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Intermediate Microeconomics and Its Application This page intentionally left blank I n t e r m e d i a t e M i c r o e c o n o m i c s a n d I t s A p p l i c a t i o n 11E WA LT ER N I CH OLS O N AMHERSTCOLLEGE C H R I S T O P H E R S N Y D E R DARTMOUTHCOLLEGE Australia (cid:129) Brazil (cid:129) Japan (cid:129) Korea (cid:129) Mexico (cid:129) Singapore (cid:129) Spain (cid:129) United Kingdom (cid:129) United States IntermediateMicroeconomics,Eleventh ª2010,2007South-Western,CengageLearning Edition ALLRIGHTSRESERVED.Nopartofthisworkcoveredbythe WalterNicholsonandChristopherSnyder copyrighthereonmaybereproducedorusedinanyformorby anymeans—graphic,electronic,ormechanical,including VicePresidentofEditorial,Business:JackW.Calhoun photocopying,recording,taping,Webdistribution,information storageandretrievalsystems,orinanyothermanner—exceptas Publisher:MelissaAcuna maybepermittedbythelicensetermsherein. AcquisitionsEditor:MikeRoche DevelopmentalEditor:SusanSmart Forproductinformationandtechnologyassistance, contactusatCengageLearningCustomer&Sales MarketingManager:JohnCarey Support,1-800-354-9706 MarketingCoordinator:SuellenRuttkay Forpermissiontousematerialfromthistextorproduct, ContentProjectManager:DarrellFrye submitallrequestsonlineatwww.cengage.com/ permissionsFurtherpermissionsquestionscanbeemailed MediaEditor:DeepakKumar [email protected] FrontlistBuyer,Manufacturing:SandeeMilewski CompositorandProductionService:Cadmus ExamView(cid:2)isaregisteredtrademarkofeInstructionCorp. Communications WindowsisaregisteredtrademarkoftheMicrosoftCorporation usedhereinunderlicense.MacintoshandPowerMacintoshare Sr.ArtDirector:MichelleKunkler registeredtrademarksofAppleComputer,Inc.usedhereinunder license. InternalDesigner:JuliCook ª2010CengageLearning.AllRightsReserved. CoverDesigner:RoseAlcorn CoverImage:ªGeorgeClerk/iStockphotoPhotography LibraryofCongressControlNumber:2009931153 Manager StudentEditionISBN13:978-1-4390-4404-9 StudentEditionISBN10:0-4390-4404-X StudentEditionwithInfoAppsISBN13:978-0-324-59910-7 StudentEditionwithInfoAppsISBN10:0-324-59910-2 South-WesternCengageLearning 5191NatorpBoulevard Mason,OH45040 USA CengageLearningproductsarerepresentedinCanadabyNelson Education,Ltd. Foryourcourseandlearningsolutions,visitwww.cengage.com Purchaseanyofourproductsatyourlocalcollegestoreoratour preferredonlinestorewww.ichapters.com Printed in the United States of America 1 2 3 4 5 6 7 13 12 11 10 09 D e d i c a t i o n TO ELIZABETH, SARAH, DAVID, SOPHIA, ABIGAIL, NATHANIEL, AND CHRISTOPHER WalterNicholson TO CLARE, TESS, AND MEG ChristopherSnyder About the Authors Walter Nicholson Walter Nicholson is the Ward H. Patton Professor of EconomicsatAmherstCollege.HereceivedaB.A.inmathematicsfromWilliams CollegeandaPh.D.ineconomicsfromtheMassachusettsInstituteofTechnology (MIT). Professor Nicholson’s primary research interests are in the econometric analyses of labor market problems, including welfare, unemployment, and the impact of international trade. For many years, he has been Senior Fellow at Mathematica,Inc.andhasservedasanadvisortotheU.S.andCanadiangovern- ments.Heandhiswife,Susan,liveinNaples,Florida,andAmherst,Massachusetts. ChristopherSnyder ChristopherSnyderisaProfessorofEconomicsatDart- mouthCollege.HereceivedhisB.A.ineconomicsandmathematicsfromFordham UniversityandhisPh.D.ineconomicsfromMIT.BeforecomingtoDartmouthin 2005, he taught at George Washington University for over a decade, and he has been a visiting professor at the University of Chicago and MIT. He is a past PresidentoftheIndustrialOrganizationSocietyandAssociateEditoroftheInter- national Journal of Industrial Organization and Review of Industrial Organiza- tion. His research covers various theoretical and empirical topics in industrial organization,contracttheory,andlawandeconomics. Professor Snyder and his wife, Maura Doyle (who also teaches economics at Dartmouth),livewithinwalkingdistanceofcampusinHanover,NewHampshire, withtheir3daughters,ranginginagefrom7to12. vi B r i e f C o n t e n t s Preface xxvii PART 1 INTRODUCTION 1 CHAPTER1 EconomicModels3 AppendixtoChapter1: MathematicsUsedinMicroeconomics26 PART 2 DEMAND 51 CHAPTER2 UtilityandChoice53 CHAPTER3 DemandCurves87 PART 3 UNCERTAINTY AND STRATEGY 137 CHAPTER4 Uncertainty139 CHAPTER5 GameTheory175 PART 4 PRODUCTION, COSTS, AND SUPPLY 213 CHAPTER6 Production215 CHAPTER7 Costs243 CHAPTER8 ProfitMaximizationandSupply274 PART 5 PERFECT COMPETITION 301 CHAPTER9 PerfectCompetitioninaSingleMarket303 CHAPTER10 GeneralEquilibriumandWelfare345 PART 6 MARKET POWER 375 CHAPTER11 Monopoly377 CHAPTER12 ImperfectCompetition408 PART 7 INPUT MARKETS 449 CHAPTER13 PricinginInputMarkets451 AppendixtoChapter13: LaborSupply478 CHAPTER14 CapitalandTime487 AppendixtoChapter14: CompoundInterest509 vii Intermediate Microeconomics and Its Application viii BRIEF CONTENTS PART 8 MARKET FAILURES 527 CHAPTER15 AsymmetricInformation529 CHAPTER16 ExternalitiesandPublicGoods566 CHAPTER17 BehavioralEconomics601 Glossary 637 Index 645 Solutions to Odd-Numbered Problems and Brief Answers to MicroQuizzes are located on the companion Web site, http://www.cengage.com/economics/nicholson

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INTERMEDIATE MICROECONOMICS AND ITS APPLICATION offers an exceptionally clear and concise introduction to the economics of markets. This proven text uses a managerial focus and includes relevant applications and strong examples, with an algebraic approach, and emphasizes activities that allow you to