Models in Microeconomic Theory

362 Pages·2020·5.641 MB·English

by  Martin J. Osborne, Ariel Rubinstein

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Models in Microeconomic Theory covers basic models in current microeconomic theory. (cid:23)
Part I (Chapters 1–7) presents models of an economic agent, discussing abstract models of (cid:29)
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preferences, choice, and decision making under uncertainty, before turning to models of (cid:9)
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the consumer, the producer, and monopoly. Part II (Chapters 8–14) introduces the concept
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of equilibrium, beginning, unconven� onally, with the models of the jungle and an economy
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with indivisible goods, and con� nuing with models of an exchange economy, equilibrium
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with ra� onal expecta� ons, and an economy with asymmetric informa� on. Part III (Chapters (cid:15)
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15–16) provides an introduc� on to game theory, covering strategic and extensive games (cid:24) Ariel Rubinstein
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and the concepts of Nash equilibrium and subgame perfect equilibrium. Part IV (Chapters (cid:25)
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17–20) gives a taste of the topics of mechanism design, matching, the axioma� c analysis of (cid:25)(cid:25)
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economic systems, and social choice. (cid:25)
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The book focuses on the concepts of model and equilibrium. It states models and results
precisely, and provides proofs for all results. It uses only elementary mathema� cs (with (cid:30)
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almost no calculus), although many of the proofs involve sustained logical arguments. It
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includes about 150 exercises. (cid:27)
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With its formal but accessible style, this textbook is designed for undergraduate students of
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microeconomics at intermediate and advanced levels.
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As with all Open Book publica� ons, this en� re book is available to read for free on the (cid:21)
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publisher’s website. Printed and digital edi� ons, together with supplementary digital (cid:28)
material, can also be found at www.openbookpublishers.com (cid:22)
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Cover design by Mar� n J. Osborne (cid:30)
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e (cid:25)
book (cid:25)(cid:25)
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ebook and OA edi� ons (cid:25)
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also available
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OBP
MODELS IN MICROECONOMIC THEORY

MODELS IN MICROECONOMIC THEORY
Martin J. Osborne
University of Toronto
Ariel Rubinstein
Tel Aviv University
New York University
https://www.openbookpublishers.com
c 2020MartinJ.OsborneandArielRubinstein
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MartinJ.OsborneandArielRubinstein, ModelsinMicroeconomicTheory. Cambridge,
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Version: 2020.3.26(h)
Contents
Personal note xi
Preface xiii
Part I Individual behavior 1
1 Preferences and utility 3
1.1 Preferences 3
1.2 Preference formation 7
1.3 An experiment 8
1.4 Utility functions 9
Problems 13
Notes 15
2 Choice 17
2.1 Choice and rational choice 17
2.2 Rationalizing choice 18
2.3 Property α 21
2.4 Satisficing 22
2.5 The money pump argument 23
2.6 Evidence of choices inconsistent with rationality 24
Problems 27
Notes 29
3 Preferences under uncertainty 31
3.1 Lotteries 31
3.2 Preferences over lotteries 31
3.3 Expected utility 35
3.4 Theory and experiments 38
3.5 Risk aversion 39
Problems 41
Notes 43
v
vi Contents
4 Consumer preferences 45
4.1 Bundles of goods 45
4.2 Preferences over bundles 46
4.3 Monotonicity 48
4.4 Continuity 49
4.5 Convexity 50
4.6 Differentiability 53
Problems 54
Notes 56
5 Consumer behavior 57
5.1 Budget sets 57
5.2 Demand functions 58
5.3 Rational consumer 59
5.4 Differentiable preferences 61
5.5 Rationalizing a demand function 64
5.6 Properties of demand functions 68
Problems 71
Notes 74
6 Producer behavior 75
6.1 The producer 75
6.2 Output maximization 77
6.3 Profit maximization 79
6.4 Cost function 81
6.5 Producers’ preferences 84
Problems 85
Notes 87
7 Monopoly 89
7.1 Basic model 89
7.2 Uniform-price monopolistic market 90
7.3 Discriminatory monopoly 94
7.4 Implicit discrimination 96
Problems 99
Notes 102
Contents vii
Part II Equilibrium 103
8 A jungle 105
8.1 Model 105
8.2 Equilibrium 108
8.3 Pareto stability 110
8.4 Equilibrium and Pareto stability in a jungle 112
8.5 Which allocations can be obtained by a social planner who controls
the power relation? 113
8.6 Externalities 116
Problems 118
Notes 120
9 A market 121
9.1 Model 121
9.2 Existence and construction of a market equilibrium 127
9.3 Equilibrium and Pareto stability 131
9.4 Uniqueness of market equilibrium 132
Problems 134
Notes 135
10 An exchange economy 137
10.1 Model 137
10.2 Competitive equilibrium 139
10.3 Existence of a competitive equilibrium 144
10.4 Reopening trade 145
10.5 Equilibrium and Pareto stability 146
10.6 The core 148
10.7 Competitive equilibrium based on demand functions 149
10.8 Manipulability 150
10.9 Edgeworth box 150
Problems 152
Notes 155
11 Variants of an exchange economy 157
11.1 Market with indivisible good and money 157
11.2 Exchange economy with uncertainty 164
Problems 171
Notes 173
viii Contents
12 A market with consumers and producers 175
12.1 Production economy 175
12.2 An economy with capital and labor 180
Problems 183
13 Equilibrium with prices and expectations 187
13.1 Distributing customers among bank branches 187
13.2 Asymmetric information and adverse selection 192
13.3 A fishing economy 196
Problems 199
Notes 201
14 A market with asymmetric information 203
14.1 Introductory model 203
14.2 Labor market with education 204
Problems 211
Notes 213
Part III Game theory 215
15 Strategic games 217
15.1 Strategic games and Nash equilibrium 217
15.2 Basic examples 218
15.3 Economic examples 223
15.4 Existence of Nash equilibrium 229
15.5 Strictly competitive games 232
15.6 Kantian equilibrium 234
15.7 Mixed strategies 235
15.8 Interpreting Nash equilibrium 241
Problems 241
Notes 246
16 Extensive games 249
16.1 Extensive games and subgame perfect equilibrium 250
16.2 What is a strategy? 256
16.3 Backward induction 257
16.4 Bargaining 263
Problems 275
Notes 278
Contents ix
Part IV Topics 279
17 Mechanism design 281
17.1 Deciding on a public project 281
17.2 Strategy-proof mechanisms 282
17.3 The Vickrey-Clarke-Groves mechanism 284
Problems 287
Notes 288
18 Matching 289
18.1 The matching problem 289
18.2 The Gale-Shapley algorithm 290
18.3 The Gale-Shapley algorithm and stability 295
Problems 298
Notes 299
19 Socialism 301
19.1 Model 301
19.2 Properties of economic systems 304
19.3 Characterization of socialism 307
Problems 309
Notes 310
20 Aggregating preferences 311
20.1 Social preferences 311
20.2 Preference aggregation functions 312
20.3 Properties of preference aggregation functions 314
20.4 Arrow’s impossibility theorem 317
20.5 Gibbard-Satterthwaite theorem 321
Problems 324
Notes 326
Index 335