Table Of Content

CON TE NTS Preface xix TheM arket ConstrauM cotdienlg OptimiaznaEdtq iuoinl ibrTihueDm e 1 3 manCdu rve TheS uppCluyr ve MarkEeqtu ilibrCioumm 3 5 7 paraSttiavtei cOst hWeary tsoA lloAcpaatret mentTsh eD is 9 11 crimitnianMgo nopolistT heO rdinaMroyn opolistR entC ontrol • • • WhicWahy I sB est? Pareto EfficiCeonmcpya WraiyntsgoA l 14 15 locAaptaer tmentEsq uiliibntr hiLeuo mnR gu n Summary 16 17 18 ReviQeuwe stions 19 BudgeCto nstraint TheB udgCeotn straiTnwtoG oodArsOe f tEenno ugh Prpo 20 21 ertoifte hsBe u dgSeett How Btuhdeg LeitnC eh angesT he 22 24 NumerairTeax esS,u bsiadniRdea st,i oningEx ampleT:h e 26 26 FoodS tamPpro gramB udgLeitnC eh angesS ummary Review 31 31 Questions 32 CONTENTS VIII Preferences ConsuPmreeerrf encesA ssumpatbiooPunrtse ferencIensd if 34 35 freenCcuer ves ExamplPersee rfoefn cesP erfcteS ubstitutes 36 37 PerfeCcotm plemtesn Bads NeutralsS atiatioDni screte • • • • • Goods Welle-hBavPerdee rfencesT he MarRgaitonefSa ulb stitu • 44 tion OthIenrt erproeftt haMetR iSo nsB ehavitohrMe R So f 48 50 Summary ReviQeuwe stions 51 52 52 Utility CardUitniall itCyo nstrauU cttiilFniugtn yct ioSno mEex am 57 58 ploefs UtFiulnicttyi onEsx amplIen:d iffeenrcCeu rvefsr omU tility 59 PerfeScutb stitutePse rfeCcotm plementsQ uasiliPnreeafre rences • • Cobb-DoluagsP referenceMsa rgiUntaill ityM argiUntaill ity • • 65 andM RS UtilfioCtro ym mutingS ummary Review 66 67 69 QuestionAsp pendixE xampleC:o bb-DougPlraesf erences 70 70 Choice OptimChaoli ce ConsuDmeemra nd SomEex amples 73 78 78 Perfect SubstiPteurtfeesCc otm plemtesn Neutraalnsd B ads • • • DiscreGtoeo ds ConcavPer eferenceCso bb-DougPlraesf erences • • • EstimUattiilFnuigcnt tyi onsI mplicoaftt hiMeoR nSCs o ndition 83 85 ChoosTianxge s Summary ReviQeuwe stionAsp pen- 87 89 89 dix ExampleC:o bb-DougDleamsa ndF unctions 90 Demand NormaanlId n feGroioodrs IncomeC uOrffveaerns Ed n gCeulr ves 96 SomEex amplesP erfeScutb stitutePse rfeCcotm plements 97 99 • CobbD-ouglaPsr eferenceHso mothetPirce ferenceQsu asilinear • • • PreferencOesrd inaGroyo dansGd i ffGeono ds TheP riOcffee r • 104 Curavnedt hDee maCnudr ve SomEex amples Perfect 106 107 SubstitutePse rfeCcotm plemtesn A DiscreGtoeo d Substitutes • • • anCdo mplementTsh Ien veDresmea Funndc tion Summary 111 112 ReviQeuwe stionAsp pendix 114 115 115 CONTENTISX RevealPerde ference 7 ThIed eoafR eveaPlreeefrde nce FromR eveaPlreeerdfe tnocPe r ef 119 erence RecovePrrienfge rencTehse WAexaiko omfR e 120 122 vealePdr eferencCeh eckWiARnPg TheS troAnxgi oomf 124 125 ReveaPlreedf erencHeo w Cthoe ck SARPI ndNeuxm bers 128 129 PriIcned ices ExamplIen:d exiSnogc iSaelc uriPtayy ments 130 132 Summary ReviQeuwe stions 135 135 SlutsEkqyu ation 8 ThSeu bstiEtffuetcito nE xampleC:a lculatthieSn ug bstituEtfi-on 137 fectT heI nceo meEcfft ExampleC:a lculatthienI gn comEeff ect 141 Sigonft hSeu bstiEtffuetcito nT heTo taClh anignDe e mand 142 143 Rates of ChTahneLg aewo fD emand ExampolfIe nsc ome 144 147 andS ubstiEtffuetcitosn ExampleR:eb atinag T ax Example: 147 VoluntaRreya lT imeP ricinAgn otShuebrs tiEtffuetcito nC om 153 pensaDtemeadnC du rves Summary ReviQeuwe stions 155 156 157 Appendix ExamplRee:b atian gS malTla x 157 Buyinagn dS elling 9 Neatn Gdr oDsesm ands TheB udgeCto nstrainCth anging 160 161 thEen dowmentP riCchena ges OffeCru rvaensDd e mand 163 164 Curves TheS lutsky REeqvuiastiitoenUd s oef t he Slut- 167 168 sky EquatiEoxnam ple: CalctuhleEa ntdionwgm enItn comEeff ect 172 Labor SupplThye B udgeCto nstrainCto mpairvSaett atoifc s 173 • LabSourp ply ExamplOev:e rtime tahneSd u pployfL aborS um- 174 mary ReviQeuwe stionAsp pendix 178 179 179 X CONTENTS In tertpeomraClh oice ThBe udgeCto nstrainPtr eferfeoCnroc nessu mptioCno m 182 185 paraSttiavtei csT heS lutEsqkuya tainoIdn n terteCmhpooircael 186 InflationP resVeanulte A: ColseLro ok Analyz 187 189 191 inPgr eensVtal ufeo Sre vePrearli odsU soef P resVealnute 193 194 ExalmepV:a luaSi tnrgoe fPa am ymeEnxtapsml Tehe:T ruCeo softa CredCiatr Bdo nds ExapmlIen:s taLlolamTneasnx tes 197 199 ExalmepS:c ahroslhainSpdas viCnhgosio cfte h Ien teRraetset 200 Summary ReviQeuwe stions 201 201 AsseMta rkets RatoefRs e turn ArbitarnaPdgr ee sVeanltu e Adjustments 202 204 foDri effrenacmeosnA gs sets AssewtistC ho nsumpRteitounr ns 204 TaxiaotonfA ssReett urns ApplicatioDnesp letable 205 206 207 ReosurceWshe n CtuaotF oresEtx almeGp:a soPlrciiendseu ring • • the GuFlifn aWnIacnrisa tli tutioSunmsm ary Review 211 212 QuestionAsp pendix 213 213 Uncertainty ContitnC goennsumptionE xapmlCea:t apshBteor nodUtsi lity 215 FunctainoPdn rso babilitEixeasl mepS:o mEex almeposfU tility 220 FunctEixopencst ed UtWihlyiE txyp ecUtteidlI isRt eya sonable 221 RisAkv ersion ExapmlTehe:D emafnodr InDsiurance 222 224 versificatRiiosSnkp readinRgo loeft hSet oMcakr ket 228 228 229 Summary ReviQeuwe stionAsp pendix Exalmep: 230 230 231 ThEeff ceotf xaTatoinIo nnv esitnRm iesAnkstys ets RiskAys sets Mean-VaUrtiialnictey M easuRriisnkg Equiliibnar ium 234 239 MarkfeotRr i sAksys ets HowR etuArdnujss t Exapmle: 241 242 RankMiutnugFa uln Sdusm mary ReviQeuwe stions 246 246 CONTENTXSI ConsumeSru'rsp lus 14 Demanfrod Dai scGroeotde ConstirnUugtc itlfirtoDyme mand 248 OthIenrt erproeftC aotnisou'nmsSseu rrplus FroCmo n 249 250 sumeSrur'psl tuoCs o nsu'mS eurrsplusA pproxiam aCtioinnnutg 251 ouDse mand QuasilUitnielairt yI nterptrheCeth ianngg e in 251 251 Consu'mSseu rrplus ExampleT:h eC hangien C onsumerS'usr plus 252 Compensaantdi nEgq uViaviraalteinotn ExampleC:o mpensating 254 andE q1LivaViaernita tioEnxsa mpleC:o mpensatainndEg q uiavlenVta ri atiofno rQ uasilinPeraerf erenPcerso cde'urSsu rplusB enefit-Cost 258 AnalysisR ationi.n CgallcautGianigan nsLd o sses Sum 260 262 mary ReviQeuwe stionsA ppendix ExampleA: 263 263 264 FewD emandF unctionEsx ampleC:V ,E V,a ndC onsumerS'usr plus MarkeDte mand 15 FroImn diuvatlioM d arkDeetm and ThIen veDresmea Fnudn ction 266 ExampleA:dd ingU p "LineaDre"m andC urvesD iscGroeotdes 268 TheE xtenasnidtv heIe n tenMsarigvien Elasticity 269 269 270 ExampleT:h eE lasticoifat Lyi neaDre mandC urveE laisttayin cdD e mand Elaisttyi cRaenvde nue ExamplSet:r ikaensdP rofits 272 273 ConstEalnats ticity DEelmaasntadinscMd ia tryg iRneavlen ue 276 277 ExamplSee:t tian Pgr iceM argiRneavle nCuuer ves IncoEmlea s 279 ticityS ummary ReviQeuwe stionAsp pendix 280 281 282 283 ExampleT:h eL affeCru rve ExamApnloet:h eErx pressfioorEn l asticity Equilibrium 16 Supply MarkEeqtu ilibriTuwmo S pecCiaasle s In- 289 289 290 verDseem aanndSd u ppCluyr ves ExamplEeq:1 lilibwriituLhmi n- 291 earC urvesC omparSattaitviec s ExampleS:h iftinBgo thC urves 293 Taxes ExampleT:a xatiwoint Lhi neaDre manda ndS uplpy Pass 294 inAgl oanT ga x TheD eadweLiogsohsfat T ax Example: 298 300 TheM arkefto rL oans ExamplFeo:o d SubsiEdxiaemsp lSeu:b sidiine s IraqP areEtffioc iency ExampleW:a itiinngL ineS ummary 306 309 ReviQeuwe stions 309 XIIC ONTENTS Auctions ClassiofifcA autcitoino nsB iddingA uRcutDlieeosnsi gn 312 • 313 OthAeurc tFioromns ExalmeLp:a Btied doinen Bga Eyx apmle: 316 OnlAidnA eu ctPiroonbslw eimtAshu ctionsT hWei nn'eCsru rse 319 Summary ReviQeuwe stions 320 320 321 Technology InpuatnsdO utputs DescrTiebcihnngo lCoognisctarla ints 322 323 ExampolfTe ecsh nologyF ixPerpdoot rionPsef ercStu bstitutes 324 • CobDbo-uglParospe rotfTi eecsh nologTyh Mea rgiPnraold uct • • 326 TheTe chniRcaatolefS ubstitutiDoinm iniMsahrignign al 328 328 Product DiminiTsehcihnnRgia ctoaeflS ubstitutiTohne 329 329 LonRgu na nd SthhoeRr utn RetutronS sc ale Summary 330 330 ReviQeuwe stions 332 333 ProfMiatx imization Profits ThOer ganiozfFa itrimosn ProfiatnSsdt oMcakr ket 334 336 Value ThBe oundaorfti hFeeis r m FixaendVd a irabFlaec 336 338 tors ShortP-rRouMfinat x imizatiCoonm pareSa ttaitvics 339 339 ProMfiatx imiziant LitoohnneRg u n InveFrascetD oerm and 341 342 Curves ProMfiatx imizaantRdie tountr oSn csa le Revealed 343 344 Profittayb iliExapmlHeo:Dw o F armReeratscPo tr iScupepo rts? 345 CosMti nimizatiSounm mary ReviQeuwe stionAsp 349 349 350 pendix 351 CosMti nimization CosMti nimizatiEoxna pmlMei:n imCiozsfirtonS sgpe ciTficech - 353 noolgiReesv eaCloesMdti nimizatiRoent utronS sc aalned the 357 CosFtu nctionL ong-RuSnh oarntdC- oRsutns Fixaendd 358 360 Quasi-CFoisxtesd SunCko sts Summary Review 362 362 363 QuestionAsp pendix 363 364 CONTENTXSI II CosCtu rves 21 AverCaogset s MargiCnoaslt s MargiCnoasaltn sVd a riable 367 369 Costs ExalmepS:ep ciCfiotcsC urveEsx amMpalgrei:nC aols t 371 Cuerfsvo Trw Pol anLotnsg -CRousnt s DiscLreevtoeelf s n Ptl a 375 Size Long-Run CMoasrtgsi nSaulm mary Review 377 379 380 QuestionAsp pendix 381 381 FirSmu pply 22 MarkEentv ironmenPtusrC eo mpetitiTohne SuDpepcliy 383 384 sioofanC ompetFiitrimv eA n ExceptiAonno tEhxecre ption 386 388 ExapmlPer:ci iOnpge raStyisntgTe hmeIs n veSruspepF luyn c 389 tion ProfiatnPsd r oduScuerrp'lsu s ExapmlTeh:Se u pply 391 391 CurfvoaerS pceiCfioscFt u ncTthiLeo onn g-SRuupnpC luyre v oFfi ram Long-CRounns tAavnetrC aogset s Summary Review 395 397 398 QuestionAsp pendix 399 399 IdnustSruyp ply 23 ShortI-nRduuns try SuIpnpdluyEs qturiyl iibntr hiSeuh moR rutn 401 InduEsqturiyl iibntr hLieou nmRg u n ThLeo ng-Run Supply 402 403 Curve ExalmepT:xa atiinto hnLe o nRgu ann idnt hSeh oRrutn 405 TheM eanionfZg e rPor ofits Fxied FaacntdEo crosn oRmeinct 409 ExalmepT:xa iL iceinnNs eewYsor kC itEyc onoRmeinct 410 412 RentRaalta ensPd r ices ExapmlLei:q Luiocre TnhsePe osl itics 414 ofR ent ExmaplFea:r mtihnGego vernmEenenrtPg oyl icy 415 417 Two-TiPerriecdi PnOrcgiie Cl o ntroTlhEsen titPlrgeormaemn t • • Summary ReviQeuwe stions • 421 422 XIVC ONTENTS Monopoly MaximiPzrionfigt s LineDaerm anCdu rvaen dM onopoly 424 425 MarkPurpi cing ExapmlTehe:I mpaofcT tae xso na M onopo 427 liIsnte fficioefMn ocnyo poly DeadweLiogshsMt o onfo poly 429 431 ExapmlTehe:O ptimLfaieol fa PatEexnaptml Pea:t Tehinctk Neatts- ural MonopWohlayCt a usMeosn opoliesE?xa mplDei:- 435 437 amonAdrFseo revEexrapm lPeo:o liinAn ugc tMiaornk eEtxsap mle: PriFciex iinnC go mpuMteemroM rayre ktSsu mmary Review 441 QuestionAsp pendix 442 443 MonopolBye havior PriDcies criminaFtiiroDsnet g-rPerei ce DiscrimEixnation 445 445 ampFliserdt:e- gPrrceiDeei scriimnPiar ncattSiiecocenoD n edg-rPerei ce Dismcirniation ExalmePp:r iDcies criimnAi infraraetsiE oxn 448 ampPlrese:cit rpiDornuP grc ieTsh ird-DPergiDrcieese c rimination 452 ExapmlLei:n ear CDueersmvE axnadpm lCea:l cuOlpattiPimrnaig!c e DiscrimEixnapamltPeiro:in Dc ies crimiinAn caatdiJeoomnui rcn als BundlingE xapmlSeo:ft wSaurieTt weos- PTaarrti ffs Mo 457 458 nopolCiosmtpiect itiAoL no caMtoidooenfPl r odDuicffte iraetniton 459 ProdDuicefftr entiatiMoonrV een dors Summary 463 465 466 467 Review Questions 467 FactMoarr kets Monopiontl hyOe u tpMuatr ket Monopys on ExalmepT:h e 468 471 MinimWuamg Uep straenaDdmo wnstream MonSoupmomlaireys 475 Review QuestAipopnesn dix 477 478 478 CONTENTSX V Oligopoly 27 ChoosaiS nttgre agy QuantLietayd ershiTph eF oll'osw er 481 481 PorbleTmh Lee ea'rdPsro blePmr iLceea dershiCpo mparing • • 487 PriLceea dearnsQdhu iapn tLietayd ershiSpi multaQnueaonutsi ty 489 SettingA nE xampolfCe o urEnqouti libriAudmj usttt moe n 489 491 EquilibriMuamn Fyi rimns CoEuqruniolti briSuimm ulta 493 493 neoPursi ce SettCionlgl usioPnu nhimsenStt rategies 494 495 498 ExamplPer:i Mcaet cahniCdno gme ptitEixoanlm epV:o ltuaEnrxyop rt RestrCaoimnptarsoi fts hoSeno lutionSsu mmary Review 501 502 Questions 503 GameT heory 28 TheP ayoMffa triaxG aomfe NashE quilibriuMmi xed 504 506 StrategiEesx apmlReo:Pc akp Secri ssT shoer Prisoner's Dilemma 507 RepeaGtaemde s EnofcrinaCg a rtel ExapmlTei:t 509 511 512 froF aitnA irPlricinienS ge queGnatmieasl A Gamoef E ntry 514 DeterrencSeu mmary ReviQeuwe stions 516 518 519 GameA pplications 29 BesRte spoCnusrev es MixeSdtt reagies GameosfC oordi 520 522 nation Batotftl hSeee xePsr isoner'sA ssDuirlaenmcmea 524 • • GamesC hickeHno twoC odoirnaGtamee osf C ompetition • • • 528 GameosfC oexistenGcaem eosfC ommtiment ThFreo agn d 533 535 thSec orpiTohnKe i nKdildypn paerW heSnt reInsWg etahek sns • • SaviannSgdos c Sieaclu riHtoyl d BUapr gainingT he • • • 543 UltimGaatmueSm u mmary ReviQeuwe stions • 546 547