we also take into account those who cannot obtain the good, how much better off are consumers as a whole? Might they be worse off? And if we lump consumers and producers together, will their total welfare be greater or lower, and by how much? To answer questions such as these, we need a way to measure the gains and losses from government interventions and the changes in market price and quantity that such interventions cause Our method is to calculate the changes in consumer and producer surplus that result from an intervention In Chapter 4, we saw that consumer surplus measures the aggregate net benefit that consumers obtain from a competitive market In Chapter 8, we saw how producer surplus measures the aggregate net benefit to producers Here we will see how consumer and producer surplus can be applied in practice Review of Consumer and Producer Surplus For a review of consumer surplus, see §4.4, where it is defined as the difference between what a consumer is willing to pay for a good and what the consumer actually pays when buying it In an unregulated, competitive market, consumers and producers buy and sell at the prevailing market price But remember, for some consumers the value of the good exceeds this market price; they would pay more for the good if they had to Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good For example, suppose the market price is $5 per unit, as in Figure 9.1 Some consumers probably value this good very highly and would pay much more than $5 for it Consumer A, for example, would pay up to $10 for the good However, because the market price is only $5, he enjoys a net benefit of $5—the $10 value he places on the good, less the $5 he must pay to obtain it Consumer B values the good somewhat less highly She would be willing to pay $7, and Price F IGURE 9.1 $10 Consumer Surplus CONSUMER AND PRODUCER SURPLUS Consumer A would pay $10 for a good whose market price is $5 and therefore enjoys a benefit of $5 Consumer B enjoys a benefit of $2, and Consumer C, who values the good at exactly the market price, enjoys no benefit Consumer surplus, which measures the total benefit to all consumers, is the yellow-shaded area between the demand curve and the market price Producer surplus measures the total profits of producers, plus rents to factor inputs It is the green-shaded area between the supply curve and the market price Together, consumer and producer surplus measure the welfare benefit of a competitive market S Producer Surplus D Q0 Consumer A Consumer B Consumer C Quantity CHAPTER • The Analysis of Competitive Markets 319 thus enjoys a $2 net benefit Finally, Consumer C values the good at exactly the market price, $5 He is indifferent between buying or not buying the good, and if the market price were one cent higher, he would forgo the purchase Consumer C, therefore, obtains no net benefit.1 For consumers in the aggregate, consumer surplus is the area between the demand curve and the market price (i.e., the yellow-shaded area in Figure 9.1) Because consumer surplus measures the total net benefit to consumers, we can measure the gain or loss to consumers from a government intervention by measuring the resulting change in consumer surplus Producer surplus is the analogous measure for producers Some producers are producing units at a cost just equal to the market price Other units, however, could be produced for less than the market price and would still be produced and sold even if the market price were lower Producers, therefore, enjoy a benefit—a surplus—from selling those units For each unit, this surplus is the difference between the market price the producer receives and the marginal cost of producing this unit For the market as a whole, producer surplus is the area above the supply curve up to the market price; this is the benefit that lower-cost producers enjoy by selling at the market price In Figure 9.1, it is the green triangle And because producer surplus measures the total net benefit to producers, we can measure the gain or loss to producers from a government intervention by measuring the resulting change in producer surplus For a review of producer surplus, see §8.6, where it is defined as the sum over all units produced of the difference between the market price of the good and the marginal cost of its production Application of Consumer and Producer Surplus With consumer and producer surplus, we can evaluate the welfare effects of a government intervention in the market We can determine who gains and who loses from the intervention, and by how much To see how this is done, let’s return to the example of price controls that we first encountered toward the end of Chapter The government makes it illegal for producers to charge more than a ceiling price set below the market-clearing level Recall that by decreasing production and increasing the quantity demanded, such a price ceiling creates a shortage (excess demand) Figure 9.2 replicates Figure 2.24 (page 58), except that it also shows the changes in consumer and producer surplus that result from the government price-control policy Let’s go through these changes step by step Change in Consumer Surplus: Some consumers are worse off as a result of the policy, and others are better off The ones who are worse off are those who have been rationed out of the market because of the reduction in production and sales from Q0 to Q1 Other consumers, however, can still purchase the good (perhaps because they are in the right place at the right time or are willing to wait in line) These consumers are better off because they can buy the good at a lower price (Pmax rather than P0) How much better off or worse off is each group? The consumers who can still buy the good enjoy an increase in consumer surplus, which is given by the blue-shaded rectangle A This rectangle measures the reduction of price in each unit times the number of units consumers are able to buy at the lower price On the other hand, those consumers who can no longer buy the good lose surplus; their loss is given by the green-shaded Of course, some consumers value the good at less than $5 These consumers make up the part of the demand curve to the right of the equilibrium quantity Q0 and will not purchase the good • welfare effects Gains and losses to consumers and producers 320 PART • Producers, Consumers, and Competitive Markets Price S F IGURE 9.2 Deadweight Loss CHANGE IN CONSUMER AND PRODUCER SURPLUS FROM PRICE CONTROLS The price of a good has been regulated to be no higher than Pmax, which is below the marketclearing price P0 The gain to consumers is the difference between rectangle A and triangle B The loss to producers is the sum of rectangle A and triangle C Triangles B and C together measure the deadweight loss from price controls B P0 C A Pmax Shortage D Q1 Q0 Q2 Quantity triangle B This triangle measures the value to consumers, less what they would have had to pay, that is lost because of the reduction in output from Q0 to Q1 The net change in consumer surplus is therefore A − B In Figure 9.2, because rectangle A is larger than triangle B, we know that the net change in consumer surplus is positive It is important to stress that we have assumed that those consumers who are able to buy the good are the ones who value it most highly If that were not the case—e.g., if the output Q1 were rationed randomly— the amount of lost consumer surplus would be larger than triangle B In many cases, there is no reason to expect that those consumers who value the good most highly will be the ones who are able to buy it As a result, the loss of consumer surplus might greatly exceed triangle B, making price controls highly inefficient.2 In addition, we have ignored the opportunity costs that arise with rationing For example, those people who want the good might have to wait in line to obtain it In that case, the opportunity cost of their time should be included as part of lost consumer surplus Change in Producer Surplus: With price controls, some producers (those with relatively lower costs) will stay in the market but will receive a lower price for their output, while other producers will leave the market Both groups will lose producer surplus Those who remain in the market and produce quantity Q1 are now receiving a lower price They have lost the producer surplus given by rectangle A However, total production has also dropped The purple-shaded triangle C measures the additional loss of producer surplus for those producers who have left the market and those For a nice analysis of this aspect of price controls, see David Colander, Sieuwerd Gaastra, and Casey Rothschild, “The Welfare Costs of Market Restriction,” Southern Economic Journal, Vol 77(1), 2011: 213–223 CHAPTER • The Analysis of Competitive Markets 321 who have stayed in the market but are producing less Therefore, the total change in producer surplus is −A − C Producers clearly lose as a result of price controls Deadweight Loss: Is the loss to producers from price controls offset by the gain to consumers? No As Figure 9.2 shows, price controls result in a net loss of total surplus, which we call a deadweight loss Recall that the change in consumer surplus is A − B and that the change in producer surplus is −A − C The total change in surplus is therefore (A − B) ϩ (−A − C) ϭ −B − C We thus have a deadweight loss, which is given by the two triangles B and C in Figure 9.2 This deadweight loss is an inefficiency caused by price controls; the loss in producer surplus exceeds the gain in consumer surplus • deadweight loss Net loss of total (consumer plus producer) surplus If politicians value consumer surplus more than producer surplus, this deadweight loss from price controls may not carry much political weight However, if the demand curve is very inelastic, price controls can result in a net loss of consumer surplus, as Figure 9.3 shows In that figure, triangle B, which measures the loss to consumers who have been rationed out of the market, is larger than rectangle A, which measures the gain to consumers able to buy the good Here, because consumers value the good highly, those who are rationed out suffer a large loss The demand for gasoline is very inelastic in the short run (but much more elastic in the long run) During the summer of 1979, gasoline shortages resulted from oil price controls that prevented domestic gasoline prices from increasing to rising world levels Consumers spent hours waiting in line to buy gasoline This was a good example of price controls making consumers—the group whom the policy was presumably intended to protect—worse off D Price S B C Pmax Q1 EFFECT OF PRICE CONTROLS WHEN DEMAND IS INELASTIC If demand is sufficiently inelastic, triangle B can be larger than rectangle A In this case, consumers suffer a net loss from price controls P0 A F IGURE 9.3 Q2 Quantity 322 PART • Producers, Consumers, and Competitive Markets EX A M P L E PRICE CONTROLS AND NATURAL GAS SHORTAGES In Example 2.10 (page 59), we discussed the price controls that were imposed on natural gas markets during the 1970s, and we analyzed what would happen if the government were once again to regulate the wholesale price of natural gas Specifically, we saw that, in 2007, the free-market wholesale price of natural gas was about $6.40 per thousand cubic feet (mcf), and we calculated the quantities that would be supplied and demanded if the price were regulated to be no higher than $3.00 per mcf Now, equipped with the concepts of consumer surplus, producer surplus, and deadweight loss, we can calculate the welfare impact of this ceiling price Recall from Example 2.10 that we found that the supply and demand curves for natural gas could be approximated as follows: Supply: QS = 15.90 + 0.72PG + 0.05PO Demand: QD = 0.02 - 1.8PG + 0.69PO where QS and QD are the quantities supplied and demanded, each measured in trillion cubic feet (Tcf), PG is the price of natural gas in dollars per thousand cubic feet ($/mcf), and PO is the price of oil in dollars per barrel ($/b) As you can verify by setting QS equal to QD and using a price of oil of $50 per barrel, the equilibrium free market price and quantity are $6.40 per mcf and 23 Tcf, respectively Under the hypothetical regulations, however, the maximum allowable price was $3.00 per mcf, which implies a supply of 20.6 Tcf and a demand of 29.1 Tcf Figure 9.4 shows these supply and demand curves and compares the free market and regulated prices Rectangle A and triangles B and C measure the changes in consumer and producer surplus resulting from price controls By calculating the areas of the rectangle and triangles, we can determine the gains and losses from controls To the calculations, first note that Tcf is equal to billion mcf (We must put the quantities and prices in common units.) Also, by substituting the quantity 20.6 Tcf into the equation for the demand curve, we can determine that the vertical line at 20.6 Tcf intersects the demand curve at a price of $7.73 per mcf Then we can calculate the areas as follows: A = (20.6 billion mcf ) * ($3.40/mcf) = $70.04 billion B = (1/2) * (2.4 billion mcf) * ($1.33/mcf ) = $1.60 billion C = (1/2) * (2.4 billion mcf ) * ($3.40/mcf ) = $4.08 billion (The area of a triangle is one-half the product of its altitude and its base.) The annual change in consumer surplus that would result from these hypothetical price controls would therefore be A - B = 70.04 - 1.60 = $68.44 billion The change in producer surplus would be -A - C = -70.04 - 4.08 = -$74.12 billion And finally, the annual deadweight loss CHAPTER • The Analysis of Competitive Markets 323 would be -B - C = -1.60 - 4.08 = -$5.68 billion Note that most of this deadweight loss is from triangle C, i.e., the loss to those consumers who are unable to obtain natural gas as a result of the price controls 20 P= $19.20 Supply 18 Demand 16 PG ($/mcf ) 14 12 10 $7.73 B C PO = $6.40 A QD = 29.1 QS = 20.6 Pmax = $3.00 0 10 20 Quantity (Tcf) Q* = 23 30 40 F IGURE 9.4 EFFECTS OF NATURAL GAS PRICE CONTROLS The market-clearing price of natural gas was $6.40 per mcf, and the (hypothetical) maximum allowable price is $3.00 A shortage of 29.1 - 20.6 = 8.5 Tcf results The gain to consumers is rectangle A minus triangle B, and the loss to producers is rectangle A plus triangle C The deadweight loss is the sum of triangles B plus C 9.2 The Efficiency of a Competitive Market To evaluate a market outcome, we often ask whether it achieves economic efficiency—the maximization of aggregate consumer and producer surplus We just saw how price controls create a deadweight loss The policy therefore imposes an efficiency cost on the economy: Taken together, producer and consumer surplus are reduced by the amount of the deadweight loss (Of course, this does not mean that such a policy is bad; it may achieve other objectives that policymakers and the public deem important.) MARKET FAILURE One might think that if the only objective is to achieve economic efficiency, a competitive market is better left alone This is sometimes, • economic efficiency Maximization of aggregate consumer and producer surplus 324 PART • Producers, Consumers, and Competitive Markets • market failure Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers but not always, the case In some situations, a market failure occurs: Because prices fail to provide the proper signals to consumers and producers, the unregulated competitive market is inefficient—i.e., does not maximize aggregate consumer and producer surplus There are two important instances in which market failure can occur: • externality Action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price Externalities: Sometimes the actions of either consumers or producers result in costs or benefits that not show up as part of the market price Such costs or benefits are called externalities because they are “external” to the market One example is the cost to society of environmental pollution by a producer of industrial chemicals Without government intervention, such a producer will have no incentive to consider the social cost of pollution We examine externalities and the proper government response to them in Chapter 18 Lack of Information: Market failure can also occur when consumers lack information about the quality or nature of a product and so cannot make utility-maximizing purchasing decisions Government intervention (e.g., requiring “truth in labeling”) may then be desirable The role of information is discussed in detail in Chapter 17 In the absence of externalities or a lack of information, an unregulated competitive market does lead to the economically efficient output level To see this, let’s consider what happens if price is constrained to be something other than the equilibrium market-clearing price We have already examined the effects of a price ceiling (a price held below the market-clearing price) As you can see in Figure 9.2 (page 320), production falls (from Q0 to Q1), and there is a corresponding loss of total surplus (the deadweight-loss triangles B and C) Too little is produced, and consumers and producers in the aggregate are worse off Now suppose instead that the government required the price to be above the market-clearing price—say, P2 instead of P0 As Figure 9.5 shows, although producers would like to produce more at this higher price (Q2 instead of Q0), consumers will now buy less (Q3 instead of Q0) If we assume that producers produce only what can be sold, the market output level will be Q3, and again, there is a net loss of total surplus In Figure 9.5, rectangle A now represents a Price S F IGURE 9.5 WELFARE LOSS WHEN PRICE IS HELD ABOVE MARKET-CLEARING LEVEL When price is regulated to be no lower than P2, only Q3 will be demanded If Q3 is produced, the deadweight loss is given by triangles B and C At price P2, producers would like to produce more than Q3 If they do, the deadweight loss will be even larger P2 A B P0 C D Q3 Q0 Q2 Quantity CHAPTER • The Analysis of Competitive Markets 325 transfer from consumers to producers (who now receive a higher price), but triangles B and C again represent a deadweight loss Because of the higher price, some consumers are no longer buying the good (a loss of consumer surplus given by triangle B), and some producers are no longer producing it (a loss of producer surplus given by triangle C) In fact, the deadweight loss triangles B and C in Figure 9.5 give an optimistic assessment of the efficiency cost of policies that force price above market-clearing levels Some producers, enticed by the high price P2, might increase their capacity and output levels, which would result in unsold output (This happened in the airline industry when, prior to 1980, fares were regulated above market-clearing levels by the Civil Aeronautics Board.) Or to satisfy producers, the government might buy up unsold output to maintain production at Q2 or close to it (This is what happens in U.S agriculture.) In both cases, the total welfare loss will exceed the areas of triangles B and C We will examine minimum prices, price supports, and related policies in some detail in the next few sections Besides showing how supply–demand analysis can be used to understand and assess these policies, we will see how deviations from the competitive market equilibrium lead to efficiency costs EX AMPLE THE MARKET FOR HUMAN KIDNEYS Should people have the right to sell parts of their bodies? Congress believes the answer is no In 1984, it passed the National Organ Transplantation Act, which prohibits the sale of organs for transplantation Organs may only be donated Although the law prohibits their sale, it does not make organs valueless Instead, it prevents those who supply organs (living persons or the families of the deceased) from reaping their economic value It also creates a shortage of organs Each year, about 16,000 kidneys, 44,000 corneas, and 2300 hearts are transplanted in the United States But there is considerable excess demand for these organs, so that many potential recipients must without them, some of whom die as a result For example, as of July 2011, there were about 111,500 patients on the national Organ Procurement and Transplantation Network (OPTN) waiting list However, only 28,662 transplant surgeries were performed in the United States in 2010 Although the number of transplant surgeries has nearly doubled since 1990, the number of patients waiting for organs has increased to nearly five times its level in 1990.3 To understand the effects of this law, let’s consider the supply and demand for kidneys First the supply curve Even at a price of zero (the effective price under the law), donors supply about 16,000 kidneys per Source: Organ Procurement and Transplantation Network, http://www.optn.transplant.hrsa.gov 326 PART • Producers, Consumers, and Competitive Markets year But many other people who need kidney transplants cannot obtain them because of a lack of donors It has been estimated that 8000 more kidneys would be supplied if the price were $20,000 We can fit a linear supply curve to this data—i.e., a supply curve of the form Q = a + bP When P = 0, Q = 16,000, so a = 16,000 If P = $20,000, Q = 24,000, so b = (24,000 - 16,000)/20,000 = 0.4 Thus the supply curve is Supply: QS = 16,000 + 0.4P Note that at a price of $20,000, the elasticity of supply is 0.33 It is expected that at a price of $20,000, the number of kidneys demanded would be 24,000 per year Like supply, demand is relatively price inelastic; a reasonable estimate for the price elasticity of demand at the $20,000 price is −0.33 This implies the following linear demand curve: In §2.6, we explain how to fit linear demand and supply curves from information about the equilibrium price and quantity and the price elasticities of demand and supply Demand: QD = 32,000 - 0.4P These supply and demand curves are plotted in Figure 9.6, which shows the market-clearing price and quantity of $20,000 and 24,000, respectively S′ $40,000 S D $30,000 Price B $20,000 C $10,000 A D $0 8,000 16,000 24,000 32,000 Quantity F IGURE 9.6 THE MARKET FOR KIDNEYS AND THE EFFECT OF THE NATIONAL ORGAN TRANSPLANTATION ACT The market-clearing price is $20,000; at this price, about 24,000 kidneys per year would be supplied The law effectively makes the price zero About 16,000 kidneys per year are still donated; this constrained supply is shown as S' The loss to suppliers is given by rectangle A and triangle C If consumers received kidneys at no cost, their gain would be given by rectangle A less triangle B In practice, kidneys are often rationed on the basis of willingness to pay, and many recipients pay most or all of the $40,000 price that clears the market when supply is constrained Rectangles A and D measure the total value of kidneys when supply is constrained Index A Abadie, Alberto, 3n6 Absolute advantage, 618–619 Accounting costs, 230 Accounting profit, long-run competitive equilibrium and, 301–302 Ackerman, Frank, 677n12 Acreage limitation programs, 334 Actual returns, 178 Actuarial fairness, 172–173 Adams, Frank A., III, 327n4 Ad valorem tax, 345 Adverse selection, 634 Advertising, 429–433 effects of, 430 elasticity of demand and, 431 in practice, 432–433 rule of thumb for, 431–432 Advertising game, 491 Advertising-to-sales ratio, 431 Agency relationships, 645–651 Aggregate demand, 128–129 Agostini, Claudio, 51n15 Airbus, 513–514 Airline/aircraft industries competition and collusion in, 501–502 jet fuel demand and, 536–537 learning curves and, 265 price discrimination and fares, 409–410 regulation and, 330–331 strategic policy and, 512–514 Akerlof, George A., 194n29, 632n1 Allen, Mike, 337n9 Allocations, efficient, 604–606 Aluminum smelting short-run cost of, 240–242 short-run output of, 290–291 American Airlines, 392–393, 501–502 Amortization, 234–235 Anchoring, 194–195 Andreyeva, T., 370n6 Animal health warranties, 645 Antitrust laws, 389–395 anticompetitive conduct and, 391 Antitrust Division of Department of Justice and, 391 enforcement of, 391–392 in Europe, 392 Federal Trade Commission and, 391, 392 illegal combinations and, 389–390 parallel conduct and, 390 732 predatory pricing and, 390 private proceedings and, 391 Apple, 8, 390 Apple iPod, 621–622 Arbitrage, definition of, Arc elasticity of demand, 36–37 Archer Daniels Midland Company, 10, 379, 393 Asset beta, 575 Asset returns, 177–179 Assets definition of, 176 expected vs actual returns, 178 risky and riskless, 177 Astra-Merck, 364–365 Asymmetric information adverse selection and, 634 cost-benefit comparison, 640–641 efficiency wage theory and, 654–656 equilibrium, 640 guarantees and warranties, 642 implications of, 634–635 integrated firms and, 652–654 labor markets and, 654–656 managerial incentives and, 652–654 market signaling and, 638–643 moral hazard and, 643–645 principal-agent problem, 645–651 quality uncertainty and, 632–638 reputation and, 636 standardization and, 636 AT&T, 417–419 Auction markets, defined, 516 Auctions, 516–524 bidding and collusion and, 521 common-value auctions, 519–520 formats, 517 Internet, 522–524 legal services and, 522 maximizing auction revenue, 520–521 private-value auctions, 517–518 valuation and information and, 517–518 winner’s curse and, 519–520 Automobile industry See also specific companies choosing new car, 579–580 demand and, 40–45 design and, 77–78, 88–89 emission standards and, 17–18 hybrid cars, 16 product differentiation and, 452 variable cost curve and, 266 Autor, David H., 554n10 Average costs, 239 Average expenditure curve, 537, 546, 547 definition of, 383 monopsony power and, 546–547 Average fixed costs, 237 Average products of labor curve, 209 production process and, 206–207 relationship with marginal products, 209 Average revenue, monopoly and, 358–359 Average total costs, 237 Average variable costs, 237, 291–292 Axelrod, Robert, 498n9 B Babock, Linda, 196n34 Backward-bending supply of labor, 539 Badger Meter, 501 Bads (goods), 76–77 Bailey, Elizabeth, 675n10 Baily, Martin N., 46n12 Bajari, Patrick, 522n22 Baker, Jonathan B., 142n12 Bandwagon effect, 136 Bankruptcies, recent rise in, 282 Banzhaf, Spencer, 665n2 Bargaining Coase theorem and, 685, 687 economic efficiency and, 685–686 strategy and, 508–509, 685 Bargaining power, 548 Barlow, Connie C., 59n22 Barnes, James, 39n9 Barnett, A H., 327n4 Barney, Dwane L., 327n4 Barriers to entry, 376 Baseball See Major league baseball BASF A.G of Germany, 393 Battle of the sexes game, 497–498 Baye, Michael, 175n8 Beach location game, 493–494 Bebchuk, Lucian A., 648n14–15 Becker, Gary S., 164n5 Behavioral economics, 67–69, 189–197 anchoring and, 194–195 decision making biases and, 194–195 endowment effect and, 190–191 loss aversion and, 191 INDEX • 733 probabilities and uncertainty, 195 reference point and, 190–191 rule-of-thumb and, 194–195 Beijing sulfur dioxide emissions, 672–673 Bell, Frederick W., 689n22 Berliner, Diane T., 622n9 Berndt, Ernst R., 433n23 Berry, Steven, 89n8 Bertrand, Joseph, 465 Bertrand model, 465–466 “Best fit” criterion, 701 Bicycle markets, 11–12 Bidding, collusion and, 521 Bilateral monopoly, 388 Blackley, Dixie M., 313n10 Blair, Roger D., 327n5 Block pricing, 404 BMW, 426 Boeing, 513–514 Bonds cash flow value from, 565 definition of, 564 effective yield on, 566–567 perpetuities, 565–566 value of, 564–569 Bonus-payment systems, 651 Boskin, Michael, 105n15 Boyle, Robert, 6n2 Bram, Jason, 32n5 Braniff Airways, 392–393 Brealey, Richard, 574n12 Brownell, K.D., 370n6 Bryan, Michael F., 105n17 Bubbles, 185–189 Budget constraints, 82–86 Budget line, 82–84 definition of, 82 income changes and, 84 market baskets and, 83 Bundling, 419–429 mixed vs pure bundling, 423–426 in practice, 426–427 relative valuations and, 420–423 tying and, 428–429 zero marginal costs and, 425 Burrows, James, 297n5 Business executives, risk choice and, 169–170 Business school, value of, 582–584 Buyer interaction, monopsony and, 387 Buyer numbers, monopsony and, 387 C Cable television, bundling and, 426 CAFE (Corporate Average Fuel Economy), 17 Camerer, Colin, 189n23, 196n34 Capacity constraints, 45 Capital company cost of, 576 price of, 244 rental rate of, 244–245 Capital asset pricing model, 575–576 Capital gain, 177 Capital-intensive technology, 221 Capital investment discount rate and, 569 negative future cash flows and, 572 net present value criterion for, 569–573 opportunity cost of capital, 570 real vs nominal discount rates and, 571–572 Capital loss, 177 Card, David, 16n8, 549n7 Cardinal utility function, 80 Carpet industry, returns to scale in, 225–226 Cartels, 477–482 analyzing CIPEC, 479–480 analyzing OPEC, 478–479 conditions for success of, 478 definition of, 452 monopoly power and, 478 price analysis and, 478–480 Case-Shiller Housing Price Index, 186, 188 Cash flows, negative future, 572 Caulkins, Jonathan P., 673n7 Ceiling prices, 58, 319 Cellular phone service pricing, 417–419 Centner, Terence J., 645n8 CEO compensation, 647–648 Cereal, ready-to-eat, 142 Chain-weighted price index, 104 Chandler, Alfred Jr., 202n1 Chay, Kenneth Y., 135n9 Chemical processing industry, learning curve and, 264–265 China Mobile, 417, 418 Chinese housing bubble, 187 Christensen, Laurits, 268n19 Christie’s auction house, 521, 522 Chrystal, K Alec, 622n9 Cigliano, Joseph M., 536n2 Cinemax, 426 Civil Aeronautics Board (CAB), 330 Clayton Act (1914), 390 Clean Air Act, 134–135, 674 Clinton Corn Processing Company, 10 Coal, demand for (multiple regression analysis), 706–707 Coase, Ronald, 203n2, 685n20, 691n23 Coase theorem, 685, 687 Cobb-Douglas production function, 276–278 Cobb-Douglas utility function, 153 Coffee markets monopolistic competition in, 455–456 weather conditions and pricing, 46–48 Cohen, Alma, 648n15 Cola markets, monopolistic competition in, 455–456 College education costs of, 13–14, 28 net present value of, 581 College trust funds, 92 Collusion, 469–472, 521 Commercial airlines See Airline/aircraft industries Commercial banking, price rigidity and leadership in, 475 Commercial paper rate, 590 Commercial real estate, September 11 effects on, 31–32 Commitment, credibility and, 506–508 Common property resources, 687–690 Common-value auctions, 518, 519–520 Company cost of capital, 576 Comparative advantage, 618–619 Compensation, executive, 647–648 Competition Directorate, 392 Competition vs collusion, 469–472 Competitive buyer, competitive seller compared, 383 Competitive equilibrium, 301–304, 607–609 Competitive firms See also Profit maximization demand and marginal revenue for, 285–287 economic rent and, 304–305 incurring losses and, 289 input price changes and, 293–294 long-run equilibrium and, 301–304 long-run profit maximization and, 300–301 long-run supply and, 306–314 producer surplus in long run and, 305–306 producer surplus in short run and, 298–300 profit maximization by, 287 short-run profit maximization by, 287–289 short-run supply curve and, 292–295 Competitive markets consumer and producer surplus and, 318–323 consumer equilibrium and, 607–609 deadweight loss and, 321 economic efficiency of, 323–328, 609–610 efficiency of, 623–625 failure and, 625–627 government policies and, 317–323 incentive programs and, 334–335 market failure and, 323–325 minimum prices and, 328–331 perfectly competitive markets, 279–281 price supports and, 332–339 production quotas and, 333–338 supply in, 537–539 taxes or subsidies and, 345–351 welfare loss and, 324 Complementary goods, 24–25, 118–119 Completely inelastic demand, 34, 35 Completeness, consumer preferences and, 70 Computers production costs of, 235–236 wage inequality and, 554–555 Concentration ratio, 376n10 Condominiums, 283–284 734 • INDEX Congleton, Roger D., 379n12 Constant-cost industries, 307–308 Constant returns to scale, 223 Constant sum game,488n2 Constrained optimization, 149 Consumer behavior See also Consumer preferences assumptions and, 68–70 budget constraints and, 82–86 consumer choice and, 86–92 consumer preferences, 69–82 corner solutions and, 89–90 cost-of-living indexes and, 100–105 marginal utility and consumer choice, 95–100 price supports and, 332 revealed preference and, 92–95 steps and, 68 theory of, 67–68 trade-offs and, Consumer choice, 86–92 Consumer expenditures price elasticity and, 126–128 in United States, 117–118 Consumer groups, creation of, 405–406 Consumer investment decisions, 578–580 Consumer preferences, 69–82 See also Consumer behavior basic assumptions about, 70 completeness and, 70 fairness and, 192–194 framing, 191 health care choices, 90–91 indifference curves and, 71–72 indifference maps and, 72–73 marginal rate of substitution and, 74–75 market baskets and, 69–70 more vs less and, 70 perfect substitutes and perfect complements and, 75–77 reference points and, 190–191 transitivity and, 70 Consumer Price Index (CPI), 12, 100, 105 Consumer satisfaction maximization, 86–88 Consumer surplus, 132–135, 318–323 application of, 134 capturing, 400–401 change in, 319–320 demand and, 132–134 generalized, 133 Consumption decisions See also Bundling products bundled, 421 products sold separately, 421 Contract curve, 606–607 Convenience stores advertising and, 432–433 markup pricing and, 372–373 Cooper, John C B., 55n18 Cooperative games, 488–489 Cooperatives, 283–284 Cooter, Robert, 685n19 Cootner, Paul H., 46n12 Copper price of, 29–30, 52–54 short-run world supply of, 297–298 supply and demand for, 53 supply of, 45–46 Copyrights, 376 Corner solutions, 89–90 Corporate bonds versus prime rate, 475 rates and, 590 yields on, 567–569 Corporate takeovers, 646 Corts, Kenneth S., 241n5 Cost-benefit comparison, 640–641 Cost constraints, production and, 202 Cost curves, 238–240 Cost functions, 265–269 Cost minimization, 249–250, 273–274 Cost-of-living adjustments, 102 Cost-of-living indexes, 100–105 chain weighting and, 104 ideal, 101–102 Laspeyres index, 102–103 Paasche index, 103–104 Cost-reducing innovation, 515 Costs See Production costs Cost theory, duality in, 275–276 Coughlin, Cletus, 622n9 Coupons, economics of, 408–409 Cournot, Augustin, 458 Cournot equilibrium, 460–461, 464–465 Cournot model, 458–461 equilibrium in, 460–461 linear demand curve and, 461–463 reaction curves and, 460 Cournot-Nash equilibrium, 460 Cramer, Gail L., 343n13 Crandall, Robert, 392, 502 Crawfish fishing in Louisiana, 689–690 Credibility, 506–508 Credit market, adverse selection and, 635 Cremers, Martjin, 648n14 Crime deterrence, 164–165 Cross-price elasticity of demand, 35 Crude oil, price of, 55 Cubic cost function, 267 Customer preferences ordinal vs cardinal utility, 80 utility functions and, 79–80 Cyclical industries, 41–43 D Dahl, Carol, 44n11 Deadweight loss definition of, 321 from monopoly power, 378 from monopsony power, 387 taxes and, 346 Deaton, Angus, 98n11 Decision making, 163–164 Decision making biases, 194–195 Decreasing-cost industries, 309 Decreasing returns to scale, 223 Dedrick, Jason, 621n8 Deere, Donald, 550n8 Degree of economies of scope, 259–260 De La Torre Ugarte, Daniel G., 39n9 Dell, 8, 235 Delta Air Lines, 234, 243 Demand See also Demand curves; Supply and demand competitive firms and, 285–287 consumer surplus and, 132–134 cyclical industries and, 41–43 durability and, 40–41 elasticity of, 126–127 income elasticities and, 40–43 short-run vs long-run elasticities, 39–48 speculative, 129 Demand curves, 23–25 See also Supply and demand; Individual demand competitive firms and, 285–288 complementary goods and, 24–25 individual demand curves, 112–114 market demand curves, 124–132 monopolies and, 365 shifting of, 24 substitute goods and, 24–25 Demand estimation, 139–143 demand relationship form and, 140–142 interview and experimental approaches to, 143 statistical approach to, 139–140 Demand for loanable funds, 588 Demand shifts, monopolies and, 365–366 Demand theory, 149–157 Cobb-Douglas utility function and, 153 duality in consumer theory and, 154–155 equal margin principle, 151 income and substitution effects and, 155–157 marginal rate of substitution and, 151–152 marginal utility of income and, 152 method of Lagrange multipliers and, 150–151 utility maximization and, 149–150 Department of Justice Antitrust Division, 391, 394 Depletable resources, 584–587 Deposits, refundable, 677 Depreciation, 243–244 Deregulation, 330–331 Derived demands, 530 Dermisi, Sofia, 32n6 Developed countries, labor productivity in, 215 Deviations, risk and, 161–163 Diaper wars, 515–516 Differentiated products, price competition and, 465–467 Diminishing marginal returns, 217–219 Diminishing marginal utility, 95 Direct marketing experiments, 143 Discount bonds, 589 INDEX • 735 Discounted present value, 561, 562 Discount rate commercial banks and, 589 determination of, 569–570 real vs nominal, 571–572 risk-adjusted, 575–576 Discounts, quantity, 404 Discrimination, price See Price discrimination Diseconomies of scale, 255–256, 308 Diseconomies of scope, 259 Disequilibrium, market, 608 Disney Channel, 426 Disneyland, 416 Disposable diaper industry, capital investment in, 576–578 DiTella, Raphael, 81n4 Diversifiable risk, 574–575 Diversification risk and, 170–171 stock market and, 171 Dividend yields for S&P 500, 184 Dixit, Avinash, 492n5, 516n19, 570n10 Dollar bill game, 489 Dominant firm model, 476–477 Dominant strategy, 490–491 Double marginalization, 442–443 Dranove, David, 176n9 Dreyfus, Mark K., 580n15 Duality, 154–155 Dulberger, Ellen R., 105n15 Duopoly, 458, 462 DuPont, 514–515 Durability demand and, 40–41 supply and, 45–46 Durable equipment consumption of, 43 investment in, 42–43 Dutch auction, 517 DVD rentals, effect on movie theater tickets, 596–597 E eBay, 522–524 Economic efficiency bargaining and, 685–686 of competitive markets, 323–328, 609–610 equity and, 610–613 exchange and, 602–610, 624 free trade and, 618–623 market failure and, 625–627 monopolistic competition and, 454–455 production and, 613–618, 624 Economic forecasting, 704–705 Economic inefficiency, moral hazard and, 645 Economic rent definition of, 305 factor markets and, 542–544 Economic theories, 5–6 Economies of scale, 255–256 barriers to entry and, 376 learning versus, 262–264 Economies of scope, 258–261 Edgeworth box, 603–604 Education benefits of, 640–642 college costs and, 13–14, 28 determining spending levels of, 694–695 net present value and, 581 public, 691 Effective yield, bond, 566–567 Efficiency, public goods and, 691–692 Efficiency wage theory, 654–656 Efficient allocations, 602, 604–606 Effluent fees, 247–249 Egalitarian view of equity, 611, 612 Eggs, cost of, 13–14, 28 Elasticity in supply and demand, 33–39, 126–128 See also Price elasticity advertising and, 431 arc elasticity of demand, 36–37 cross-price elasticity of demand, 35 definition of, 33 income elasticity of demand, 34–35, 40–43 linear demand curve, 34 long-run, 311–312 monopolies and, 376 monopsony and, 385–389 oil and, 56–58 point vs arc elasticities, 36–37 price markup and, 373 short-run market and, 296–297 short-run vs long-run elasticities, 39–48 soft drinks and, 370 tax impact on, 347 Electric power, cost functions for, 268–269 Ellerman, A.D., 675n10 Ellerman, Denny, 675n10 Elliott, Kimberly Ann, 622n9 Ellis, Gregory M., 587n21 Elobeid, Amani, 598n1 Emissions efficient levels of, 668 emissions trading and clear air, 673–675 marginal external costs of, 666 standards vs fees and, 669–671 stock externalities and, 678–684 sulfur dioxide, 665–666, 672–673 transferable emissions permits, 671–672 Emissions fee, 668–669 Emissions standard, 668 Empty threats, 506 Endowment effect, 190–191 Energy efficiency, 251–253 through capital substitution for labor, 252 through technological change, 252 Energy Independence and Security Act, 17 Engel curves, 116–118 English (or oral) auction, 517 Enomoto, Carl E., 374n9 Entry and exit, competitive equilibrium and, 300, 302–304 Entry barriers competitive strategy and, 376 oligopolies and, 456 Entry deterrence, 510–516 Entry fees, 414 Equal marginal principle, 96, 151 Equilibrium, 25–26, 640 competitive, 301–304, 607–609 consumer, 607–609 Cournot equilibrium, 460–461, 464–465 dominant strategies and, 491 exchange efficiency and, 607–609 factor markets and, 542–545 general analysis and, 595–602 labor market, 542–545 long-run, 301–304, 453–454 market changes and, 26–32 Nash equilibrium, 458, 466, 467, 469, 492–498 oligopoly and, 457–458 short-run, 453–454 Stackelberg equilibrium, 492, 492n6 supply and demand and, 25–26 Equilibrium price, 49 Equilibrium quantity, 49 Equitable allocations, 610–613 egalitarian view of, 611, 612 market-oriented view of, 611, 612 perfect competition and, 612–613 Rawlsian view of, 611, 612 social welfare functions and, 611–612 utilitarian view of, 611, 612 utility possibilities frontier and, 610–612 Equity, four views of, 612 Espey, Molly, 44n11 Ethanol global market, 598–600 European antitrust laws, 392 European Merger Control Act, 392 European Union, 392 ex ante forecasts, 704 Excess demand, 58, 608 Excess supply, 608 Exchange economy, defined, 602 Exchange efficiency, 602–610 advantages of trade and, 602–603 competitive equilibrium and, 607–609 contract curve and, 606–607 Edgeworth box and, 603–604 efficient allocations and, 604–606 Excise tax, effects on monopolies, 367 Executive compensation, 647–648 Exhaustible resources, 584–587 Expansion path, 249–251 Expansion strategy, 509 Expected payoff, 495 Expected returns, 178 Expected utility, 165, 195 Expected value, 161 ex post forecasts, 705 Extensive form of a game, 503–504 736 • INDEX Extent of market, 9–12 External costs, negative, 662–664 Externalities, 661–666 common property resources, 687–690 crawfish fishing in Louisiana, 689–690 emissions example, 667–678 marginal external benefit, 664 marginal external costs, 663 marginal social benefit, 664 marginal social costs, 663 market failure, 323–325, 667–678 municipal solid waste example, 678 negative externalities and inefficiency, 662–664 positive externalities and inefficiency, 664–665 property rights, 684–687 public goods, 690–694 recycling example, 675–677 stock, 678–684 F Facebook, 138–139 Factor inputs demand when one input is variable, 530–533 demand when several inputs are variable, 533–534 marginal revenue product, 531 market supply of, 539–541 supply to a firm, 537–539 Factor markets competitive, 529–542 economic rent and, 542–544 equilibrium in, 542–545 market demand curve and, 534–535 with monopoly power, 550–555 with monopsony power, 546–550 Factors of production, 204 Factory, net present value of, 570–571 Fair, Ray C., 541n3 Fairness, 192–194 Farber, Henry S., 196n34 Federal funds rate, 590 Federal Trade Commission Act (1914, amended 1938, 1973, 1975), 391 Financial losses, competitive firm incurring, 289–290 Firm interactions, monopoly power and, 377 First-degree price discrimination, 401–404 First mover advantage, 463–464 Fisher, Franklin M., 46n12 Fishing industry common property resources and, 687–690 property rights and, 685 Fishman, Alan, 647 Fixed costs, 233–234 Fixed input, 205 Fixed-proportions production function, 219–220 Fixed-weight indexes, 103 Flows vs stocks, 560–561 Foley, Patricia, 53n16 Food, Conservation, and Energy Act of 2008, 39 Food cooperatives, 283 Food crisis, 212–214 cereal yields and world price of food, 213 index of world food production per capita, 213 Ford, Henry, 656 Ford Motor Company, 17, 77–78, 88, 310, 389, 457, 656 Formby, John P., 130n5 Fox, Merritt B., 646n9 Framing, 191 Frech, H E., III, 98n12 Free entry and exit, perfect competition and, 280–281 Free riders, 693 Free trade, 618–623 comparative advantage and, 618–619 expanded possibilities frontier and, 619–620 gains from, 618–623 protectionism and, 622–623 Friedlaender, Ann F., 260n11 Friedman, James W., 492n5 Frijters, Paul, 81n5 Fudenberg, Drew, 492n5 Fullerton, Don, 673n7 Future cash flows, negative, 572 G Games, defined, 487 Game theory See also Prisoners’ dilemma acquiring a company and, 490 auctions and, 516–524 bargaining strategy and, 508–509 battle of the sexes game, 497–498 beach location game, 493–494 commitment and credibility and, 506–508 dominant strategy and, 490–491 empty threats and, 506 entry deterrence and, 510–516 extensive form of a game and, 503–504 finite number of repetitions and, 499 infinitely repeated game, 499 matching pennies game, 496–497 maximin strategies and, 494–496 mixed strategies and, 496–498 moving first advantage and, 504–505 Nash equilibrium and, 492–498 noncooperative vs cooperative games, 488–489 product choice problem, 492–493 repeated games, 498–502 reputation and, 507–508 sequential games, 502–505 strategic decisions and, 487–490 tit-for-tat strategy, 498–499 winner’s curse and, 519–520 Gasoline demand for, 40–41, 43–45 long-run demand for, 131–132 prices and per capita consumption, 131 rationing of, 98–100 taxes on, 122–124, 349–351 Gates, Bill, 394 Gateway, 234 General Electric, 43 General equilibrium analysis, 595–602 “contagion” across world stock markets, 600–601 economic efficiency, 601–602 General Foods, 456 General Mills, 67 General Motors, 5, 43, 89, 177, 178, 201, 267, 310, 358, 389 Ghemawat, Pankaj, 509n12, 514n16 Ghosh, Soumendra N., 374n9 Gibson, Robert C., 44n11 Giffen good, 122 Gillette, 417 Gillingham, Kenneth, 251n8 Glaister, Stephen, 44n11 Global warming, 679–684 reducing GHG emissions, 683 Gokhale, Jagadeesh, 105n17 Golden parachutes, 648 Gonik, Jacob, 654n19 Gordon, Robert J., 105n15 Government bailouts, 185 Government intervention competitive markets and, 317–323 price controls, 58–60 price supports and, 332–333 Graham, Daniel, 44n11 Graham, David, 331n7 Greene, David, 44n11 Greene, William H., 269n19 Greenhouse gases See Global warming Greenstone, Michael, 135n9 Griffin, James M., 55n18, 294n4 Griliches, Zvi, 105n15 Gross domestic product (GDP), 42–43 Grossman, Gene M., 621n7 Guarantees, product, 642 H Hahn, Robert W., 673n8 Haisken-Denew, John P., 81n5 Hall, Robert E., 91n10 Halvorsen, Robert, 587n21 Hamermesh, Daniel, 643n7 Hamilton, James D., 54n19 Hansen, Julia, 130n5 Happiness marginal utility and, 97–98 ordinal scale for, 81–82 Harrison, David, Jr., 693n25 Hauser, John, 467n5 Health care consumer choice of, 90–91 inefficiency in health care system, 626–627 production function for, 211–212 INDEX • 737 Herd behavior, 184, 195 Hersey Products, 501 Herzlinger, Regina E., 649n16 Hester, Gordon L., 673n8 Hewlett-Packard, 8, 235 Hicks, John, 156 Hicksian substitution effect, 156–157 Himmelberg, Charles, 195n33 Hochman, Eithan, 222n11 Holden, Reed, 291n3 Home Box Office, 426 Homogeneous products, price competition with, 465–467 Horizontal integration, 439, 651 Horizontal summation of demand, 124 Hortaỗsu, Ali, 522n22 Hossain, Tankim, 195n32 Hotelling, Harold, 585n20 Hotelling rule, 585n20 Housing cooperatives, 283–284 demand for, 129–130 long-run supply of, 313–314 selling a house, 192 Housing price bubble, 185–188 Hufbauer, Gary Clyde, 622n9 Human capital, 580–584 Human kidneys, market for, 325–328 Hybrid cars, 16 I IBM, 235, 429 Ideal cost-of-living indexes, 101–102 Import tariffs or quotas, 340–344 Incentive design, in integrated firms, 652–654 Incentive programs, 334–335 Income budget constraints and, 84 distribution of, 29 elasticities of demand, 34–36, 41 happiness and, 82 individual demand and, 113–114 risk aversion and, 166–167 from sales jobs, 161, 164 Income-consumption curve, 114–115 Income effects, 121–122, 155–157 Increasing-cost industries, 308–309 Increasing returns to scale, 223, 256 Incremental profit, 402n3 Indifference curves consumer preferences and, 71–72 convexity, 75 ordinal utility function and, 80 risk and, 180–183 risk aversion and, 169 shape of, 73–74 utility functions and, 79–80 Indifference maps, 72–73 Individual demand, 112–119 See also Market demand; Network externalities Engel curves and, 116–118 Giffen good and, 122 income and substitution effects and, 119–124 income changes and, 114–115 individual demand curve and, 112–114 normal vs inferior goods and, 115–116 price changes and, 112, 113 substitutes and complements and, 118–119 Individual resource producer, production decisions by, 584–585 Industries, definition of, Industry demand for labor, determining, 534–535 Inefficiency negative externalities and, 662–664 positive externalities and, 664–665 Inelastic demand, 126, 321 Inferior goods, 115–116, 121 Infinitely elastic demand, 34, 35 Infinitely repeated game, 499 Infiniti, 426 Inflation-adjusted returns, 178 Inflexibility, short-run production, 253–254 Information market failure and, 324 value of and risk, 174–176 Informational cascades, 187, 189 Inglehart, Ronald, 81n6 Input choices, production and, 202 Input efficiency, 613–614 Input flexibility, 217 Input price changes, 293–294 Input substitution, 218–219 Insurance, 171–173 actuarial fairness and, 172–173 adverse selection and, 634–635 law of large numbers and, 172 moral hazard and, 643–645 risk and, 172–173 title insurance, 173–174 Integrated firm, asymmetric information in, 652–654 Intercollegiate athletics, cartelization of, 480–481 Interest rates determination of, 588–590 present discounted value and, 561–564 variety of, 589–590 International Bauxite Association (IBA), 477 International Coffee Agreement (ICA), 47n13 International competition, strategic trade policy and, 512–514 International Competition Network, 392 International Council of Copper Exporting Countries (CIPEC), 479, 480 International trade comparative advantage and, 619 expanded possibilities frontier and, 619–620 gains from, 618–623 protectionism and, 622–623 Internet auctions, 522–524 Internet bubble, 185 Intertemporal price discrimination, 410–413 Intertemporal production decisions, 584–587 individual resource producers and, 584–585 market price behavior and, 584–585 resource production by monopolist, 586–587 user cost and, 585–586 Interviews, demand determination and, 143 Investment decisions, consumer, 578–580 Investment portfolio, risk and, 179–180 iPod production, 621–622 Irvin, Thomas R., 665n3 Irwin, D A., 265n26 Isocost line, 245 Isoelastic demand, 127–128 Isoquant maps, 217 Isoquants, 216–217 Isoutility curve, 79 J Jensen, Clarence W., 343n13 Jet fuel, demand for, 536–537 Job market signaling, 638–643 Johnson, D Gale, 343n13 Jones, Charles I., 91n10 Jorgenson, Dale W., 105n15 Joskow, Paul, 675n10 Just, Richard E., 222n11 K Kahn, James R., 44n11 Kahneman, Daniel, 98n11, 189n24, 191n27, 194n31 Kao Soap Ltd., 467–469, 471–472 Kaplan, Daniel P., 331n7 Kaplow, Louis, 671n5 Kaserman, David L., 327n4, 327n5 Katz, Lawrence, 554n10 Kessler, Daniel, 176n9 Killinger, Kerry, 647, 648n13–14 Kimberly-Clark, 515–516, 576–578 Kinked demand curve model, 473–474 Klein, Benjamin, 429n19 Klenow, P J., 265n15 Knetsch, Jack, 189n24, 191n27 Knight, Frank, 160n1 Knittel, Chris, 131n6 Kohlhase, Janet E., 541n3 Kraemer, Kenneth L., 621n8 Kraft General Foods, 142 Krasker, William S., 649n16 Kreps, David, 465n2, 497n7 Krueger, Alan, 16n8, 549n7, 554n10 Krugman, Paul R., 513n14 L Labor curve average product of, 209 marginal product of, 209 738 • INDEX Labor market asymmetric information in, 654–656 equilibrium in, 542–545 predicting requirements in, 263 productivity and, 214 signaling in, 638–642 Labor supply elasticities of, 541 for one- and two-earner households, 541–542 shifts in, 532 Lagrange multipliers, 150–151 Lagrangian function, 150 Land rent, 544 Langley, Sudchada, 37n8, 129n3 Laspeyres price index, 102–103 Law of diminishing marginal returns, 209–211 Law of large numbers, 172 Law of small numbers, 195 Learning curve changes in cost and, 261–265 versus economies of scale, 262–264 graphing of, 261–262 in practice, 264–265 Least-squares criterion, 701 Least-squares estimator, 702n2 Least-squares regression, 266 Lee, Jungmin, 643n7 Lee, William C., 98n12 Legal service auctioning, 522 Legal solutions, property rights and, 686–687 Lehn, Kenneth, 637n3 Lemons problem, 633 Lenovo, Leontief production function, 219–221 Lerner Index of Monopoly Power, 371–373 Levinsohn, James, 89n8 Lewbel, Arthur, 425n17 Lexus, 426 Lieberman, Marvin, 264n13 Lin, William, 39n9 Linden, Greg, 621n8 Linear demand curves, 34 Linear regression, 700 Linear supply and demand curves, 49–52, 127, 461–463 Linux, 390 List, John A., 191n8 Loanable funds, supply and demand of, 588–590 Loewenstein, George, 189n23, 196n34 Long, M.W., 370n6 Long-run average cost curve (LAC), 254 Long-run competitive equilibrium, 303 accounting profit and, 301–302 economic profit and, 301–302 entry and exit and, 300, 302–304 firms having different costs and, 304 firms having identical costs, 304 monopolistic competition and, 453–454 opportunity cost of land and, 304 zero economic profit and, 302 Long-run costs, 243–253 average costs, 254–255 choosing inputs and, 245–247 cost minimization with varying output levels and, 249–250 cost minimizing input choice and, 244–245 effluent fees and, 247–249 expansion path and, 249–251 isocost line and, 245 price of capital and, 244 relationship with short-run costs, 257–258 rental rate of capital and, 244–245 user cost of capital and, 243–244 Long-run elasticities, 39–48, 311–312 Long-run expansion path, 253 Long-run marginal cost curve, 254–255 Long-run producer surplus, 305–306 Long-run production, 205 Long-run profit maximization, 300–301 Long-run supply, 306–314 constant-cost industries and, 307–308 decreasing-cost industries and, 310 elasticity and, 311–312 increasing-cost industries and, 308–309 tax effects and, 310–311 Loss aversion, 191 Lost earnings, value of, 563–564 Lustgarten, Steven H., 389n17 M MacAvoy, Paul W., 59n22 MacCrimmon, Kenneth R., 169n7 MacCulloch, Robert, 81n4 MacKie-Mason, Jeffrey K., 478n12 Macroeconomics, definition of, Macunovich, Diane J., 541n3 Majority-rule voting, 694 Major league baseball asymmetric information and, 638 lemons in, 637–638 monopsony power and, 548–549 Maloney, M T., 674n9 Malthus, Thomas, 211, 212 Managerial incentives, 652–654 applications, 654 Manthy, Robert S., 30n4 Marginal benefit, 87 Marginal costs average-marginal relationship, 239–240 consumer choice and, 87 estimation of, 291–292 external, 663 monopolies and, 359–361 opportunity, 551 production and, 236–237 profit maximization and, 284–287 short-run, 238 Marginal expenditure, 383, 537, 546–547 Marginal products labor curve and, 209 production process and, 206–207 relationship with average products, 209 Marginal rate of substitution, 74–75, 114, 151–152 Marginal rate of technical substitution, 218, 247, 274–275 Marginal rate of transformation, 614–615 Marginal revenue monopoly and, 358–359 one variable input and, 530–533 profit maximization and, 284–287, 361–362 several variable inputs and, 533–534 Marginal revenue product, 531 Marginal social cost, 663 Marginal utility consumer choice and, 95–100 of income, 152 utility maximization and, 149 Market baskets (market bundles) budget line and, 83 consumer preferences and, 69–70 Market-clearing price, 25, 326 Market concentration, monopolies and, 376 Market data, fitting supply and demand curves to, 49–52 Market definition, 8, 9–10 Market demand, 124–132 coupons and rebates and, 409 curve of, 534–535 elasticity of demand and, 126–128 from individual to market demand, 124–126 inelastic demand, 126 isoelastic demand, 127–128 Market failure, 323–325 correcting, 667–678 externalities and, 324, 626 incomplete information and, 625–626 lack of information and, 324 market power and, 625 public goods and, 626, 692–693 Marketing experiments, direct, 143 Market mechanism, supply and demand curve and, 21, 25–26 Market-oriented view of equity, 611, 612 Market power, 358, 625 elasticities of demand for soft drinks, 370 production, price, and monopoly power, 371 vertical integration and, 439–443 Market price, 8–9 Market price behavior, 585 Markets competitive vs noncompetitive, extent of, 9–12 nature of, 7–12 perfectly competitive, role of, Market signaling, asymmetric information and, 638–643 Market supply elasticity of, 296–297 short-run curves and, 295–300 Market value maximization, 282n1 Markup pricing, 372–373 INDEX • 739 Matching pennies game, 496–497 Maximin strategies, game theory and, 494–496 Mayer, Christopher, 195n33 McAfee, Preston, 516n19 McClennan, Mark, 176n9 McDermott, Shaun P., 673n7 McDonald’s, 428, 636 McKean, Brian J., 673n8 Medical care, value of information and, 175–176 Medicare, 635n2, 636–637 Menell, Peter S., 678n13 Merck, 281 Mercurio Europeo, 478 Metals, supply of, 45–46 Metering demand, 428–429 Method of Lagrange multipliers, 150–151 Microeconomics definition of, reasons to study, 16–18 themes of, 4–7 Microsoft, 390, 567–569 Microsoft Corporation, 235, 394–395, 429, 530 Milgrom, Paul, 516n19 Military pay, 545 Milk cartel, 481–482 Miller, Jonathan, 284n2 Mineral resources, 29–31 Minimum cost, producing an output and, 246 Minimum prices, 328–331 Minimum wage history of, 15–16 teenage labor markets and, 549–550 unemployment and, 329 Miranda, Marie Lynn, 678n13 Mixed bundling, 423–426 Mixed strategies, game theory and, 496–498 Mobil Oil, 429 Models, 5–6 Monopoly, 358–368, 452–456 See also Antitrust laws; Monopsony average and marginal revenue and, 358–359 bilateral monopoly, 388 cartels and, 478 deadweight loss and, 378 definition of, 357, 358, 452 demand shifts and, 365–366 economic efficiency and, 454–455 elasticity of market demand and, 376 factor markets and, 550–555 firm interactions and, 377 Lerner Index and, 371–372 makings of, 452–453 measuring power of, 371–372 monopsony compared, 385 multiplant firms and, 367–368 natural monopoly, 380–381 number of firms and, 376–377 output decisions and, 359–361 perfect competition versus, 454 power of, 368–375 price regulation and, 379–380 pricing rule of thumb and, 363–364, 372 production with two plants, 369 regulation in practice and, 381–382 rent seeking and, 378–379 resource production by monopolist, 586–587 short and long run equilibrium and, 453–454 social costs of, 377–382 sources of power, 375–377 tax effects and, 366–367 unionized and nonunionized workers and, 552 wage rates and, 551–552 Monopsony, 382–385 bargaining power and, 548 buyer interaction and, 387 deadweight loss from, 387 definition of, 357, 358 elasticity of market supply and, 386–387 factor markets and, 546–550 marginal and averaged expenditure and, 546–547 monopoly compared, 385 monopsonist buyer, 384 number of buyers and, 387 power and, 382–385 purchasing decisions and, 547–548 social costs of, 387–388 sources of power, 386–387 U.S manufacturing and, 388–389 Montero, J P., 675n10 Moral hazard, 643–645 Morgan, John, 175n8, 195n32 Morkre, Morris E., 343n13 Morrison, S., 331n7 Movies bundling of, 419–420 DVD rental effect on, 596–597 Mueller, Michael J., 587n21 Multiplant firms, monopolies and, 367–368 Multiple regression analysis, 700–707 demand for coal (example), 706–707 economic forecasting, 704–705 estimation, 701–702 goodness of fit, 704 statistical tests, 702–704 Municipal solid waste regulation, 678 Murphy, Kevin M., 550n8 Mutual funds, diversification and, 171 Myers, Stewart, 574n12 N Nagle, Thomas, 291n3 Narasimhan, Chakravarthi, 408n5 Nash, John, 458 Nash equilibrium, 458, 466, 467, 469, 492–498 National Collegiate Athletic Association (NCAA), 481 National defense, 691 National Organ Transplantation Act, 325, 326 Natural Gas Policy Act of 1978, 59n22 Natural gas shortages, price controls and, 59–60, 322–323 Natural monopoly, 377 Natural resource prices, 29–31 Negative externalities, 662–664 Negatively correlated variables, 171 Negative network externalities, 137–138 Neptune Water Meter Company, 501 Net present value capital investment decisions and, 569–573 of college education, 581 discount rates and, 575–576 interest rates and, 589–590 Network externalities, 135–139 bandwagon effect and, 136 Internet auctions and, 523 negative, 137–138 positive, 135–137 snob effect and, 137 Neumark, David, 16n8, 550n8 Nevin, John R., 456n1 Nevo, Aviv, 408n5 Newell, Richard G., 251n8 New York taxicab supply, 312–313, 338–339, 573 Noll, Roger, 548n5 Nominal discount rate, 571–572 Nominal prices, 12–16 Noncompetitive markets, Nonconstant sum game, 488n2 Noncooperative games, 470, 488–489 Nondiversifiable risk, 179, 574–575 Nonexclusive goods, 690–691 Nonprice rationing, 98–100 Nonprofit hospitals, 649 Nonprofit organizations, 649 Nonrival goods, 690 Nonsystematic risk, 574n12 Nonunionized workers, monopoly power and, 552 Normal vs inferior goods, 115–116 Normative analysis, 6–7 North American Free Trade Agreement (NAFTA), 622–623 Northeast Interstate Dairy Compact, 481 Northwestern University Law School, 232–233 No-shirking constraint curve, 655 O Office space, September 11 effects on, 31–32 Oi, Walter Y., 414n12 Oil market, upheaval in, 54–58 price elasticity estimates, 55 price of crude oil, 55 Saudi production cut, impact of, 57 740 • INDEX Oligopoly, 456–464 Cournot model and, 458–461 definition of, 452 dominant firm model and, 476–477 first mover advantage and, 463–464 kinked demand curve model and, 473–474 market equilibrium and, 457–458 Nash equilibrium and, 458 prisoners’ dilemma and, 472–477 Stackelberg model and, 463–464 Oligopsony, 382 Olson, C Vincent, 331n7 Omidyar, Pierre, 523 One-earner households, labor supply and, 541–542 Online consumer electronics market, value of information in, 175 Online trading, 183 Opportunity costs of capital, 570 of land, 304 marginal cost and, 292 measuring, 230–231 Optimal strategy, defined, 488 Optimization, constrained, 149 Orange, 417, 418 Ordinal utility function, 80 Organization of Petroleum Exporting Countries (OPEC), 44, 54–58, 478–479, 585, 587 Organ Procurement and Transplantation Network (OPTN), 325 Orr, James, 32n5 Output decisions, monopolies and, 359–361 Output efficiency, 615–616 Output rule, 288 Over-the-counter drugs, advertising expenditures and, 432–433 P Paasche index, 103–104 Pakes, Ariel, 89n8 Palmer, Karen, 251n8 Parallel conduct, 390 Pareto, Vilfredo, 602 Pareto efficient allocation, 602, 611 Pareto inefficient allocation, 611 Parry, Ian, 44n11 Partial equilibrium analysis, 595, 596 Patents, 376 Payment streams, valuing of, 562–563 Payoff defined, 488 expected, 495 matrix, 470 risk and, 161 Peak-load pricing, 410, 412–413 P/E ratio for S&P 500, 184 Perfect competition, equity and, 612–613 Perfect complements, 75–77 Perfectly competitive markets, 279–281 free entry and exit and, 280–281 price taking and, 280 product homogeneity and, 280 Perfectly elastic supply, 297 Perfectly inelastic supply, 297 Perfect price discrimination, 402 Perfect substitutes, 75–77 Perpetuities, 565–566 Persian Gulf stability, 54–55 Petrin, Amil, 77n3 Petroleum products, short-run production of, 294–295 Peyer, Urs, 648n14 Pfizer, 281 Phelps Dodge, 53 Pillsbury, 409 Pindyck, Robert S., 44n11, 55n18, 59n22, 372n8, 478n12, 570n10, 587n21, 684n18, 700n1 Point elasticity of demand, 36 Polinsky, A Mitchell, 164n5 Pollution demand for clean air and, 693–694 emissions example, 667–678 global warming and, 679–684 recycling and, 675–677 solid waste, 678 value of clean air and, 134–135 Positive analysis, 6–7 Positively correlated variables, 171 Positive network externalities, 135–137 Potential interactions, Predatory pricing, 390 Prediction accuracy, Preemptive investment strategy, 509–510 Present discounted value, 561–564 Price caps, 382 Price changes budget constraints and, 84–86 individual demand and, 112 Price competition, 465 Bertrand model and, 464–465 choosing prices and, 466–467 with differentiated products, 465–467 with homogeneous products, 465–467 Price-consumption curve, 112 Price controls, 58–60, 319–323 Price discrimination, 401–410 See also Bundling consumer group creation and, 405–406 first-degree, 401–404 imperfect, 402–404 intertemporal, 410–412 peak-load pricing and, 410, 412–413 perfect, 402 relative prices and, 406–407 second-degree, 404, 405 third-degree, 404–410 two-part tariffs and, 414–419 Price elasticity See also Elasticity in supply and demand air travel and, 409–410 consumer expenditures and, 126–128 coupons and, 409 housing demand and, 129–130 Price elasticity of demand, 33 Price elasticity of supply, 36 Price leadership, 474 Price minimums, 328–331 Price of capital, 244 Price of risk, 180 Price regulation, monopolies and, 379–380 Price rigidity, 473–475 Prices, role of, Price setting, by dominant firm, 476–477 Price signaling, 474 Price supports, 332–339 consumers and, 332 government and, 332–333 import quotas and tariffs and, 340–344 producers and, 332 Price taking, 280, 285–287 Pricing, monopolies and, 363–364 Prilosec pricing, 364–365 Prime rate, 475, 590 Principal-agent problem, 645–651 incentives and, 650–651 in private enterprises, 646–647 in public enterprises, 648–649 Prisoners’ dilemma, 470–472, 495–496 Prius, 16 Private proceedings, antitrust laws and, 391 Private-sector unionism, decline of, 553–554 Private-value auctions, 517–518 Probabilities, subjective, 195 Procter & Gamble, 452, 467–469, 471–472, 515–516, 576–578 Producer Price Index (PPI), 12, 100 Producers, price supports and, 332 Producer surplus, 318–323 change in, 320–321 in long run, 305–306 versus profit, 299–300 short run, 298–300 Production See also Production costs cost constraints and, 202 decisions of firms and, 201–202 factors of, 201–202 firms and their production decisions, 202–205 flows (inputs and outputs), 204 function of, 202 health care, production function for, 211–212 input choices and, 202 measuring costs of, 229–237 production function, 204 returns to scale and, 223–226 short run vs long run, 205 technology and, 201–202 Production choice problem, 507 Production costs accounting costs, 230 average costs, 237 INDEX • 741 Cobb-Douglas production function and, 276–278 cost functions and, 266–267 cost minimization and, 273–274 degree of economies of scope, 259–260 diseconomies of scope and, 259 duality in production and cost theory, 275–276 dynamic changes in costs, 261–265 economic costs, 230 economies and diseconomies of scale and, 255–256 economies of scope and, 258–261 energy reduction, 251–253 estimating and predicting of, 265–269 fixed costs, 233–234 learning curve and, 261–265 long-run and short-run relationship and, 257–258 long-run average costs and, 254–255 long-run costs, 243–253 marginal costs, 236–237 marginal rate of technical substitution, 274–275 opportunity costs, 230–231 product transformation curves, 258–259 short-run costs, 237–242 short-run production inflexibility, 253–254 shutting down and, 233 sunk costs, 231–232 total costs, 233 variable costs, 233–234 Production decisions, intertemporal, 584–587 Production efficiency, 613–618 input efficiency, 613–614 marginal rate of transformation and, 614–615 output efficiency and, 615–616 output markets and, 617–618 Production possibilities frontier, 614–615 Production quotas, 333–338 Production technology, 201–202 Production with one variable input (labor), 206–215 average and marginal products and, 206–207 average product of labor curve and, 209 labor productivity and, 214 law of diminishing marginal returns and, 209–211 marginal product of labor curve and, 209 product curve slopes and, 207–209 Production with two variable inputs, 216–223 diminishing marginal returns and, 217–219 fixed-proportions production function and, 219–220 input flexibility and, 217 isoquants and, 216–217 perfect substitutes and, 219, 220 substitution among inputs and, 218–219 Products choice problem, 492–493 curve slopes, 207–209 differentiation, price competition and, 465–467 diversity, monopolistic competition and, 455 homogeneity, perfect competition and, 280 transformation curves, 258–259 Profit maximization, 282–284 See also Competitive firms assumptions of, 282 choosing output in the long run, 300–306 highly competitive markets, 281 long run, 300–301 management cost considerations and, 291–292 marginal cost and revenue and, 284– 287, 362 organizational forms and, 283 short-run by competitive firm, 287–289 Profits competitive equilibrium and, 301–304 producer surplus versus, 299–300 Property rights, 684–685 bargaining and economic efficiency, 685–686 legal solutions and, 686–687 Prospective sunk costs, 232, 234 Protectionism, 622–623 Public education, 691 Public goods, 690–694 definition of, 626 efficiency and, 691–692 market failure and, 692–693 nonexclusive goods, 690–691 private preferences for, 694–696 Public organizations, principal-agent problem and, 648–649 Publishing, price discrimination and, 413 Purchasing decisions, with monopsony power, 547–548 Purchasing power, 85 Pure bundling, 423–424 Pure monopoly, 357, 368 Pure monopsony, 358 Putnam, Howard, 392 Q Quadratic cost function, 267 Quality uncertainty, 632–638 Quantity discounts, 404 Quantity forcing, 443 Quigley, John, 130n4, 314n11 R Rabin, Matthew, 189n23 Range of products, Rapaport, Carol, 32n5 Raphael, Stephen S., 314n11 Raphael, Steven, 130n4 Rate of return See Effective yield, bond Rate-of-return regulation, 381 Rationing, gasoline, 98–100 Rawls, John, 611n3 Rawlsian view of equity, 611, 612 Raw material costs, 23 Reaction curves, Cournot equilibrium and, 460 Real discount rate, 571–572 Real prices, 12–16 Real returns, 178 Rebates, 123–124, 408–409 Recreation, revealed preference for, 94–95 Recycling, 675–677 Reference point, 190–191 Refundable deposits, 677 Regression See Multiple regression analysis Regression residual, 701 Regulation, monopolies and, 381 Regulatory lag, 382 Reiley, David Jr., 492n5 Relative prices, determination of, 406–407 Relative valuations, bundling and, 420–423 Rental rate of capital, 244–245 Rent-maximizing policy, 552 Rent seeking, 378–379 Repeated games, 498–502 Reputation, 507–508 Research and development (R&D), 665, 679 Reservation prices, 401, 420 Reserve price, auctioning and, 517 Resource depletion, 584–587 degrees of, 587 price of exhaustible resource, 586 Resource production, by monopolist, 586–587 Restaurants, pricing and, 427–428 Return, tradeoff with risk, 179–180 Return on assets, 177–179 Returns to scale, 223–226 constant, 223 decreasing, 223 description of, 224 increasing, 223 Revealed preference, 92–95 Revenue-sharing arrangements, 651 Reynolds, R Larry, 327n4 Rhône-Poulenc of France, 393 Rigidity, price, 473–474 Risk See also Assets; Behavioral economics aversion to, 166–169 budget line and, 180 business executives and, 169–170 decision making and, 163–164 demand for risky assets, 176–184 description of, 160–165 diversification and, 170–171 expected value and, 161 indifference curves and, 180–183 information value and, 174–176 insurance and, 172–173 742 • INDEX Risk (continued) investment portfolio and, 179–180 investor’s choice problem and, 180–183 nondiversifiable risk, 178 pooling of, 635 preferences toward, 165–170 premiums, 166–168, 573 price of, 180 probability and, 160–161 reduction of, 170–176 risk loving, 166, 167 risk neutral, 166, 167 tradeoff with return, 179–180 variability and, 161–163 Risk adjustments, 573–578 capital asset pricing model and, 575–576 discount rate and, 575–576 diversifiable vs nondiversifiable risk, 574–575 Riskless assets, 177 Risky assets, 177 asset returns, 177–179 Rite Aid, 567–569 Robinson-Patman Act (1936), 391 Roche A.G of Switzerland, 393 Rockwell International, 501 Rose, Nancy L., 331n7 Rose-Ackerman, Susan, 327n5 Rossi-Hansberg, Esteban, 621n7 Rotemberg, Julio J., 194n30, 474n10 Roth, Alvin E., 327n4 R-squared (R2), 704 Rubinfeld, Daniel L., 134n8, 142n12, 693n25, 700n1 Rule-of-thumb, 194–195 S Saft, Lester F., 429n19 Salaries See Wages Salathe, Larry, 37n8, 129n3 Sales jobs, income from, 161, 164 Salesperson incentives, 654 Saloner, Garth, 474n10 Sample, 702 Sanford, Scott, 39n9 Sanger, David E., 337n9 Satterthwaite, Mark, 176n9 Saudi Arabia oil production, 56–58 Scale economies index (SCI), 267 Schaller, Bruce, 338n11 Scheinkman, Jose, 465n2 Schelling, Thomas, 512n13 Scherer, F M., 10n4, 343n13 Schill, Michael H., 284n2 Schmalensee, R., 675n10 Schmalensee, Richard L., 425n17 Scholten, Patrick, 175n8 Sealed-bid auction, 517 Secondary supply, 45 Second-degree price discrimination, 404, 405 September 11 terrorist attacks, 31–32 Sequential games, 502–505 Shavell, Steven, 164n5, 671n5 Sherman Act (1890), 390, 391 Sherwin, Robert A., 10n3 Shields, Dennis, 39n9 Shields, Michael A., 81n5 Shirking model, 655 Shortage, price pressures and, 25–26 Short-run average cost curve (SAC), 254 Short-run costs, 237–242 average-marginal relationship, 239–240 cost curves and, 238–240 determinants of, 237–238 diminishing marginal returns and, 238 inflexibility and, 253–254 marginal costs and, 238 relationship with long-run costs, 257–258 total cost as a flow, 240 Short-run elasticities, 39–48 Short-run equilibrium, monopolistic competition and, 453–454 Short-run expansion path, 254 Short-run production, 205 Short-run profit maximization, 285, 287–289 Short-run supply curves, 295–300 Shubik, Martin, 489, 489n3 Shut downs, 233, 289–290 Sibley, David S., 331n7 Signaling, 641 market, 638–643 price, 474 Simonsohn, Uri, 190n25 Sinai, Todd, 195n33 Skeath, Susan, 492n5, 516n19 Skinner, Robert, 39n9 Slutsky equation, 156 Small, Kenneth, 44n11 Smith, Adam, 609 Smith, Vernon, 190n25 Smith, W James, 130n5 Snob effect, 137 Snow shovel demand, 193 Social costs monopolies and, 377–382 monopsonies and, 387–388 Social rate of discount, 682 Social Security system solvency, 105 Social welfare functions, 611–612 Soft drinks, elasticities of demand for, 370 Software, production costs of, 235–236 Sönmez, Tayfun, 327n4 Sotheby’s auction house, 521, 522 Specific taxes, effects of, 345–348 Speculative demand, 129 Spence, Michael, 638n4 Sprint, 417–419 Stackelberg equilibrium, 492, 492n6 Stackelberg model, 463–464, 502, 505 Standard and Poor’s/Case-Shiller Housing Price Index, 186, 188 Standard deviation, 162–163 Standard error of forecast (SEF), 705 Standard error of the regression, 704 Standard of living, labor productivity and, 214–215 Statistical tests, 702–704 Steel production, 247–249 Sterner, Thomas, 44n11 Stigler, George J., 10n3 Stiglitz, Joseph E., 654n20 Stock externalities, 678–684 stock buildup and impact of, 679–682 Stockholder control, 647 Stock of capital, 214 Stocks and stock market buying on margin, 183 “contagion,” 600–601 diversification and, 171 investing in, 183–184 risk and, 177–179 stock prices in U.S and Europe, 601 Stocks vs flows, 560–561 Stollery, Kenneth R., 587n21 Strategic behavior, 686 Strategic decisions, gaming and, 487–490 Strategic trade policy, international competition and, 512–514 Strategy, defined, 488 Subjective probability, 160 Subsidies, effects of, 348–349 Substitute goods, 24–25, 118–119 Substitution among inputs, 218–219 Substitution effects, 120–121, 155–157 Sugar quota, 342–344 Sulfur dioxide emissions, 665–666, 672–673 See also Emissions Sumner, Daniel A., 347n14 Sunk costs, 231–232 amortizing of, 234–235 entry deterrence and, 509, 510 versus fixed costs, 234–235 Supermarket chains advertising and, 432–433 markup pricing and, 372–373 Supplemental Security Income, 105 Supply See also Supply and demand durability and, 45–46 elasticities of, 36 of loanable funds, 588–590 long-run, 306–314 restrictions, 333–334 supply curves, 22–23 variables affecting, 23 Supply and demand See also Elasticity in supply and demand changing market conditions and, 48–52 demand curves, 23–25 equilibrium and, 25–26 linear curves and, 49–52 market equilibrium changes and, 26–32 market mechanism and, 25–26 price controls and, 58–60 supply curves, 22–23 Surplus consumer, 132–135 market clearance and, 25–26 Systematic risk, 574n12 INDEX • 743 T Takeda Chemical Industries of Japan, 393 Tariffs, 340–342 two-part tariffs, 414–419 world ethanol market and, 598–600 Tarr, David G., 343n13 Taubenslag, Nancy, 501n10 Taubman, Alfred, 521 Taxes effects of, 345–348 firm output and, 311 monopolies and, 366–367 specific, 345–348 Taxes, and transfer pricing, 448–449 Tax-exempt status, 649 Taxicab drivers, 196–197 Taxicab supply, in New York, 312–313, 338–339, 573 Technical efficiency, 613 Technical feasibility, 205 Technological change, 214 Technological improvements, effect of, 210 Technology, production, 201, 204 Teece, David J., 55n18 Teenage labor markets, minimum wage and, 549–550 Thaler, Richard, 189n24, 191n27, 196n34 Theory of the firm, 5, 201 Third-degree price discrimination, 404–410 Tirole, Jean, 492n5 Titanium dioxide industry, entry deterrence and, 514–515 Tit-for-tat strategy, 498–499 Title insurance, 173–174 T-Mobile, 417–419 Tokgoz, Simla, 598n1 Tollison, Robert D., 379n12 Toothpaste market, 452 Total costs, 233, 240 Toyota, 16, 310 Trade, advantages of, 602–603 Tradeable emissions permits, 671–672, 674 Trade-offs, optimal, 4–5 Transfer pricing with competitive outside market, 446–448 in integrated firm, 443–449 with noncompetitive outside market, 448 no outside market and, 443–446 taxes and, 448–449 Transitivity, consumer preferences and, 70 Trapani, John M., 331n7 Treasury bills rates of, 589 risk and, 178 Treasury bond rate, 589 Treaty of the European Community, 392 Triplett, Jack E., 105n16 Trucking industry, economies of scope in, 260–261 Tullock, Gordon, 379n12 Tussing, Arlon R., 59n22 Tversky, Amos, 194n31 Two-earner households, labor supply for, 541–542 Two-part tariff, 414–419 many consumers and, 415–417 single consumer and, 414 two consumers and, 415 Tying, 428–429 U Ulen, Thomas, 685n19 Ultimatum game, 193 Uncertainty, consumer behavior and, 195 bubbles, 185–189 informational cascades, 187, 189 Unemployment, 656 Unequal probability outcomes, 163 Unilever, Ltd., 467–469, 471–472 Unionized workers decline of, 552 monopoly power and, 552 as percentage of total, 553 Unit-elastic demand curve, 127 Ünver, M Utku, 327n4 Usage fees, 414 Used car market, asymmetric information and, 632–634 User cost of capital, 243–244 User cost of production, 585–586 Utilitarian view of equity, 611, 612 Utility, 78 Utility functions, 79–80, 149 Utility maximization, demand theory and, 149–150 Utility possibilities frontier, 610–612 V Value of complete information, 174 in online consumer electronics market, 175 Variability, 161–163 Variable costs, 233–234 Variable profit, 401, 402, 402n3 Variance, calculating, 162 Verizon, 417–419 Vertical integration, 651 alternatives to, 443 market power and double marginalization, 439–443 purpose of, 439–443 Videos, pricing of, 374–375 Viscusi, W Kip, 580n15 Voicu, Ioan, 284n2 W Wages computer skills and, 554–555 discrimination in, 552 efficiency and, 654–656 inequality of, 29 monopoly power and, 551–552 substitution and income effects, 540 Wal-Mart, 509–510 Walt Disney World, 416 Walton, Sam, 509 Wang, Charles C.Y., 648n15 Wang, Judy S., 260n11 Warranties, 642, 645 Wascher, William, 16n8, 550n8 Washington Mutual, 647 Waste disposal, 675–677 Water meter industry, 501 Webb-Pomerene Act (1918), 390n18 Wehrung, Donald A., 169n7 Weitzman, Martin, 587n21, 654n19, 684n18 Welch, Finis, 550n8 Welfare economics, 609 Welfare effects, 319, 611–612 Welfare loss, 332–333 Westcott, Paul C., 39n9 Wetzstein, Michael E., 645n8 Wheat aggregate demand for, 128–129 market for, 37–39 price supports and, 335–338 production function for, 221–222 Whinston, Clifford, 331n7 Whitacre, Mark, 393n20 White, Lawrence J., 689n21 Williamson, Oliver, 204n3 Winner’s curse, 519–520 Wohlgenant, Michael K., 347n14 Wolfram, Catherine, 408n5 Wood, Geoffrey E., 622n9 Workers, trade-offs and, 4–5 World copper industry, 297–298 World food production per capita, 213 X Xerox Corporation, 428–429, 643 Y Yandle, Bruce, 674n9 Yellen, Janet L., 654n20 Z Zavodny, Madeline, 549n7 Zero economic profit, 302, 306 Zero emissions policy, 681 Zilberman, David, 222n11 This page intentionally left blank 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 13 10 5.4 The Value of Information in an Online Consumer Electronics Market 175 5.5 Doctors, Patients, and the Value of Information 5.6 Investing in the Stock Market 183 186 11 1.4 The Minimum Wage 5.7 The Housing Price Bubble (I) 2.1 The Price of Eggs and the Price of a College Education Revisited 28 5.8 The Housing Price Bubble (II) 5.9 Selling a House 2.2 Wage Inequality in the United States 5.10 New York City Taxicab Drivers 2.3 The Long-Run Behavior of Natural Resources Prices 29 2.4 The Effects of 9/11 on the Supply and Demand for New York City Office Space 31 2.5 The Market for Wheat 2.6 The Demand for Gasoline and Automobiles 2.7 2.8 The Behavior of Copper Prices 2.9 Upheaval in the World Oil Market 14 29 188 192 196 6.1 A Production Function for Health Care 6.2 Malthus and the Food Crisis 6.3 Labor Productivity and the Standard of Living 6.4 A Production Function for Wheat 43 6.5 Returns to Scale in the Carpet Industry The Weather in Brazil and the Price of Coffee in New York 46 7.1 Choosing the Location for a New Law School Building 232 7.2 Sunk, Fixed, and Variable Costs: Computers, Software, and Pizzas 235 7.3 The Short-Run Cost of Aluminum Smelting 240 7.4 The Effect of Effluent Fees on Input Choices 247 7.5 Reducing the Use of Energy 7.6 Economies of Scope in the Trucking Industry 7.7 The Learning Curve in Practice 7.8 Cost Functions for Electric Power 8.1 Condominiums versus Cooperatives in New York City 283 8.2 The Short-Run Output Decision of an Aluminum Smelting Plant 290 8.3 Some Cost Considerations for Managers 8.4 The Short-Run Production of Petroleum Products 294 8.5 The Short-Run World Supply of Copper 8.6 Constant-, Increasing-, and Decreasing-Cost Industries: Coffee, Oil, and Automobiles 310 8.7 The Supply of Taxicabs in New York 8.8 The Long-Run Supply of Housing 9.1 Price Controls and Natural Gas Shortages 9.2 The Market for Human Kidneys 9.3 Airline Regulation 9.4 Supporting the Price of Wheat 9.5 Why Can’t I Find a Taxi? 37 52 54 2.10 Price Controls and Natural Gas Shortages 3.1 Designing New Automobiles (I) 3.2 Can Money Buy Happiness? 59 77 81 3.3 Designing New Automobiles (II) 88 3.4 Consumer Choice of Health Care 90 3.5 A College Trust Fund 92 3.6 Revealed Preference for Recreation 3.7 Marginal Utility and Happiness 3.8 The Bias in the CPI 4.1 Consumer Expenditures in the United States 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 4.6 The Value of Clean Air 4.7 Facebook 94 97 105 117 122 128 129 131 134 138 4.8 The Demand for Ready-to-Eat Cereal 5.1 Deterring Crime 5.2 Business Executives and the Choice of Risk 5.3 175 142 164 The Value of Title Insurance When Buying a House 173 169 211 212 215 221 225 251 264 268 291 297 312 313 325 330 338 260 335 322 LIST OF EXAMPLES 9.6 The Sugar Quota 14.2 Labor Supply for One- and Two-Earner Households 541 342 9.7 A Tax on Gasoline 349 10.1 Astra-Merck Prices Prilosec 14.3 Pay in the Military 364 10.2 Elasticities of Demand for Soft Drinks 545 14.4 Monopsony Power in the Market for Baseball Players 548 370 10.3 Markup Pricing: Supermarkets to Designer Jeans 372 14.5 Teenage Labor Markets and the Minimum Wage 549 10.4 The Pricing of Videos 14.6 The Decline of Private-Sector Unionism 374 10.5 Monopsony Power in U.S Manufacturing 10.6 A Phone Call about Prices 388 392 393 11.1 The Economics of Coupons and Rebates 563 15.2 The Yields on Corporate Bonds 10.8 The United States and the European Union versus Microsoft 394 408 553 554 15.1 The Value of Lost Earnings 10.7 Go Directly to Jail Don’t Pass Go 11.2 Airline Fares 14.7 Wage Inequality Revisited 567 15.3 The Value of a New York City Taxi Medallion 15.5 Choosing an Air Conditioner and a New Car 409 11.3 How to Price a Best-Selling Novel 11.4 Pricing Cellular Phone Service 15.5 Should You Go to Business School? 413 16.1 The Global Market for Ethanol 11.5 The Complete Dinner versus la Carte: A Restaurant’s Pricing Problem 427 11.6 Advertising in Practice 587 598 16.2 “Contagion” across Stock Markets around the World 600 432 12.1 Monopolistic Competition in the Markets for Colas and Coffee 455 16.3 Trading Tasks and iPod Production 12.2 A Pricing Problem for Procter & Gamble 16.5 Inefficiency in the Health Care System 12.3 Procter & Gamble in a Prisoners’ Dilemma 579 582 15.6 How Depletable are Depletable Resources? 417 573 15.4 Capital Investment in the Disposable Diaper Industry 576 467 471 621 16.4 The Costs and Benefits of Special Protection 17.1 Medicare 622 626 636 12.4 Price Leadership and Price Rigidity in Commercial Banking 475 17.2 Lemons in Major League Baseball 12.5 The Prices of College Textbooks 12.6 The Cartelization of lntercollegiate Athletics 480 17.4 Reducing Moral Hazard: Warranties of Animal Health 645 12.7 The Milk Cartel 17.5 CEO Salaries 476 481 13.1 Acquiring a Company 17.3 Working into the Night 647 17.6 Managers of Nonprofit Hospitals as Agents 490 13.2 Oligopolistic Cooperation in the Water Meter Industry 501 13.3 Competition and Collusion in the Airline Industry 501 17.7 Efficiency Wages at Ford Motor Company 13.5 DuPont Deters Entry in the Titanium Dioxide Industry 514 18.4 Regulating Municipal Solid Wastes 13.6 Diaper Wars 18.6 The Coase Theorem at Work 13.8 Internet Auctions 522 14.1 The Demand for Jet Fuel 18.5 Global Warming 536 673 682 687 18.7 Crawfish Fishing in Louisiana 18.8 The Demand for Clean Air 522 656 18.2 Reducing Sulfur Dioxide Emissions in Beijing 18.3 Emissions Trading and Clean Air 515 649 18.1 The Costs and Benefits of Sulfur Dioxide Emissions 665 13.4 Wal-Mart Stores’ Preemptive Investment Strategy 509 13.7 Auctioning Legal Services 637 642 A.1 The Demand for Coal 706 693 689 678 672 ... 35 D A 30 B C 25 Pw ϭ 24 20 15 10 0 10 Qs ϭ 7.9 15 QЈs ϭ 15.9 20 25 QЈd ϭ 22 .8 30 35 Qd ϭ 25 .2 Quantity (billions of pounds) F IGURE 9.16 SUGAR QUOTA IN 20 10 At the world price of 24 cents per... 1980 1990 20 10 36 63 70 94 63 54.0 58.0 62. 4 72. 1 82. 1 0 .21 8 0 .21 0 0.149 0.118 0.094 Real Cost Index (1995 ϭ 100) 101 145 119 89 148 Real Fuel Cost Index (1995 ϭ 100) 24 9 300 163 125 3 42 71 87... result of the price controls 20 P= $19 .20 Supply 18 Demand 16 PG ($/mcf ) 14 12 10 $7.73 B C PO = $6.40 A QD = 29 .1 QS = 20 .6 Pmax = $3.00 0 10 20 Quantity (Tcf) Q* = 23 30 40 F IGURE 9.4 EFFECTS