MIcroEconomics 8e global edition perloff

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NaTure aNd Microeconomics ProPerTies of8th soils edition Global edition fifTeeNTh ediTioN Global ediTioN Ray R Weil Professor of Soil Science University of Maryland Jeffrey M Perloff Nyle C Brady (late) Professor of Soil Science, Emeritus Cornell University University of California, Berkeley Harlow, England England •• London London •• New New York York •• Boston Boston •• San San Francisco Francisco •• Toronto Toronto •• Sydney Sydney •• Dubai Dubai •• Singapore Singapore •• Hong Hong Kong Kong Harlow, Tokyo NewDelhi Delhi••Cape CapeTown Town••Sao Sao Paulo Paulo •• Mexico Mexico City City •• Madrid Madrid •• Amsterdam Tokyo •• Seoul Seoul •• Taipei Taipei •New Amsterdam •• Munich Munich •• Paris Paris••Milan Milan www.freebookslides.com For Alexx, Gregg, Laura, and Spenser Vice President, Business Publishing: Donna Battista Director of Portfolio Management: Adrienne D’Ambrosio Senior Portfolio Manager: Christina Masturzo Editorial Assistant: Courtney Paganelli Senior Editor, Global 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PEARSON, ALWAYS LEARNING, and MyLab Economics® are exclusive trademarks owned by Pearson Education, Inc., or its ­affiliates in the U.S and/or other countries Pearson Education Limited KAO Two KAO Park Harlow CM17 9NA United Kingdom and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2018 The rights of Jeffrey M Perloff to be identified as the author of this work have been asserted by him in accordance with the Copyright, Designs and ­Patents Act 1988 Authorized adaptation from the United States edition, entitled Microeconomics, 8th Edition, ISBN 978-0-13-451953-1 by Jeffrey M Perloff, 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: 1-292-21562-3 ISBN 13: 978-1-292-21562-4 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Print edition typeset in 10/11.5pt Sabon LT Pro by SPi Global Printed and bound by Vivar in Malaysia www.freebookslides.com Brief Contents Chapter Introduction 25 Chapter Supply and Demand 33 Chapter Applying the Supply-and-Demand Model 67 Chapter Consumer Choice 97 Chapter Applying Consumer Theory 134 Chapter Firms and Production 172 Chapter Costs 203 Chapter Competitive Firms and Markets 245 Chapter Applying the Competitive Model 287 Chapter 10 General Equilibrium and Economic Welfare 331 Chapter 11 Monopoly 367 Chapter 12 Pricing and Advertising 406 Chapter 13 Oligopoly and Monopolistic Competition 448 Chapter 14 Game Theory 490 Chapter 15 Factor Markets 528 Chapter 16 Interest Rates, Investments, and Capital Markets 553 Chapter 17 Uncertainty 585 Chapter 18 Externalities, Open-Access, and Public Goods 619 Chapter 19 Asymmetric Information 649 Chapter 20 Contracts and Moral Hazards 677 Chapter Appendixes 707 Answers to Selected Questions and Problems 735 Sources for Challenges and Applications 753 References 767 Definitions 777 Index 782 Credits 812 www.freebookslides.com Contents Chapter 1  Introduction 25 1.1 Microeconomics: The Allocation of Scarce ­Resources 25 Trade-Offs 26 Who Makes the Decisions 26 Prices Determine Allocations 26 APPLICATION  Twinkie Tax 26 1.2 Models 27 APPLICATION  Income Threshold Model and China 27 Simplifications by Assumption 28 Testing Theories 28 Maximizing Subject to Constraints 29 Positive Versus Normative 29 1.3 Uses of Microeconomic Models 31 Summary 31 Chapter 2  Supply and Demand CHALLENGE  Quantities and Prices of 33 Genetically Modified Foods 33 2.1 Demand 34 The Demand Curve 35 APPLICATION  Calorie Counting 38 The Demand Function 38 Solved Problem 2.1 40 Summing Demand Curves 41 APPLICATION  Aggregating Corn Demand Curves 41 2.2 Supply 42 The Supply Curve 42 The Supply Function 44 Summing Supply Curves 45 How Government Import Policies Affect Supply Curves 45 Solved Problem 2.2 46 2.3 Market Equilibrium 47 Using a Graph to Determine the Equilibrium 47 Using Math to Determine the Equilibrium 47 Forces That Drive the Market to Equilibrium 49 2.4 Shocking the Equilibrium 50 Effects of a Shock to the Supply Curve 50 Solved Problem 2.3 51 Effects of a Shock to the Demand Curve 52 2.5 Effects of Government Interventions 52 Policies That Shift Supply Curves 52 APPLICATION  Occupational Licensing 52 Solved Problem 2.4 54 Policies That Cause the Quantity Demanded to ­Differ from the Quantity Supplied 55 APPLICATION  Venezuelan Price Ceilings and Shortages 57 Solved Problem 2.5 58 Why the Quantity Supplied Need Not Equal the Quantity Demanded 59 2.6 When to Use the Supply-and-Demand Model 60 CHALLENGE SOLUTION  Quantities and Prices of Genetically Modified Foods 61 Summary 62  ■  Questions 63 Chapter 3  Applying the Supply-and-Demand Model 67 CHALLENGE  Who Pays the Gasoline Tax? 67 3.1 How Shapes of Supply and Demand Curves Matter 68 3.2 Sensitivity of the Quantity Demanded to Price 69 Price Elasticity of Demand 69 Solved Problem 3.1 70 APPLICATION  The Demand Elasticities for Google Play and Apple Apps 71 Elasticity Along the Demand Curve 71 Demand Elasticity and Revenue 74 Solved Problem 3.2 74 APPLICATION  Amazon Prime 75 Demand Elasticities over Time 75 Other Demand Elasticities 76 APPLICATION  Anti-Smoking Policies May Reduce Drunk Driving 77 3.3 Sensitivity of the Quantity Supplied to Price 78 Elasticity of Supply 78 Elasticity Along the Supply Curve 79 Supply Elasticities over Time 80 APPLICATION  Oil Drilling in the Arctic National Wildlife Refuge 80 Solved Problem 3.3 81 3.4 Effects of a Sales Tax 82 Effects of a Specific Tax on the Equilibrium 83 The Equilibrium Is the Same No Matter Whom the Government Taxes 84 Solved Problem 3.4 85 Firms and Customers Share the Burden of the Tax 85 APPLICATION  Taxes to Prevent Obesity 87 www.freebookslides.com Contents Solved Problem 3.5 87 Ad Valorem and Specific Taxes Have Similar Effects 88 Solved Problem 3.6 89 Subsidies 90 APPLICATION  Subsidizing Ethanol 90 CHALLENGE SOLUTION  Who Pays the Gasoline Tax? 91 Summary 92  ■  Questions 93 Chapter 4  Consumer Choice CHALLENGE  Why Americans Buy More 97 Ebooks Than Do Germans 97 4.1 Preferences 99 Properties of Consumer Preferences 99 APPLICATION  You Can’t Have Too Much Money 100 Preference Maps 101 Solved Problem 4.1 104 APPLICATION  Indifference Curves Between Food and Clothing 107 4.2 Utility 108 Utility Function 108 Ordinal Preferences 108 Utility and Indifference Curves 109 Marginal Utility 110 Utility and Marginal Rates of Substitution 111 4.3 Budget Constraint 112 Slope of the Budget Constraint 114 Solved Problem 4.2 114 Effect of a Change in Price on the Opportunity Set 115 Effect of a Change in Income on the Opportunity Set 116 Solved Problem 4.3 116 4.4 Constrained Consumer Choice 116 The Consumer’s Optimal Bundle 117 APPLICATION  Substituting Alcohol for Marijuana 119 Solved Problem 4.4 119 Solved Problem 4.5 120 ★ Optimal Bundles on Convex Sections of Indifference Curves 121 Buying Where More Is Better 122 Food Stamps 122 APPLICATION  Benefiting from Food Stamps 124 4.5 Behavioral Economics 125 Tests of Transitivity 125 Endowment Effect 125 APPLICATION  Opt In Versus Opt Out 126 Salience and Bounded Rationality 127 APPLICATION  Unaware of Taxes 128 CHALLENGE SOLUTION  Why Americans Buy More Ebooks Than Do Germans 128 Summary 129  ■  Questions 130 Chapter 5  Applying Consumer Theory 134 CHALLENGE  Per-Hour Versus Lump-Sum ­Childcare Subsidies 134 5.1 Deriving Demand Curves 135 Indifference Curves and a Rotating Budget Line 136 Price-Consumption Curve 137 APPLICATION  Smoking Versus Eating and Phoning 138 The Demand Curve Corresponds to the Price-Consumption Curve 138 Solved Problem 5.1 139 5.2 How Changes in Income Shift Demand Curves 139 Effects of a Rise in Income 140 Solved Problem 5.2 141 Consumer Theory and Income Elasticities 142 APPLICATION  Fast-Food Engel Curve 145 5.3 Effects of a Price Change 146 Income and Substitution Effects with a Normal Good 146 Solved Problem 5.3 148 Solved Problem 5.4 149 Income and Substitution Effects with an Inferior Good 150 Solved Problem 5.5 150 ★ Compensating Variation and Equivalent Variation 151 APPLICATION  What’s Your Smart Phone Worth to You? 152 5.4 Cost-of-Living Adjustments 152 Inflation Indexes 152 Effects of Inflation Adjustments 154 APPLICATION  Paying Employees to Relocate 156 5.5 Deriving Labor Supply Curves 158 Labor-Leisure Choice 158 Income and Substitution Effects 160 Solved Problem 5.6 161 Shape of the Labor Supply Curve 162 APPLICATION  Working After Winning the Lottery 163 Income Tax Rates and Labor Supply 164 CHALLENGE SOLUTION  Per-Hour Versus Lump-Sum Childcare Subsidies 166 Summary 167  ■  Questions 168 Chapter 6  Firms and Production CHALLENGE  More Productive Workers 172 During Downturns 172 6.1 The Ownership and Management of Firms 173 Private, Public, and Nonprofit Firms 173 APPLICATION  Chinese State-Owned Enterprises 174 The Ownership of For-Profit Firms 174 The Management of Firms 175 What Owners Want 175 www.freebookslides.com Contents 6.2 Production 176 Production Functions 176 Varying Inputs over Time 176 6.3 Short-Run Production 177 Total Product 177 Marginal Product of Labor 178 Solved Problem 6.1 179 Average Product of Labor 179 Graphing the Product Curves 179 Law of Diminishing Marginal Returns 181 APPLICATION  Malthus and the Green Revolution 182 6.4 Long-Run Production 183 Isoquants 184 APPLICATION  A Semiconductor Integrated Circuit Isoquant 187 Substituting Inputs 188 Solved Problem 6.2 189 6.5 Returns to Scale 191 Constant, Increasing, and Decreasing Returns to Scale 191 Solved Problem 6.3 192 APPLICATION  Returns to Scale in Various ­Industries 192 Varying Returns to Scale 194 6.6 Productivity and Technical Change 195 Relative Productivity 195 Innovations 196 APPLICATION  Robots and the Food You Eat 197 APPLICATION  A Good Boss Raises Productivity 198 CHALLENGE SOLUTION  Labor Productivity During Downturns 198 Summary 199  ■  Questions 200 Chapter 7  Costs 203 CHALLENGE  Technology Choice at Home Versus Abroad 203 7.1 The Nature of Costs 204 Opportunity Costs 204 APPLICATION  The Opportunity Cost of an MBA 205 Solved Problem 7.1 206 Opportunity Cost of Capital 206 Sunk Costs 207 7.2 Short-Run Costs 208 Short-Run Cost Measures 208 APPLICATION  The Sharing Economy and the Short Run 209 Short-Run Cost Curves 210 Production Functions and the Shape of Cost Curves 212 APPLICATION  A Beer Manufacturer’s Short-Run Cost Curves 215 Effects of Taxes on Costs 215 Solved Problem 7.2 216 Short-Run Cost Summary 217 7.3 Long-Run Costs 218 All Costs Are Avoidable in the Long Run 218 Minimizing Cost 218 Isocost Line 219 Combining Cost and Production Information 221 Solved Problem 7.3 222 Factor Price Changes 224 Solved Problem 7.4 225 The Long-Run Expansion Path and the Long-Run Cost Function 225 Solved Problem 7.5 227 The Shape of Long-Run Cost Curves 227 APPLICATION  3D Printing 230 Estimating Cost Curves Versus Introspection 230 7.4 Lower Costs in the Long Run 231 Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves 231 APPLICATION  A Beer Manufacturer’s Long-Run Cost Curves 232 APPLICATION  Should You Buy an Inkjet or a Laser Printer? 233 Short-Run and Long-Run Expansion Paths 234 The Learning Curve 235 7.5 Cost of Producing Multiple Goods 236 APPLICATION  Medical Economies of Scope 238 CHALLENGE SOLUTION  Technology Choice at Home Versus Abroad 238 Summary 239  ■  Questions 240 Chapter 8  Competitive Firms and Markets CHALLENGE  The Rising Cost of Keeping 245 On Truckin’ 245 8.1 Perfect Competition 246 Price Taking 246 Why the Firm’s Demand Curve Is Horizontal 247 Deviations from Perfect Competition 248 Derivation of a Competitive Firm’s Demand Curve 249 Solved Problem 8.1 250 Why We Study Perfect Competition 251 8.2 Profit Maximization 251 Profit 251 Two Decisions for Maximizing Profit 253 8.3 Competition in the Short Run 255 Short-Run Output Decision 256 Solved Problem 8.2 258 Short-Run Shutdown Decision 259 APPLICATION  Fracking and Shutdowns 261 Solved Problem 8.3 262 Short-Run Firm Supply Curve 262 Short-Run Market Supply Curve 262 Short-Run Competitive Equilibrium 265 Solved Problem 8.4 266 8.4 Competition in the Long Run 267 Long-Run Competitive Profit Maximization 267 Long-Run Firm Supply Curve 268 www.freebookslides.com Contents APPLICATION  The Size of Ethanol Processing Plants 269 Long-Run Market Supply Curve 269 APPLICATION  Entry and Exit of Solar Power Firms 270 APPLICATION  Upward-Sloping Long-Run Supply Curve for Cotton 273 APPLICATION  Reformulated Gasoline Supply Curves 277 Solved Problem 8.5 278 Long-Run Competitive Equilibrium 279 CHALLENGE SOLUTION  The Rising Cost of Keeping On Truckin’ 280 Summary 281  ■  Questions 282 Chapter 9  Applying the Competitive Model 287 CHALLENGE  Liquor Licenses 287 9.1 Zero Profit for Competitive Firms in the Long Run 288 Zero Long-Run Profit with Free Entry 288 Zero Long-Run Profit When Entry Is Limited 289 APPLICATION  What’s a Name Worth? 291 The Need to Maximize Profit 291 9.2 Consumer Welfare 291 Measuring Consumer Welfare Using a Demand Curve 292 APPLICATION  Willingness to Pay on eBay 294 Effect of a Price Change on Consumer Surplus 295 APPLICATION  Goods with a Large Consumer ­Surplus Loss from Price Increases 296 Solved Problem 9.1 297 9.3 Producer Welfare 297 Measuring Producer Surplus Using a Supply Curve 298 Using Producer Surplus 299 Solved Problem 9.2 300 9.4 Competition Maximizes Welfare 300 Solved Problem 9.3 302 APPLICATION  Deadweight Loss of Christmas ­Presents 304 9.5 Policies That Shift Supply and Demand Curves 305 Entry Barrier 306 APPLICATION  Welfare Effects of Allowing Fracking 306 9.6 Policies That Create a Wedge Between Supply and Demand 307 Welfare Effects of a Sales Tax 307 APPLICATION  The Deadweight Loss from Gas Taxes 309 Solved Problem 9.4 309 Welfare Effects of a Subsidy 310 Solved Problem 9.5 311 Welfare Effects of a Price Floor 312 Solved Problem 9.6 314 APPLICATION  How Big Are Farm Subsidies and Who Gets Them? 315 Welfare Effects of a Price Ceiling 316 Solved Problem 9.7 316 APPLICATION  The Social Cost of a Natural Gas Price Ceiling 317 9.7 Comparing Both Types of Policies: Imports 318 Free Trade Versus a Ban on Imports 318 APPLICATION  Russian Food Ban 320 Free Trade Versus a Tariff 320 Free Trade Versus a Quota 323 Rent Seeking 323 CHALLENGE SOLUTION  Liquor Licenses 324 Summary 326  ■  Questions 327 Chapter 10  General Equilibrium and Economic Welfare 331 CHALLENGE  Anti-Price Gouging Laws 331 10.1 General Equilibrium 333 Feedback Between Competitive Markets 334 Solved Problem 10.1 336 Minimum Wages with Incomplete Coverage 337 Solved Problem 10.2 339 APPLICATION  Urban Flight 340 10.2 Trading Between Two People 340 Endowments 340 Mutually Beneficial Trades 342 Solved Problem 10.3 344 Bargaining Ability 344 10.3 Competitive Exchange 344 Competitive Equilibrium 345 The Efficiency of Competition 346 Obtaining Any Efficient Allocation Using Competition 347 10.4 Production and Trading 347 Comparative Advantage 347 Solved Problem 10.4 349 Efficient Product Mix 351 Competition 351 10.5 Efficiency and Equity 353 Role of the Government 353 APPLICATION  The 1% Grow Wealthier 354 Efficiency 356 Equity 356 APPLICATION  How You Vote Matters 359 Efficiency Versus Equity 361 CHALLENGE SOLUTION  Anti-Price Gouging Laws 362 Summary 363  ■  Questions 363 Chapter 11  Monopoly 367 CHALLENGE  Brand-Name and Generic Drugs 367 11.1 Monopoly Profit Maximization 368 Marginal Revenue 369 Solved Problem 11.1 371 Choosing Price or Quantity 373 Graphical Approach 373 Mathematical Approach 375 APPLICATION  Apple’s iPad 376 www.freebookslides.com 800 Index Nash equilibrium applying to dynamic entry game, 510–512 equilibrium in oligopolies and, 458–459 example (explanation of parent/ child interactions), 503 mixed strategies in static games, 501–502 multiple Nash equilibria applied to static games, 500 strategies in static games, 495–496 subgames perfect Nash equilibrium, 508–509 Nash, John, 459, 495 Nash-Stackelberg equilibrium algebraic solution (airline example), 471–472 calculating, 728–729 comparing with Cournot and collusive equilibria, 472–473 graphical model (airline example), 470–472 why sequential movement is essential, 472 Natural disasters anti-price gouging laws, 331, 362–363 impact on equilibrium price, 332 insurance and, 604–605 Natural monopolies, 386–387 Negative externalities See also Externalities defined, 620 Spam example, 621 Net present value (NPV) approach to investments, 565–566 example (Golden State Warriors), 566 internal rate of return and, 566–567 Network externalities behavioral economics and, 397–398 eBay example, 399 as explanation for monopolies, 398–399 overview of, 397 Nominal prices, inflation and, 562–563 Nonlinear price discrimination example of uniform pricing (iTunes), 432–433 overview of, 427–428 two-part pricing, 429 two-part pricing with identical consumers, 429–430 two-part pricing with nonidentical consumers, 430–432 types of price discrimination, 412 Nonprofit firms, 173 Nonsatiation property, consumer preferences, n 100 Nonuniform pricing market power and, 406 price discrimination See Price discrimination tie-in sales, 433–436 two-part pricing, 429–433 Normal-form, representation of static games, 493–494 Normal goods fast-food example, 145–146 income effects, 146–149 income elasticities of, 143 some goods must be normal, 144 substitution effects, 146–149 Normative statements, in microeconomics, 29–31 NPV See Net present value (NPV) O Observable characteristics, identifying groups by, 424–425 Oligopolies applying static game to strategic advertising by oligopolies, 504 Bertrand oligopoly See Bertrand oligopoly cartels See Cartels comparing market structures, 450–451 Cournot oligopoly See Cournot oligopoly defined, 448 overview of, 448–449 Stackelberg oligopoly See Stackelberg oligopoly OPEC (Organization of Petroleum Exporting Countries) as example of cartel, 451 market power and price of exhaustible resources and, 575–576 Open-access common property, 635–636 Opportunistic behavior adverse selection See Adverse selection asymmetric information and, 650 moral hazards and, 650–651 restricting, 660 Opportunity costs of durable goods, 206–207 example problem, 206 of MBA degree, 205–206 overview of, 204–205 Opportunity sets bundle of goods and, 113 impact of income change on, 116 impact of price change on, 115–116 impact of water quotas on, 114–115 Optimal bundle on convex sections of indifference curves, 121–122 corner solution, 119–120 Giffen goods and, 150–151 interior solution, 118 more-is-better and, 122 overview of, 117–118 Options (stock), contracts for avoiding moral hazard, 689–690 Ordinal preferences, utility and, 108–109 Organization of Petroleum Exporting Countries (OPEC) as example of cartel, 451 www.freebookslides.com Index market power and price of exhaustible resources and, 575–576 Organizational change productivity and, 172–173 Outputs competitive factor and output markets, 539–540 competitive factor market and monopolized output markets, 540–541 converting inputs into, 173, 176 cost of producing multiple goods, 236 decisions in short-run competition, 256–257 determining profit-maximizing output in monopolies, 375–377 effect of adding extra labor, 180–181 graphing product curves, 179–180 isoquants for combining inputs for single level of output, 187 law of diminishing marginal returns, 181–183 learning curve and cumulative output, 235 long-run market supply when input prices vary with output, 273–275 market power in output markets, 539 monopolized factor market and competitive output markets, 541–542 monopoly in both input and output markets, 542–544 production function and, 176 profit maximization and, 253–254 profit maximization for labor, 531 reducing below competitive level lowers welfare, 301–304 relationship between labor market and output market, 531 relationship of product curves, 181 returns to scale varying by output levels, 194–195 of short-run production, 177–178 technical progress increasing levels of, 196–197 technological and economic efficiency and, 203 Overconfidence, biases in assessing risk probability, 608 Owners management of firms and, 175 what owners want, 175 Ownership, of for-profit firms, 174 P Package tie-in sales See Bundling (package tie-in sales) Pareto-efficient allocations competitive exchange and, 346–347 contract curves and, 343 efficiency of competition and, 352 government policies and, 356 obtaining any efficient allocation using competition, 347 Pareto principle government policies and, 356 in study of welfare, 332 Pareto, Vilfredo, 332 Partial-equilibrium analysis applied to effects of minimum wage, 58–60 applied to feedback between competitive markets, 334 overview of, 333 Partnerships, ownership of forprofit firms, 174 Patents brand name vs generic drugs, 367–368 example (Botox), 388–390 government role in creating monopolies, 387 as monopoly, 368 801 Pay cuts, vs layoffs, 698–700 Payoff function cooperation and, 497 in games, 491 Payoff (or profit) matrix, in static games, 493 Payoffs, in games, 491 Per-hour subsidies, for childcare, 134, 166–167 Perfect competition characteristics of, 247 comparing market structures, 450–451 deriving demand curve for competitive firm, 249–250 deviations from, 248–249 overview of, 246 price taking and, 246–247 reasons for studying, 251 Perfect complements, marginal rate of substitution and, 106 Perfect monitoring, 681 Perfect price discrimination calculating, 723–724 efficiency of, 414–416 example (Botox), 416–417 overview of, 413–414 transaction costs and, 418 types of price discrimination, 412 Perfect substitutes Coke/Pepsi choice, 139, 141–142 marginal rate of substitution and, 105–106 Perfectly elastic demand, 72 Perfectly elastic supply, 78 Perfectly inelastic demand, 71–72 Perfectly inelastic supply, 78 Physical products See Products Piece-rate contracts, 690 Piracy, of software, 637–638 Policies See also Government policies and regulation creating barriers to entry or exit, 306–307 entry barriers, 306–307 free trade vs ban on imports, 318–320 free trade vs quotas, 323 free trade vs tariffs, 320–323 www.freebookslides.com 802 Index Policies (continued) regulating imports, 318 rent seeking and, 323–324 that create wedge between supply and demand, 307 that shift supply and demand curves, 305–306 welfare effects of price ceilings, 316–318 welfare effects of price floors, 312–314 welfare effects of sales taxes, 307–309 welfare effects of subsidies, 310–312 Pollution Coase Theorem, 632–633 controlling by allocating property rights, 631–632 emissions fees, 626–627 emissions standards, 626 markets for pollution externalities, 634 regulating externalities, 624–626 regulating externalities (pulp and paper mill example), 626 taxes in controlling, 627 trade and, 643–644 welfare effects in competitive market, 732–734 Pooling equilibrium, 667–668 Positive externalities See also Externalities defined, 621 markets for, 635 Positive monotonic transformation, n 109 Positive statements, in microeconomics, 29–31 PPF See Production possibility frontier (PPF) Predictions of game outcome, 493–494 positive statements, 30 Preference maps for bundle of goods, 101 indifference curves and, 101 properties, 101 Preferences, consumer curvature of indifference curves, 105–106 defined, 98 indifference curves, 101–104 indifference curves (food/ clothing example), 107 ordinal preferences, 108–109 overview of, 99 preference maps, 101 properties, 99–101 willingness to substitute, 104–105 Preferences, social, 358–359 Present biases food stamp example, 569–570 time-varying discounting and, 568–569 Present value (PV) calculating real present value of payment, 563–564 interest rates connecting present and future value, 557–558 of stream of payments, 558–559, 732 Present value of payments over time, 567–568, 732 Price ceilings anti-price gouging laws, 331, 362–363 government regulation of monopolies, 390–394 nonoptimal price regulation, 392–394 social costs of, 317–318 supply and demand and, 55–58 welfare effects of, 316–317 Price-consumption curves demand curve corresponding to, 138 example (tobacco use), 138 taste (indifference curves) impacting, 137–138 Price discrimination due to false beliefs about quality, 660–661 example (Disneyland), 410 group See Group price discrimination nonlinear See Nonlinear price discrimination nonuniform pricing, 406–407 not all price differences are price discrimination, 412 perfect See Perfect price discrimination preventing resale, 411–412 types of, 412 welfare effects of, 426 which firms can price discriminate, 410–411 why it pays, 408–409 Price elasticity of demand downward-sloping linear demand curve, 71–73 example (oil drilling in Arctic National Wildlife Refuge), 80–81 example (price of corn), 70–71 group price discrimination and, 421 horizontal demand curve, 73 Lerner Index and, 381 monopolies and, 372–373 over time, 75–76 overview of, 69–71 residual demand curves, 720 revenue and, 74–75 Slutsky equation applied to, 714–715 surplus and, 721–722 total, average, and marginal revenue and, 371 vertical demand curve, 73 Price elasticity of supply along supply curve, 79 example (oil drilling in Arctic National Wildlife Refuge), 80–81 over time, 79 overview of, 78–79 Price floors agricultural, 312–314 supply and demand and, 58–59 welfare effects of, 312 Price supports, redistribution of wealth and, 353 Price taking, in competitive markets, 246–247 Prices/pricing advertising and, 664 allocations determined by, 26 www.freebookslides.com Index anti-price gouging laws, 331, 362–363 block pricing, 427–428, 724–725 bundling tie-in sales, 434–436 choosing price vs quantity in monopolies, 373 compensating variation and equivalent variation and, 151–152 effect of price change on consumer surplus, 295–296 effect of price change on demand, 146, 169 effect of price change on factor demand, 533 effect of price change on opportunity set, 115–116 effect of price change on revenue, 74 efficiency of perfect price discrimination, 414–416 example (buying discounts), 425–426 Giffen goods and, 150–151 group price discrimination, 418–419, 724 group price discrimination (textbook resale example), 422 group price discrimination with two groups, 418–419 identifying groups for price discrimination, 424–425 impact on quantity demanded, 36–37 impact on quantity supplied, 42–43 long-run market supply when input prices vary with output, 273–275 marginal revenue and price in monopolies, 369–370 market failure due to monopoly pricing, 382–385 market failure when marginal costs are not equal to price, 302 market failure when price exceeds marginal cost, 382 market power from price ignorance, 661–662 nominal vs real prices, 152–153 nonlinear price discrimination, 427–428 not all price differences are price discrimination, 412 overview of, 406–407 perfect price discrimination, 413–416, 723–724 preventing resale, 411–412 price discrimination, 412 price discrimination (Botox example), 416–417 price taking in competitive markets, 246–247 quantity vs price in monopolies, 725–726 relationship to marginal cost in Lerner Index, 381 requirement tie-in sales, 433 sale prices, 440–441 sales prices, 406 sensitivity of quantity demanded to, 69 sensitivity of quantity supplied to, 78 short-run firm supply curve and, 262–263 tie-in sales, 433 transaction costs and perfect price discrimination, 418 two-part pricing, 429 two-part pricing with identical consumers, 429–430 two-part pricing with nonidentical consumers, 430–432, 725–726 uniform pricing (iTunes example), 432–433 welfare effects of price discrimination, 426 which firms can price discriminate, 410–411 why price discrimination pays, 408–409 Prices/pricing, of exhaustible resources constant or falling prices, 574–576 803 overview of, 571–573 scarce exhaustible resources (redwood tree example), 574 Principal-agent problem asymmetric information, 679–680 efficiency of contracts, 680 example (honest cabbies?), 683, 684–685 example (subprime loans), 682–683 overview of, 679–680 symmetric information, 680–681 Principals, checks on principals in contracts, 697–698 Prisoner’s dilemma game cooperation in repeated prisoner’s dilemma game, 505 dominant strategies in, 494–495 Private costs, cost of production without externalities, 621 Private firms overview of, 173–174 ownership of, 174 Private goods, rival goods compared with, 635 Private value auctions, 516 Probability of risk biases in assessing, 608 frequency of events and, 587 overview of, 587 probability distribution, 588 subjective probability, 587–588 Producer surplus (PS) applying, 299 block pricing and, 419–420 competition maximizing welfare, 300–301 effects of pollution, 622–623 effects of tariff or quotas, 320–323 entry barrier, 306–307 example (rose production), 300 group price discrimination and, 426 loss from eliminating free trade, 318–320 www.freebookslides.com 804 Index Producer surplus (PS) (continued) measuring with supply curve, 298–299 monopsonies and, 547 nonoptimal price regulation, 392 optimal price regulation, 390–391 overview of, 297–298 perfect price discrimination and, 414–416 reducing output below competitive level lowers welfare, 301–304 rent seeking and, 323–324 welfare effects of price ceilings, 316 welfare effects of price floors, 312 welfare effects of sales taxes, 307–309 welfare effects of subsidies, 310 Producer welfare See Producer surplus (PS) Producers, number of producers and comparative advantage, 350–351 Product curves, graphing, 179–181 Production average product of labor, 179 combining cost and production information, 221 constant, increasing, and decreasing returns to scale (CRS), 191–192 graphing product curves, 179–181 isoquants, 184–187 law of diminishing marginal returns, 181–183 long-run, 183–184 marginal product of labor, 178–179 overview of, 172–173 production function, 177 quantity vs price in monopolies, 725–726 returns to scale by industry, 192–194 returns to scale varying by output levels, 194–195 short-run, 177 substituting inputs and, 188–190 total product in short-run production, 177–178 Production and trading comparative advantage, 347–351 competition and, 351–353 efficient product mixes, 351 overview of, 347 Production functions Cobb-Douglas production function See Cobb-Douglas production function determining shape of cost curves, 212 example (beer manufacturer), 717–718 fixed-proportions production function, 185–186 relationship of inputs to outputs, 176–177 returns to scale and, 194 Production possibility frontier (PPF) comparative advantage and, 347–351 cost of producing multiple goods, 236–237 efficiency of competition and, 352 efficient product mixes, 351 example, 349–350 number of producers and, 350–351 optimal product mix, 350 Productivity innovations and technical progress and, 196–197 of labor during recession, 172, 198–199 organizational change and, 197–198 relative productivity, 195–196 Products See also Outputs adverse selection with products of unknown quality, 652–653 Bertrand oligopoly with differentiated products, 475–477 Bertrand oligopoly with identical products, 474 efficient product mixes, 351 example of spurious product differentiation (bottled water), 477 identical or homogeneous in competitive markets, 247 nonidentical firms with differentiated products in Cournot oligopoly, 467–469 as output, 176 Profit firms must maximize profit to survive, 291 formula for, 251–252 graphical approach to profit maximization, 373–375 mathematical approach to profit maximization, 375–377 maximizing, 175, 721 maximizing for output, 531– 532 maximizing for output (airlines example), 460 maximizing in long-run competition, 267 maximizing in monopolies, 368, 725–726 maximizing in monopsonies, 544–546 maximizing in short-run competition, 251–252 output decision rules, 253–254 shutdown decision rule, 254–255 two decisions for maximizing profit, 253 zero long-run profit with free entry, 288–289 zero long-run profit with limited entry, 289–290 Profit-sharing contracts, 687–688 Properties consumer preferences, 99–101 www.freebookslides.com Index preference maps, 101 Property rights, allocating to reduce externalities, 631–632 Prospect theory comparing with expected utility theory, 611–612 overview of, 611 properties of, 612–613 PS See Producer surplus (PS) Public firms overview of, 173–174 state-owned enterprises in China, 174 Public goods example (free riding on measles vaccination), 640 free riding and, 638–639 overview of, 638 reducing free riding, 641 valuing, 641–642 Public utilities block pricing by, 427–428 as natural monopoly, 386 PV See Present value (PV) Q Quality goods price discrimination due to false beliefs about quality, 660–661 shipping fees and, 150 varying quality with asymmetric information, 655–656 warranties as signal of quality, 657 Quantity demanded cross-price elasticity of demand and, 77 demand curves and, 35–36 effect of prices on, 36–37 income elasticity of demand and, 76–77, 142–143 relationship to income, 140, 141–142 sensitivity to price, 69 Quantity supplied price and, 42 supply elasticity and, 78–79 Quotas effects of, 322 free trade vs., 323 impact on supply curves, 46 import policies and, 318 R Rate of return on bonds, 567–568 internal rate of return approach to investing, 566–567 Rawls, John, 360 Rawlsian welfare functions, 360 Real prices, inflation and, 562–563 Rebates, group price discrimination and, 426 Reformulated Fuels Program (RFG), 277 Regression confidence in estimates, 708–709 estimating economic relations, 707–708 multiple regression, 709 overview of, 707 Regulations See Government policies and regulation Relative productivity, 195–196 Rent-seeking policies, 323–324 Rents celebrities collecting, 290 example of zero long-run profit with limited entry, 289–290 on scarce resources, 573 Repeated games cooperation example (airlines), 506 cooperation in repeated prisoner’s dilemma game, 505–506 overview of, 504 strategies in dynamic games, 504 Reputation of employees, 698 screening by, 657 Requirement tie-in sales, 433–434 Resale prevention example (designer bags), 411–412 805 example (textbooks), 422 price discrimination and, 422–424 Reservation prices of lemon owners, 652–653 in perfect price discrimination, 413 Reserves, of exhaustible resources, 575 Residual demand curves deriving for competitive firm, 249–250 elasticity of, 720 Residual supply curves example (cotton in Japan), 275–276 international trade and, n 275 long-run market supply curve with a large buyer, 275–277 Resources allocating scarce See Allocation of scarce resources exhaustible See Exhaustible resources failure to diversify, 600–601 opportunity cost of using, 204 Returns to scale constant, increasing, and decreasing, 191–194 by industry, 192–194 long-run costs and, 229 varying by output levels, 194–195 Returns to specialization, 194 Revenue (R) comparing competitive firm with monopoly, 369 demand elasticity and, 74–75 demand elasticity over time and, 75–76 marginal See Marginal revenue (MR) marginal revenue product of labor See Marginal revenue product of labor (MRPL) profit and, 175 Reverse auctions, 425–427 RFG (Reformulated Fuels Program), 277–278 Risk assessment biases in, 608 www.freebookslides.com 806 Index Risk assessment (continued) expected value, 588–589 overview of, 587 probability of risk, 587–588 prospect theory, 611 variance and standard deviation from expected value, 590–591 violations of expected utility theory, 609–611 Risk attitudes expected utility theory and, 591–592 gambling and, 596–597 overview of, 591 risk aversion, 592–595 risk neutrality, 595–596 risk preference, 596 Risk aversion attitudes toward risk, 592–594 investing and, 607 unwillingness to take a fair bet, 592 Risk preferring attitudes toward risk, 595–596 indifferent regarding fair bet, 592 investing and, 605–606 overview of, 596 willing to take a fair bet, 592 Risk premiums, 594–595 Risk reduction diversification, 598–600 flight insurance example, 603–604 insurance, 601–603 natural disaster insurance, 604–605 obtaining information, 598 overview of, 597–598 Rival goods, 635 Rivalry/exclusion club goods, 637 free riding and, 638–639 open-access common property, 635–636 overview of, 635 piracy and, 637–638 public goods, 638–640 valuing public goods, 641–642 Robinson-Patman Act, n 408 Rules, of games, 491 S Sales, of exhaustible resources, 570–571 Sales prices, 406 Sales taxes burden shared by firms and customers, 85–88 effect on supply-and-demand, 82–83 effects of ad valorem and specific taxes, 88–90 equilibrium effects of, 83–85 example (gasoline tax), 91–92 example (prevention of obesity), 87 impact on demand, 35 welfare effects of, 307–309 Salience, bounded rationality and, 127 Satiation more-is-better and, 122 mutually beneficial trades and, 342–344 Scale, return to See Returns to scale Scarce resources allocation of See Allocation of scarce resources causes of monopolies, 386 pricing, 571–573 Screening actions for equalizing information, 656–657 bad workers, 700 Sealed-bid auction overview of, 515 strategies in, 517 Second-degree price discrimination See Nonlinear price discrimination Second-price strategy in auctions, 516–517 example (eBay), 294–295 Second Theorem of Welfare Economics, 345, 347 Self-control problems, resulting in falling discount rate, 569–570 Sellers, in competitive markets, 247 Separating equilibrium, education as signal of ability and, 667 Sequential games credible threat and, 509–510 dynamic entry games, 510–512 dynamic entry games (keeping out casinos example), 513 game trees, 506–507 limit pricing, 513 overview of, 504, 506 subgames perfect Nash equilibrium, 508–509 Sequential movement, in Stackelberg oligopoly, 472 Services as output, 176 price determining allocations, 26 trade-offs in resource allocation, 26 Shareholders, 174 Shares, corporate, 174 Sherman Antitrust Act in 1890, 453–455 Shift in demand curve comparing competitive firm with monopoly, 378 effect of factors other than price on demand, 37 effects of rise in income on demand, 140–142 effects on monopolies, 377–378 equilibrium effects of, 50 labor example, 533 policies causing, 304–305 shocks to equilibrium, 50–52 Shift in supply curve causing movement along demand curve, 68 equilibrium effects of, 50 example, 44–45 policies causing, 304–305 shocks to equilibrium, 50–51 variables causing, 43–44 Shirking bonding to prevent, 693 contracts for avoiding moral hazard, 700–701 deferred payments to prevent, 695 efficiency wages to prevent, 696–697, 734 monitoring for avoiding, 691–692 www.freebookslides.com Index Shocks effects of supply shock depend on shape of demand curve, 68–69 feedback between competitive markets, 334–336 to market equilibrium, 50–51 Short- and long-run expansion paths, 234–235 Short-run average cost curves (SRAC) laser printer example, 233–234 Short-run average cost curves (SRAC) (continued) long-run average cost as envelope of short-run average cost curves, 231–232 Short-run competition competitive equilibrium, 265–267 firm supply curve, 262 market supply curve, 262–265 output decisions, 256–259 overview of, 255–256 shutdown decisions, 259–262 Short-run cost curves example (beer manufacturer), 215, 717–718 long-run average cost as envelope of short-run average cost curves, 231–234 overview of, 210–212 production functions determining shape of, 212 shape of average cost curve, 214–215 shape of marginal cost curve, 214 shape of variable cost curve, 212–213 Short-run costs average, 210 fixed, variable, and total, 208 marginal, 209–210 overview of, 208 production functions and shape of cost curves, 212 shape of average cost curve, 214–215 shape of marginal cost curve, 214 shape of variable cost curve, 214–215 short-run cost curve (beer manufacturer example), 215 short-run cost curves, 210–212 taxes impacting, 215–217 Short-run demand demand elasticity over time, 75 factor demand in competitive factor market, 529–533 Short-run production average product of labor, 179 defined, 177 graphing product curves, 179–181 law of diminishing marginal returns, 181–183 marginal product of labor, 178–179 overview of, 177 total product, 177–178 Shutdown decisions in monopolies, 375 decisions in short-run competition, 259–261 example (ethanol processing plants), 269 fracking and shutdowns, 261 rules in profit maximization, 254–255 Signaling actions for equalizing information, 657 education as signal of ability, 666–670 employees signaling regarding productivity, 700 strategies in dynamic games, 505 Simplification, models and, 28 Single-price monopoly comparing welfare effects of group price discrimination, 426 group price discrimination compared with, 426 perfect price discrimination, 415–416 Slutsky equation, n 146, 714–715 Slutsky, Eugene, 714 807 Snob effect, network externalities and, 398 Social costs cost of production with externalities, 622 social marginal costs, 623 Social producer surplus, 623 Social welfare functions efficiency vs equity, 361 in ranking allocations, 356–357 voting as means of ranking allocations, 360–361 SOEs (state-owned enterprises), in China, 174 Sole proprietorships, ownership of for-profit firms, 174 Specialization, returns to, 194 Specific taxes (unit taxes) equilibrium effects of, 88–90, 709–710 example (roses), 308 free trade vs tariffs, 320–323 impact on monopolies, 384, 722–723 impact on short-run equilibrium, 266–267 types of sales taxes, 82–83 Spurious product differentiation Cournot oligopoly and, 467–468 example (bottled water), 477 SRAC (short-run average cost curves) laser printer example, 234–235 long-run average cost as envelope of short-run average cost curves, 231–232 Stackelberg game tree, 507 Stackelberg oligopoly comparing types of equilibria, 472–473 as dynamic entry game, 510–512 graphical model of, 470–471 limit pricing and, 513 overview of, 469 as sequential game (airline example), 506–510 sequential movement in, 472 www.freebookslides.com 808 Index Standard deviation, from expected value, 590–591 Standards, actions for equalizing information, 658 State-contingent contracts, 685 State-owned enterprises (SOEs), in China, 174 States of nature, decision making and, 586 Static games applying to strategic advertising by oligopolies, 497–499 best response and Nash Equilibrium, 495–496 cooperation and, 505–506 dominant strategies, 494–495 in explanation of parent/child interaction, 503 mixed strategies, 501–502 multiple Nash equilibria and, 500–501 normal-form representation of, 492–493 overview of, 492–493 predicting outcomes, 494 Statistical discrimination, in hiring, 670–672 Stocks (investment) failure to diversify, 600–601 investing in corporations, 174 risk premium of, 594–595 Stocks (of durable goods), 554 Strategies, in game theory auction strategies, 516–517 best response and Nash Equilibrium, 495–496 defined, 491 dominant strategies in static games, 494–495 in dynamic games, 504 mixed strategies, 501–502 multiple Nash equilibria and, 500–501 in normal-form representation of static games, 504 pure strategy and mixed strategy, 501–502 in repeated prisoner’s dilemma game, 505–506 Stream of payments interest rates on, 558–561 present value of payments over time, 732 Subgames, in sequential games, 507 Subgames perfect Nash equilibrium, 508–509 Subjective probability, 587–588 Subsidies effects on supply and demand, 90–92 example (aircraft construction), 448, 483–484 example (childcare), 134, 166–167 example (Ethanol), 90–91 as negative tax, n 87 welfare effects of, 310–312 Substitute goods cross-price elasticity of demand and, 77 demand and price and, 34–35 example (substituting alcohol for marijuana), 119 imperfect substitutes, 107 marginal rate of substitution (MRS) and, 105–106 market power and lack of, 381–382 perfect complements, 106 perfect substitutes, 105–106 Substitution bias, in CPI, 157–158 Substitution effects example (apple pie), 148–149 example (plate prices at two types of stores), 149–150 inferior goods and, 150–151 labor-leisure choice and, 158–160 with normal goods, 146–150 overview of, 146 Slutsky equation applied to, 714–715 Sunk costs as barrier to entry, 306 overview of, 207–208 Supply excess supply, 49 impact of import policy on supply curves, 45–46 overview of, 42 policies creating wedge between supply and demand, 307 policies that cause demand to differ from supply, 55 policies that shift supply curves, 52–55 shock impact depending on shape of demand curve, 68–69 summing supply curves, 45 supply curve, 42–44 supply function, 44 when to use supply-anddemand model, 60–62 why supply need not equal demand, 59–60 Supply and demand demand curves, 35–36 demand function, 38–41 effect of factors other than price on demand, 37–38 equilibrium effects of government interventions, 52 example (genetically modified food), 33 import policy impacting supply curves, 45–47 market equilibrium, 47–50 overview of, 34 policies that cause demand to differ from supply, 55 policies that shift supply curves, 52–55 price ceilings, 55–58 price floors, 58–59 shocks to equilibrium, 50–52 summing demand curves, 41–42 summing supply curves, 45 supply curves, 42–44 supply function, 44–45 why supply need not equal demand, 59–60 Supply-and-demand model applying demand and supply elasticity (oil drilling example), 80–81 cross-price elasticity of demand, 77 www.freebookslides.com Index demand elasticity along downward-sloping linear curve, 71–73 demand elasticity along horizontal curve, 73 demand elasticity along vertical curve, 73 demand elasticity and revenue, 74–75 demand elasticity over time, 75–76 effects of ad valorem and specific taxes, 88–89 effects of sales taxes, 82–83 effects of subsidies, 90–91 equilibrium effects of specific sales tax, 83–85 example (gasoline tax), 67 Supply-and-demand model (continued) income elasticity of demand, 76–77 overview of, 68 price elasticity of demand, 69–71 price elasticity of supply, 78–79 quantity demanded sensitivity to price, 69 quantity supplied sensitivity to price, 78 sales tax burden shared by firms and customers, 85–88 shapes of supply and demand curves, 68 supply elasticity along supply curve, 78–79 supply elasticity over time, 78–79 use by economists, 34 when to use, 60–62 Supply curves defined, 42 determining market equilibrium, 47 effects of specific tax on short-run equilibrium, 266–267 example (coffee), 42–43 example (cotton), 273 example (gasoline), 277–278 import policy impacting, 45–47 long-run competitive equilibrium and, 279–280 long-run firm supply curve, 268 long-run market supply curve, 269–270 measuring producer surplus, 298–299 monopsonies and, 544 movement along See Movement along supply curve overview of, 42–44 shape of, 68 shift in See Shift in supply curve short-run firm supply curve, 262 short-run market supply curve, 262–265 summing, 45 supply elasticity along, 79 Supply curves, for labor deriving, 158 income and substitution effects applied to labor-leisure choice, 160–162 income tax rates and, 164–166 labor-leisure choice, 158–160 shape of, 162–164 Supply function, 44–45 Surplus consumer surplus See Consumer surplus (CS) producer surplus See Producer surplus (PS) Symmetric information, in efficient contracts, 680–681 T Tangency rule, minimizing costs and, 222 Tariffs (duty) free trade vs., 320–323 import policies and, 318 resale prevention, 411 Tastes, consumer See also Preferences, consumer, 34 Taxes 809 bounded rationality and tax salience, 127 burden of sales tax shared by firms and customers, 85–88 effect of sales tax on supplyand-demand, 82–83 effects of ad valorem and specific taxes, 88–90 effects of specific tax on monopolies, 384–385 effects of specific tax on shortrun equilibrium, 266–267 effects of tax on output on demand for labor, 533–534 equilibrium effects of specific sales tax, 83–84 example (gasoline tax), 91–92 example (tobacco use), 138 on externalities in noncompetitive markets, 631 impact of sales taxes on demand, 35 incidence of, 85–86 income tax rates and labor supply curve, 164–166 for pollution control, 627 redistribution of wealth and, 353 shifting burden to middle class, 354–355 short-run costs impacted by, 215–217 subsidies as negative tax, n 87 urban flight due to tax on wages, 340 welfare effects of sales taxes, 307–309 who pays the gasoline tax, 67–68 Technical progress defined, 196 impact on price of exhaustible resources, 575 productivity and, 196–197 Technological efficiency choices at home vs abroad, 238–239 long-run costs and, 218 maximizing profits, 175 www.freebookslides.com 810 Index Technological efficiency (continued) output decisions, 203 Testing theories, with microeconomic model, 28–29 Tests of transitivity, 125 Thales, 368 Third-degree price discrimination See Group price discrimination Third-party information, actions for equalizing information, 658–659 Threatening to punish credibility of in sequential dynamic games, 509–510 strategies in dynamic games, 504–506 Tie-in sales bundling, 434–436 overview of, 433 requirement tie-in sales, 433–434 Time choices over, 564–565 investing and See Investments price elasticity of demand over, 75–76 supply elasticity over, 80 time-varying discounting, 568–569 Total costs (C) long-run cost curves, 227–228 overview of, 208 short-run cost curves, 210–211 Total effects apple pie example, 148–150 labor-leisure choice and, 158–160 as sum of income and substitution effects, 148 Total product See Outputs Tourist-trap model monopoly pricing, 663 overview of, 662 uncompetitive pricing, 662–663 Trade benefits of, 349 long-run market supply curve with a large buyer, 275–277 pollution and, 643–644 Trade laws, resale prevention, 411–412 Trade-offs marginal rate of transformation measuring, 114 resource allocation and, 26 Trades, between two people bargaining ability and, 344 endowment as basis of, 340–342 mutually beneficial trades, 342–344 overview of, 340 Transaction costs in competitive markets, 247–248 perfect price discrimination and, 418 resale difficult when transaction costs are high, 411 Transitivity property, consumer preferences, 100 Transitivity (rationality) assumption, n 357 Trigger strategy, in dynamic games, 506 Trusts See also Cartels Two-part pricing with identical consumers, 429–430 with nonidentical consumers, 430–431, 725–726 overview of, 429 types of nonuniform pricing, 407 Two-period monopoly model, 399–400 U Ultimatum games, 519 Uncertainty assessing risk, 587 behavioral economics of, 608 biases in assessing risk probability, 608 diversification as risk reduction method, 598–600 example (British Petroleum), 585, 613–614 example (flight insurance), 603–604 expected utility theory and, 591–592 expected value in assessing risk, 588–590 information in risk reduction, 598 insurance as risk reduction method, 601–605 investing and, 605–606 natural disaster insurance, 604–605 overview of, 586 probability of risk, 587–588 prospect theory, 611–612 reducing risk, 597–598 risk attitudes, 591 risk-averse investing, 607 risk aversion, 592–594 risk-neutral investing, 606 risk neutrality, 595–596 risk preferring, 596–597 variance and standard deviation from expected value, 590–591 violations of expected utility theory, 609–611 Unified Carrier Registration Agreement, 245 Uniform pricing example (iTunes), 432–433 overview of, 406 Unions, as monopoly, 542 Unit taxes See Specific taxes (unit taxes) Unitary elasticity, of supply, 78 Universal coverage, restricting opportunistic behavior, 660 Utility defined, 98 expected utility, 591–592 indifference curves and, 109–110, 710–712 in labor-leisure choice, 715–716 marginal rate of substitution (MRS), 111–112 marginal utility, 110–111 www.freebookslides.com Index maximizing in mutually beneficial trades, 342–344 maximizing subject to budget constraint, 117–118, 712–714 ordinal preferences, 108–109 overview of, 108 risk aversion and, 592–594 risk neutrality and, 595–596 risk preferring and, 596 social welfare functions maximizing, 360–361 utility function, 108 Utility function, 108–112 V Variable costs (VC) overview of, 208 shape of variable cost curve, 212–213 short-run cost curves, 210–211 Variable costs (VC) (continued) shutdown decisions in short-run competitive firms, 259–261 taxes impacting short-run cost curves, 215–216 Variable inputs, 177 Variance, from expected value, 590–591 VC See Variable costs (VC) Vertical integration, as means of preventing resale, 411 von Neumann, John, 591 Voting, as allocation method, 357–359 W Wages compensating differentials for occupational safety, 649–650 efficiency wages to prevent moral hazard, 694–697 factor demand impacted by change in, 531–532, 730–731 income and substitution impacted by change in, 160–162 layoffs vs pay cuts, 696–698 minimum wages with incomplete coverage, 337–340 occupational licensing and, 52 price floors, 58–59 shape of labor supply curves, 162–163 unions ability to raise, 542 urban flight resulting from tax on, 340 Warranties, as signal of quality, 657 Water quotas, impacting opportunity set, 114–115 Wealth government programs in redistribution of, 353 inequitable distribution of, 354–355 Welfare applying producer surplus and, 299 barriers to entry or exit reducing, 306 block pricing and, 427–428 competition maximizing, 300–301 of consumers See Consumer surplus (CS) deadweight loss and, 302 deadweight loss (Christmas presents example), 304–305 differentiated products and, 477 in economists’ terminology, 287 effects of monopsonies, 546–548 effects of nonoptimal price regulation, 393 effects of optimal price regulation, 390–391 effects of pollution, 622–623, 732–734 effects of price ceilings, 316–317 effects of price changes, 295–297 effects of price discrimination, 426 811 effects of price floors, 312 effects of sales taxes, 307–309 effects of subsidies, 310–312 entry barrier, 306–307 government policies and, 356, n 305 group price discrimination and, 426 maximizing, 357 measuring consumer surplus with demand curve, 292–295 measuring producer surplus with supply curve, 298–299 monopolies vs competitive welfare with externalities, 630–631 overproduction causing decrease in, 302–303 perfect price discrimination and, 414–416 of producers See Producer surplus (PS) Welfare economics, 287–288 Willingness-to-accept (WTA), deadweight loss of Christmas presents and, n 304 Willingness-to-pay (WTP), deadweight loss of Christmas presents and, n 304 Willingness to substitute See Marginal rate of substitution (MRS) Winner’s curse, 517–518 World Trade Organization (WTO) aircraft subsidies and, 448 pressure on governments to reduce/eliminate barriers to trade, 395 Z Zero long-run profit for competitive firms with free entry, 288–289 for competitive firms with limited entry, 289–290 Zoning laws, as barrier to entry by hotel chains, 482–483 www.freebookslides.com Credits Cover photograph: FOTOGRIN/Shutterstock p 29, cartoon: Pearson Education, Inc p 33, photograph: AGE Fotostock/SuperStock p 35, photograph: Lev/Fotolia p 37, cartoon: Zach Weinersmith/smbc-comics p 51, cartoon: Pearson Education, Inc p 55, photograph: United States Government Printing Office p 57, photograph: Carlos Garcia Rawlins/Reuters p 67, photograph: Jeffrey M Perloff p 71, photograph: lurin/123RF p 80, photograph: United States Geological Survey (USGS) p 87, photograph: Pearson Education, Inc p 97, photograph: Jeffrey M Perloff p 99, cartoon: Pearson Education, Inc p 104, cartoon: Pearson Education, Inc p 119, photograph: Kesu/Shutterstock p 124, photograph: United States Department of Agriculture (USDA) p 134, photograph: Jim West/Alamy Stock Photo p 145, photograph: Elena Shashkina/Shutterstock p 158, cartoon: Pearson Education, Inc p 172, photograph: vario images GmbH & Co KG/Alamy Stock Photo p 183, photograph: Micheline Pelletier Decaux/Sygma/Getty Images p 183, photograph: Pearson Education, Inc p 191, cartoon: Pearson Education, Inc p 196, cartoon: Pearson Education, Inc p 197, photograph: Wang Jianwei/Xinhua News Agency/ Newscom p 203, photograph: Christian Delbert/Shutterstock p 208, cartoon: Pearson Education, Inc p 209, photograph: Pearson Education, Inc p 245, photograph: Nomad_Soul/Fotolia p 261, photograph: jaddingt/Fotolia p 287, photograph: Monkey Business/Fotolia p 290, photograph: Jeffrey M Perloff p 294, photograph: Jeffrey M Perloff p 304, cartoon: Pearson Education, Inc p 320, photograph: JackF/Fotolia p 320, photograph: Jeffrey M Perloff p 331, photograph: National Oceanic and Atmospheric ­Administration (NOAA) p 354, Abraham Lincoln photograph: Abraham Lincoln (5 Feb 1865), Alexander Gardner Gelatin silver print Library of Congress Prints and Photographs Division [LC-USZ62-11896] p 354, George Washington photograph: George Washington (Vaughan Portrait) (1795), Gilbert Stuart Oil on canvas, 73 x 60.5 cm (28 3/4 x 23 13/16 in.) Andrew W Mellon ­Collection, National Gallery of Art, Washington, DC p 355, Breaker Boys photograph: Breaker boys working in Ewen Breaker of Pennsylvania Coal Co (1911), Lewis Wickes Hine Library of Congress Prints and ­Photographs Division [LC-USZ62-12876] p 355, Migrant Mother photograph: Destitute pea pickers in California Mother of seven children Age thirty-two Nipomo, California (“Migrant Mother”) (1936), Dorothea Lange Library of Congress Prints and Photographs Division [LC-USZ62-95653] p 355, Ronald Reagan photograph: Library of Congress Prints and Photographs Division [LC-USZ62-13040] p 355, Barack Obama photograph: Pete Souza/Library of ­Congress Prints and Photographs Division [LC-DIG-ppbd-00358] p 367, photograph: Jeffrey M Perloff p 380, photograph: Jeffrey M Perloff p 382, cartoon: Pearson Education, Inc p 389, photographs: PHILADELPHIA INQUIRER/KRT/ Newscom p 406, photograph: Jeffrey M Perloff p 410, photograph: Jeffrey M Perloff p 425, cartoon: Pearson Education, Inc p 434, photograph: Paul Broadbent/Shutterstock p 448, photograph: Tom Mareschal/Alamy Stock Photo p 454, cartoon: Pearson Education, Inc p 468, photograph: Hayley Chouinard p 476, photograph: Lee Bennack p 477, photograph: Jeffrey M Perloff p 478, photograph: Jeffrey M Perloff p 490, photograph: Fotos593/Shutterstock p 499, photograph: Dorling Kindersley Limited p 501, cartoon: Pearson Education, Inc p 510, cartoon: Pearson Education, Inc p 528, photograph: vivalapenler/Fotolia www.freebookslides.com Credits p 553, photograph: Jeffrey M Perloff p 574, photograph: Jeffrey M Perloff p 585, photograph: United States Coast Guard p 587, photograph: Boeri, SRL p 592, photograph: Jeffrey M Perloff p 597, photograph: Jeffrey M Perloff p 604, cartoon: Pearson Education, Inc p 609, photograph: Uryadnikov Sergey/Fotolia p 619, photograph: Barry Sweet/AP Images p 621, photograph: Feng Yu/Fotolia p 624, cartoon: Pearson Education, Inc p 633, photograph: Doral Chenoweth III/The Columbus ­Dispatch/AP Images p 637, photograph: Pearson Education, Inc p 649, photograph: Davis Turner/EPA/Newscom p 652, photograph: Pearson Education, Inc p 657, cartoon: Pearson Education, Inc p 677, cartoon: Pearson Education, Inc p 685, photograph: Damian Dovarganes/AP Images p 689, photograph: Andy Sheppard/Redferns/Getty Images 813 www.freebookslides.com Symbols Used in This Book v = ad valorem tax (or tariff) rate, or an exponent in a Cobb-Douglass production function ∆ [capital delta] = change in the following variable (for example, the change in p between Periods and is ∆p = p2 - p1, where p2 is the value of p in Period and p1 is the value in Period 1) e [epsilon] = the price elasticity of demand η [eta] = the price elasticity of supply ℒ = lump@sum tax π [pi] = profit = revenue - total cost = R - C σ [sigma] = standard deviation θ [theta] = probability or share ξ [xi] = the income elasticity of demand Abbreviations, Variables, and Function Names AFC = average fixed cost = fixed cost divided by output = F/q MR = marginal revenue = ∆R/∆q AVC = average variable cost = variable cost divided by output = VC/q MRTS = marginal rate of technical substitution AC = average cost = total cost divided by output = C/q APZ = average product of input Z (for example, APL is the average product of labor) C = total cost = variable cost + fixed cost = VC + F CRS = constant returns to scale CS = consumer surplus CV = compensating variation MRS = marginal rate of substitution MUZ = marginal utility of good Z n = number of firms in an industry p = price PPF = production possibility frontier PS = producer surplus = revenues - variable costs = R - VC Q = market (or monopoly) output Q = output quota D = market demand curve q = firm output Dr = residual demand curve R = revenue = pq DRS = decreasing returns to scale r = price of capital services DWL = deadweight loss s = per@unit subsidy F = fixed cost S = market supply curve i = interest rate So = supply curve of all the other firms in the market I = indifference curve IRS = increasing returns to scale K = capital L = labor LR = long run m = constant marginal cost M = materials SC = a market of economies of scope SR = short run t = specific or unit tax (or tariff) T = tax revenue (α pQ, τQ, ρπ) U = utility VC = variable cost MC = marginal cost = ∆C/∆q w = wage MPZ = marginal (physical) product of input Z (for example, MPL is the marginal product of labor) Y = income or budget W = welfare ... denotes the availability of a Global Edition www.freebookslides.com The NaTure aNd Microeconomics ProPerTies of8th soils edition Global edition fifTeeNTh ediTioN Global ediTioN Ray R Weil Professor...www.freebookslides.com Microeconomics 8th edition Global edition www.freebookslides.com The Pearson Series in Economics Abel/Bernanke/Croushore... Christina Masturzo Editorial Assistant: Courtney Paganelli Senior Editor, Global ? ?Edition: Daniel Luiz Editor, Global Edition: Punita Kaur Mann Vice President, Product Marketing: Roxanne McCarley