[0133019934] [9780133019933] Microeconomics: Theory and Applications with Calculus, 3rd Edition - Hardcover

**For all intermediate Microeconomics courses at the undergraduate or graduate level. This text is also suitable for readers interested in calculus-based intermediate microeconomics.** Understand the practical, problem-solving aspects of microeconomic theory. __Microeconomics: Theory and Applications with Calculus__ uses calculus, algebra, and graphs to present microeconomic theory using actual examples, and then encourages readers to apply the theory to analyze real-world problems. The Third Edition has been substantially revised, 80% of the Applications are new or updated, and there are 24 new Solved Problems. Every chapter (after Chapter 1) contains a new feature (the Challenge and the Challenge Solution) and has many new end-of-chapter exercises. Cover 1 Microeconomics with Calculus 2 Brief Contents 6 Contents 7 Preface 15 Introduction 24 Microeconomics: The Allocation of Scarce Resources 24 Trade-Offs 25 Who Makes the Decisions 25 How Prices Determine Allocations 25 Application Fat Tax 26 Models 26 Application Income Threshold Model and China 26 Simplifications by Assumption 27 Testing Theories 28 Maximizing Subject to Constraints 28 Positive Versus Normative 29 Uses of Microeconomic Models 30 Summary 31 Supply and Demand 32 Challenge Quantities and Prices of Genetically Modified Foods 32 Demand 34 The Demand Function 35 Summing Demand Functions 39 Application Aggregating the Demand for Broadband Service 39 Supply 39 The Supply Function 40 Summing Supply Functions 42 How Government Import Policies Affect Supply Curves 43 Market Equilibrium 43 Finding the Market Equilibrium 43 Forces That Drive a Market to Equilibrium 45 Shocking the Equilibrium: Comparative Statics 46 Comparative Statics with Discrete (Relatively Large) Changes 46 Comparative Statics with Small Changes 47 Solved Problem 2.1 49 Why the Shapes of Demand and Supply Curves Matter 50 Elasticities 51 Demand Elasticity 51 Solved Problem 2.2 54 Supply Elasticity 56 Application Volcanic Eruptions and Africa’s Cut Flower Market 57 Solved Problem 2.3 58 Long Run Versus Short Run 58 Application Oil Drilling in the Arctic National Wildlife Refuge 59 Solved Problem 2.4 60 Effects of a Sales Tax 62 Two Types of Sales Taxes 62 Equilibrium Effects of a Specific Tax 62 How Specific Tax Effects Depend on Elasticities 63 Solved Problem 2.5 65 Application Subsidizing Ethanol 66 The Same Equilibrium No Matter Who Is Taxed 66 The Similar Effects of Ad Valorem and Specific Taxes 67 Quantity Supplied Need Not Equal Quantity Demanded 68 Price Ceiling 69 Application Price Controls Kill 71 Price Floor 72 When to Use the Supply-and-Demand Model 73 Challenge Solution Quantities and Prices of Genetically Modified Foods 74 Summary 75 Exercises 76 Consumer Theory 81 Challenge Why Americans Buy E-Books and Germans Do Not 81 Preferences 83 Properties of Consumer Preferences 83 Transitivity 84 Application You Can’t Have Too Much Money 84 Preference Maps 85 Indifference Curves 85 Solved Problem 3.1 88 Utility 88 Utility Function 89 Ordinal Preferences 89 Utility and Indifference Curves 91 Willingness to Substitute Between Goods 92 Solved Problem 3.2 94 Application MRS Between Recorded Tracks and Live Music 94 Curvature of Indifference Curves 95 Solved Problem 3.3 97 Application Indifference Curves Between Food and Clothing 98 Budget Constraint 99 Constrained Consumer Choice 101 Finding an Interior Solution Using Graphs 101 Solved Problem 3.4 103 Finding an Interior Solution Using Calculus 104 Solved Problem 3.5 105 Solved Problem 3.6 107 Solved Problem 3.7 108 Application Utility Maximization for Recorded Tracks and Live Music 108 Finding Corner Solutions 109 Minimizing Expenditure 112 Solved Problem 3.8 114 Behavioral Economics 115 Tests of Transitivity 115 Endowment Effect 116 Application How You Ask the Question Matters 117 Salience 117 Challenge Solution Why Americans Buy E-Books and Germans Do Not 118 Summary 119 Exercises 120 Demand 123 Challenge Paying Employees to Relocate 123 Deriving Demand Curves 124 System of Demand Functions 124 Graphical Interpretation 126 Application Quitting Smoking 128 Effects of an Increase in Income 129 How Income Changes Shift Demand Curves 129 Solved Problem 4.1 131 Consumer Theory and Income Elasticities 132 Application Fast-Food Engel Curve 134 Solved Problem 4.2 136 Effects of a Price Increase 137 Income and Substitution Effects with a Normal Good 138 Solved Problem 4.3 140 Application Shipping the Good Stuff Away 140 Income and Substitution Effects with an Inferior Good 141 Solved Problem 4.4 141 Compensated Demand Curve 142 Solved Problem 4.5 145 Slutsky Equation 145 Cost-of-Living Adjustment 147 Inflation Indexes 147 Effects of Inflation Adjustments 149 Application Fixing the CPI Substitution Bias 152 Revealed Preference 153 Recovering Preferences 154 Substitution Effect 155 Challenge Solution Paying Employees to Relocate 155 Summary 156 Exercises 157 Consumer Welfare and Policy Analysis 160 Challenge Child-Care Subsidies 160 Consumer Welfare 161 Willingness to Pay 162 Application Willingness to Pay and Consumer Surplus on eBay 164 Solved Problem 5.1 166 Expenditure Function and Consumer Welfare 166 Indifference Curve Analysis 167 Application Compensating Variation and Equivalent Variation for the Internet 169 Comparing the Three Welfare Measures 169 Solved Problem 5.2 172 Market Consumer Surplus 173 Loss of Market Consumer Surplus from a Higher Price 173 Markets in Which Consumer Surplus Losses Are Large 174 Effects of Government Policies on Consumer Welfare 175 Quotas 175 Application Water Quota 177 Food Stamps 177 Application Food Stamps Versus Cash 179 Deriving Labor Supply Curves 180 Labor-Leisure Choice 180 Solved Problem 5.3 183 Income and Substitution Effects 183 Solved Problem 5.4 184 Shape of the Labor Supply Curve 185 Application Working After Winning the Lottery 186 Income Tax Rates and the Labor Supply Curve 187 Challenge Solution Child-Care Subsidies 190 Summary 191 Exercises 192 Firms and Production 196 Challenge Labor Productivity During Recessions 196 The Ownership and Management of Firms 197 Private, Public, and Nonprofit Firms 197 The Ownership of For-Profit Firms 198 The Management of Firms 199 What Owners Want 199 Production 200 Production Functions 200 Time and the Variability of Inputs 201 Short-Run Production: One Variable and One Fixed Input 202 Solved Problem 6.1 202 Interpretation of Graphs 203 Solved Problem 6.2 205 Law of Diminishing Marginal Returns 206 Application Malthus and the Green Revolution 207 Long-Run Production: Two Variable Inputs 208 Isoquants 209 Application A Semiconductor Integrated Circuit Isoquant 212 Substituting Inputs 213 Solved Problem 6.3 214 Diminishing Marginal Rates of Technical Substitution 214 The Elasticity of Substitution 215 Solved Problem 6.4 217 Returns to Scale 217 Constant, Increasing, and Decreasing Returns to Scale 217 Solved Problem 6.5 218 Application Returns to Scale in U.S. Manufacturing 219 Varying Returns to Scale 220 Productivity and Technical Change 221 Relative Productivity 221 Application U.S. Electric Generation Efficiency 222 Innovations 222 Application Tata Nano’s Technical and Organizational Innovations 223 Challenge Solution Labor Productivity During Recessions 224 Summary 225 Exercises 226 Costs 229 Challenge Technology Choice at Home Versus Abroad 229 Measuring Costs 230 Opportunity Costs 231 Application the Opportunity Cost of an MBA 231 Solved Problem 7.1 232 Capital Costs 232 Sunk Costs 233 Short-Run Costs 234 Short-Run Cost Measures 234 Solved Problem 7.2 236 Short-Run Cost Curves 237 Production Functions and the Shape of Cost Curves 238 Application Short-Run Cost Curves for a Japanese Beer Manufacturer 240 Effects of Taxes on Costs 241 Short-Run Cost Summary 242 Long-Run Costs 242 Input Choice 243 Solved Problem 7.3 247 Solved Problem 7.4 248 How Long-Run Cost Varies with Output 251 Solved Problem 7.5 251 Solved Problem 7.6 253 The Shape of Long-Run Cost Curves 253 Application Small Is Beautiful 255 Estimating Cost Curves Versus Introspection 255 Lower Costs in the Long Run 256 Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves 256 Application Choosing an Inkjet or Laser Printer 258 Short-Run and Long-Run Expansion Paths 258 How Learning by Doing Lowers Costs 259 Application Learning by Drilling 261 Cost of Producing Multiple Goods 261 Application Economies of Scope 263 Challenge Solution Technology Choice at Home Versus Abroad 263 Summary 264 Exercises 265 Competitive Firms and Markets 269 Challenge The Rising Cost of Keeping On Truckin’ 269 Perfect Competition 270 Price Taking 270 Why a Firm’s Demand Curve Is Horizontal 271 Perfect Competition in the Chicago Commodity Exchange 272 Deviations from Perfect Competition 272 Derivation of a Competitive Firm’s Demand Curve 273 Why Perfect Competition Is Important 275 Profit Maximization 275 Profit 275 Two Steps to Maximizing Profit 276 Competition in the Short Run 279 Short-Run Competitive Profit Maximization 279 Solved Problem 8.1 281 Application Oil, Oil Sands, and Oil Shale Shutdowns 285 Short-Run Firm Supply Curve 286 Solved Problem 8.2 287 Short-Run Market Supply Curve 288 Short-Run Competitive Equilibrium 290 Solved Problem 8.3 292 Competition in the Long Run 293 Long-Run Competitive Profit Maximization 293 Long-Run Firm Supply Curve 293 Application The Size of Ethanol Processing Plants 294 Long-Run Market Supply Curve 294 Application Fast-Food Firms Entry in Russia 296 Application Upward-Sloping Long-Run Supply Curve for Cotton 298 Application Reformulated Gasoline Supply Curves 302 Solved Problem 8.4 303 Long-Run Competitive Equilibrium 303 Challenge Solution The Rising Cost of Keeping On Truckin’ 305 Summary 306 Exercises 307 Applications of the Competitive Model 311 Challenge Licensing Taxis 311 Zero Profit for Competitive Firms in the Long Run 312 Zero Long-Run Profit with Free Entry 312 Zero Long-Run Profit When Entry Is Limited 313 Application Tiger Woods’ Rents 315 The Need to Maximize Profit 316 Producer Surplus 316 Measuring Producer Surplus Using a Supply Curve 316 Using Producer Surplus 318 Solved Problem 9.1 318 Competition Maximizes Welfare 319 Measuring Welfare 320 Why Producing Less Than the Competitive Output Lowers Welfare 320 Why Producing More Than the Competitive Output Lowers Welfare 322 Application The Deadweight Loss of Christmas Presents 323 Policies That Shift Supply Curves 324 Policies That Create a Wedge Between Supply and Demand Curves 325 Welfare Effects of a Sales Tax 326 Welfare Effects of a Price Floor 327 Solved Problem 9.2 329 Application How Big Are Farm Subsidies and Who Gets Them? 331 Welfare Effects of a Price Ceiling 331 Solved Problem 9.3 332 Application The Social Cost of a Natural Gas Price Ceiling 333 Comparing Both Types of Policies: Trade 333 Free Trade Versus a Ban on Imports 334 Solved Problem 9.4 336 Free Trade Versus a Tariff 336 Solved Problem 9.5 338 Free Trade Versus a Quota 339 Rent Seeking 340 Challenge Solution Licensing Taxis 341 Summary 343 Exercises 344 General Equilibrium and Economic Welfare 348 Challenge Anti-Price Gouging Laws 348 General Equilibrium 350 Competitive Equilibrium in Two Interrelated Markets 351 Application Partial-Equilibrium Versus Multimarket-Equilibrium Analysis in Corn and Soybean Markets 352 Minimum Wages with Incomplete Coverage 353 Solved Problem 10.1 355 Application Urban Flight 355 Trading Between Two People 356 Endowments 356 Mutually Beneficial Trades 357 Solved Problem 10.2 359 Deriving the Contract Curve 360 Solved Problem 10.3 360 Bargaining Ability 361 Competitive Exchange 361 Competitive Equilibrium 362 Solved Problem 10.4 364 The Efficiency of Competition 364 Obtaining Any Efficient Allocation Using Competition 364 Production and Trading 365 Comparative Advantage 365 Solved Problem 10.5 367 Efficient Product Mix 369 Competition 369 Efficiency and Equity 371 Role of the Government 371 Application The Wealth and Income of the 1% 371 Efficiency 373 Equity 375 Efficiency Versus Equity 378 Theory of the Second Best 379 Challenge Solution Anti-Price Gouging Laws 381 Summary 382 Exercises 383 Monopoly and Monopsony 386 Challenge Pricing Apple’s iPad 386 Monopoly Profit Maximization 387 The Necessary Condition for Profit Maximization 388 Marginal Revenue and the Demand Curves 388 Solved Problem 11.1 390 Marginal Revenue Curve and the Price Elasticity of Demand 390 An Example of Monopoly Profit Maximization 392 Application China’s New Monopolies 393 Choosing Price or Quantity 394 Effects of a Shift of the Demand Curve 395 Market Power and Welfare 396 Market Power and the Shape of the Demand Curve 396 The Lerner Index 397 Solved Problem 11.2 398 Sources of Market Power 399 Effect of Market Power on Welfare 399 Taxes and Monopoly 401 Effects of a Specific Tax 401 Solved Problem 11.3 402 Welfare Effects of Ad Valorem Versus Specific Taxes 404 Causes of Monopolies 405 Cost Advantages 405 Solved Problem 11.4 407 Government Actions That Create Monopolies 408 Application Botox Patent Monopoly 409 Government Actions That Reduce Market Power 411 Regulating Monopolies 411 Solved Problem 11.5 412 Application Natural Gas Regulation 414 Increasing Competition 415 Monopoly Decisions over Time and Behavioral Economics 416 Network Externalities 416 Network Externalities as an Explanation for Monopolies 417 Application Critical Mass and eBay 417 Introductory Prices: A Two-Period Monopoly Model 418 Monopsony 419 Monopsony Profit Maximization 419 Solved Problem 11.6 422 Welfare Effects of Monopsony 423 Challenge Solution Pricing Apple’s iPad 423 Summary 424 Exercises 425 Pricing and Advertising 429 Challenge Sale Price 429 Conditions for Price Discrimination 431 Why Price Discrimination Pays 431 Which Firms Can Price Discriminate 431 Application Disneyland Pricing 432 Preventing Resale 432 Application Preventing Resale of Designer Bags 433 Not All Price Differences Are Price Discrimination 433 Types of Price Discrimination 434 Perfect Price Discrimination 434 How a Firm Perfectly Price Discriminates 434 Graphical Analysis 435 Calculus Analysis 436 Solved Problem 12.1 436 Perfect Price Discrimination Is Efficient but Harms Some Consumers 437 Application Botox Revisited 439 Transaction Costs and Perfect Price Discrimination 439 Application Google Uses Bidding for Ads to Price Discriminate 440 Group Price Discrimination 440 Group Price Discrimination with Two Groups 441 Application Smuggling Prescription Drugs into the United States 443 Solved Problem 12.2 444 Identifying Groups 446 Application Buying Discounts 446 Solved Problem 12.3 447 Welfare Effects of Group Price Discrimination 448 Group Price Discrimination Versus Competition 448 Group Price Discrimination Versus Single-Price Monopoly 448 Nonlinear Price Discrimination 449 Two-Part Pricing 450 Two-Part Pricing with Identical Consumers 451 Two-Part Pricing with Differing Consumers 452 Application Pricing iTunes 454 Tie-In Sales 455 Requirement Tie-In Sales 455 Application IBM 455 Bundling 456 Advertising 458 Deciding Whether to Advertise 459 How Much to Advertise 460 Solved Problem 12.4 461 Application Super Bowl Commercials 462 Challenge Solution Sale Price 462 Summary 464 Exercises 464 Game Theory 469 Challenge Intel and AMD’s Advertising Strategies 469 Static Games 471 Normal-Form Games 472 Failure to Maximize Joint Profits 475 Application Strategic Advertising 477 Multiple Equilibria 478 Solved Problem 13.1 479 Mixed Strategies 479 Application Parasites, Boomerangs, and Other Youths 481 Solved Problem 13.2 481 Dynamic Games 482 Repeated Game 483 Sequential Game 484 Solved Problem 13.3 489 Application First Mover Advantages and Disadvantages 490 Auctions 491 Elements of Auctions 491 Bidding Strategies in Private-Value Auctions 492 Winner’s Curse 493 Application Bidder’s Curse 494 Behavioral Game Theory 494 Application GM’s Ultimatum 495 Challenge Solution Intel and AMD’s Advertising Strategies 496 Summary 497 Exercises 497 Oligopoly 504 Challenge Government Aircraft Subsidies 504 Market Structures 506 Cartels 507 Why Cartels Succeed or Fail 507 Application Catwalk Cartel 510 Maintaining Cartels 511 Application Market Power Versus Efficiency in Hospital Mergers 513 Cournot Oligopoly Model 513 The Duopoly Nash-Cournot Equilibrium 513 The Cournot Model with Many Firms 517 The Cournot Model with Nonidentical Firms 521 Solved Problem 14.1 521 Application Air Ticket Prices and Rivalry 522 Solved Problem 14.2 524 Application Bottled Water 525 Stackelberg Oligopoly Model 525 Calculus Solution 526 Graphical Solution 527 Why Moving Sequentially Is Essential 527 Strategic Trade Policy: An Application of the Stackelberg Model 529 Solved Problem 14.3 531 Comparison of Collusive, Nash-Cournot, Stackelberg, and Competitive Equilibria 532 Application Deadweight Losses in the Food and Tobacco Industries 533 Bertrand Oligopoly Model 534 Nash-Bertrand Equilibrium with Identical Products 535 Nash-Bertrand Equilibrium with Differentiated Products 537 Application Welfare Gain from Greater Toilet Paper Variety 540 Monopolistic Competition 541 Monopolistically Competitive Equilibrium 541 Fixed Costs and the Number of Firms 542 Solved Problem 14.4 544 Application Zoning Laws as a Barrier to Entry by Hotel Chains 544 Challenge Solution Government Aircraft Subsidies 545 Summary 546 Exercises 547 Factor Markets 551 Challenge Should You Go to College? 551 Factor Markets 552 A Firm’s Short-Run Factor Demand Curve 552 Solved Problem 15.1 555 A Firm’s Long-Run Factor Demand Curves 557 Competitive Factor Markets 559 Application Black Death Raises Wages 561 Solved Problem 15.2 562 Capital Markets and Investing 562 Interest Rates 563 Discount Rate 564 Stream of Payments 564 Application Saving for Retirement 565 Investing 566 Solved Problem 15.3 568 Solved Problem 15.4 569 Durability 569 Application Durability of Telephone Poles 569 Time-Varying Discounting 570 Application Falling Discount Rates and Self-Control 572 Capital Markets, Interest Rates, and Investments 572 Solved Problem 15.5 573 Exhaustible Resources 573 When to Sell an Exhaustible Resource 574 Price of a Scarce Exhaustible Resource 574 Application Redwood Trees 577 Why Price Might Not Rise 578 Challenge Solution Should You Go to College? 580 Summary 582 Exercises 582 Uncertainty 586 Challenge Flight Insurance 586 Assessing Risk 587 Probability 587 Expected Value 588 Solved Problem 16.1 590 Variance and Standard Deviation 590 Attitudes Toward Risk 591 Expected Utility Theory 592 Risk Aversion 593 Solved Problem 16.2 595 Solved Problem 16.3 595 Risk Neutrality 596 Risk Preference 596 Application Gambling 597 Degree of Risk Aversion 598 Solved Problem 16.4 600 Reducing Risk 600 Just Say No 601 Application Harry Potter’s Magic 601 Obtaining Information 601 Application Weathering Bad Sales 601 Diversification 602 Application Employees’ Failure to Diversify 603 Insurance 604 Solved Problem 16.5 605 Application Limited Insurance for Natural Disasters 606 Investing Under Uncertainty 607 How Investing Depends on Attitudes Toward Risk 607 Investing with Uncertainty and Discounting 608 Solved Problem 16.6 609 Behavioral Economics and Uncertainty 610 Biased Assessment of Probabilities 610 Application Biased Estimates 611 Violations of Expected Utility Theory 611 Prospect Theory 613 Challenge Solution Flight Insurance 615 Summary 615 Exercises 616 Externalities and Public Goods 620 Challenge Trade and Pollution 620 Externalities 621 Application Spam: A Negative Externality 622 The Inefficiency of Competition with Externalities 622 Supply-and-Demand Analysis 622 Cost-Benefit Analysis 625 Regulating Externalities 626 Emissions Standard 628 Application Reducing Pulp and Paper Mill Pollution 628 Emissions Fee 629 Solved Problem 17.1 630 Application Why Tax Drivers 630 Benefits Versus Costs from Controlling Pollution 631 Application Protecting Babies 631 Emissions Fees Versus Standards Under Uncertainty 631 Market Structure and Externalities 633 Monopoly and Externalities 633 Monopoly Versus Competitive Welfare with Externalities 634 Solved Problem 17.2 634 Taxing Externalities in Noncompetitive Markets 635 Allocating Property Rights to Reduce Externalities 635 Coase Theorem 636 Application Buying a Town 637 Markets for Pollution 637 Application European Cap-and-Trade Policy 638 Rivalry and Exclusion 638 Open-Access Common Property 639 Application for Whom the Bridge Tolls 640 Club Goods 640 Public Goods 641 Application Radiohead’s Public Good Experiment 644 Solved Problem 17.3 645 Reducing Free Riding 646 Valuing Public Goods 646 Application What’s Their Beef? 647 Challenge Solution Trade and Pollution 648 Summary 649 Exercises 650 Information 654 Challenge Dying to Work 654 Problems Due to Asymmetric Information 656 Responses to Adverse Selection 657 Controlling Opportunistic Behavior Through Universal Coverage 657 Equalizing Information 658 Application Risky Hobbies 658 How Ignorance About Quality Drives Out High-Quality Goods 659 Lemons Market with Fixed Quality 659 Solved Problem 18.1 662 Lemons Market with Variable Quality 662 Solved Problem 18.2 662 Limiting Lemons 663 Application Changing a Firm’s Name 664 Application Adverse Selection on eBay Motors 665 Market Power from Price Ignorance 666 Tourist-Trap Model 667 Solved Problem 18.3 668 Advertising and Prices 668 Problems Arising from Ignorance When Hiring 669 Cheap Talk 669 Education as a Signal 671 Solved Problem 18.4 672 Screening in Hiring 675 Challenge Solution Dying to Work 676 Summary 677 Exercises 678 Contract Theory 681 Challenge Health Insurance 681 Principal-Agent Problem 682 A Model 683 Types of Contracts 683 Efficiency 684 Application Selfless or Selfish Doctors? 685 Production Efficiency 685 Efficient Contract 685 Full Information 686 Solved Problem 19.1 689 Asymmetric Information 690 Application Contracts and Productivity in Agriculture 692 Trade-Off Between Efficiency in Production and in Risk Bearing 692 Contracts and Efficiency 693 Solved Problem 19.2 694 Choosing the Best Contract 695 Application Music Contracts: Changing Their Tunes 696 Monitoring to Reduce Moral Hazard 696 Bonding 697 Solved Problem 19.3 698 Deferred Payments 699 Efficiency Wages 699 After-the-Fact Monitoring 700 Application The Mortgage Market Meltdown 701 Solved Problem 19.4 702 Contract Choice 703 Checks on Principals 704 Application Layoffs Versus Pay Cuts 704 Challenge Solution Health Insurance 706 Summary 707 Exercises 708 Calculus Appendix 712 Functions 712 Properties of Functions 713 Derivatives 717 Maximum and Minimum 722 Finding the Extrema of a Function 724 Maximizing with Equality Constraints 729 Maximizing with Inequality Constraints 732 Duality 739 Regression Appendix 740 Answers to Selected Problems 743 Definitions 763 References 769 Sources for Applications and Challenges 777 Index 784 Credits 801