Microeconomics, Sixth Edition
David A. Besanko and Ronald R. Braeutigam
CONTENTS
PART 1 INTRODUCTION TO MICROECONOMICS
CHAPTER 1 Analyzing Economic Problems 1
Microeconomics and Climate Change
1.1 Why Study Microeconomics? 4
1.2 Three Key Analytical Tools 5
Constrained Optimization 6
Equilibrium Analysis 12
Comparative Statics 14
1.3 Positive and Normative Analysis 18
LEARNING-BY-DOING EXERCISES
1.1 Constrained Optimization: The Farmer’s Fence 7
1.2 Constrained Optimization: Consumer Choice 8
1.3 Comparative Statics with Market Equilibrium in the U.S.
Market for Corn 16
1.4 Comparative Statics with Constrained Optimization 18
CHAPTER 2 Demand and Supply Analysis 26
What Gives with the Price of Corn?
2.1 Demand, Supply, and Market Equilibrium 30
Demand Curves 30
Supply Curves 32
Market Equilibrium 34
Shifts in Supply and Demand 35
2.2 Price Elasticity of Demand 44
Elasticities Along Specific Demand Curves 46
Price Elasticity of Demand and Total Revenue 49
Determinants of the Price Elasticity of Demand 49
Market-Level Versus Brand-Level Price Elasticities
of Demand 51
2.3 Other Elasticities 53
Income Elasticity of Demand 53
Cross-Price Elasticity of Demand 54
Price Elasticity of Supply 56
2.4 Elasticity in the Long Run Versus the Short
Run 56
Greater Elasticity in the Long Run than in the Short Run 56
Greater Elasticity In the Short Run than in the Long Run 57
2.5 Back-of-the-Envelope Calculations 59
Fitting Linear Demand Curves Using Quantity, Price, and
Elasticity Information 60
Identifying Supply and Demand Curves on the Back of an
Envelope 61
Identifying the Price Elasticity of Demand from Shifts in
Supply 63
APPENDIX Price Elasticity of Demand along a Constant
Elasticity Demand Curve 74
LEARNING-BY-DOING EXERCISES
2.1 Sketching a Demand Curve 31
2.2 Sketching a Supply Curve 33
2.3 Calculating Equilibrium Price and Quantity 34
2.4 Comparative Statics on the Market Equilibrium 37
2.5 Price Elasticity of Demand 47
2.6 Elasticities along Special Demand Curves 49
PART 2 CONSUMER THEORY
CHAPTER 3 Consumer Preferences
and the
Concept of Utility 75
Why Do You Like What You Like?
3.1 Representations
of Preferences 77
Assumptions About Consumer Preferences 77
Ordinal and Cardinal Ranking 80
3.2 Utility Functions 80
Preferences with a Single Good: The Concept of
Marginal Utility 80
Preferences with Multiple Goods: Marginal Utility,
Indifference Curves, and the Marginal Rate of
Substitution 84
3.3 Special Preferences 95
Perfect Substitutes 95
Perfect Complements 96
The Cobb–Douglas Utility Function 97
Quasilinear Utility Functions 98
3.4 Behavioral Aspects of Choice 100
LEARNING-BY-DOING EXERCISES
3.1 Marginal Utility 86
3.2 Marginal Utility That Is Not Diminishing 86
3.3 Indifference Curves with Diminishing MRSx,Y 93
3.4 Indifference Curves with Increasing MRSx,Y 94
CHAPTER 4 Consumer Choice 109
How Much of What You Like Should You Buy?
4.1 The Budget Constraint 111
How Does a Change in Income Affect the Budget Line? 113
How Does a Change in Price Affect the Budget Line? 113
4.2 Optimal Choice 116
Using the Tangency Condition to Understand When a Basket
is Not Optimal 120
Finding an Optimal Consumption Basket 121
Two Ways of Thinking About Optimality 122
Corner Points 124
4.3 Consumer Choice with Composite Goods 127
Application: Coupons and Cash Subsidies 127
Application: Joining a Club 131
Application: Borrowing and Lending 132
Application: Quantity Discounts 137
4.4 Revealed Preference 138
Are Observed Choices Consistent with Utility
Maximization? 139
4.5 Maximizing Utility Using Lagrange
Multipliers 144
APPENDIX The Time Value of Money 157
LEARNING-BY-DOING EXERCISES
4.1 Good News/Bad News and the Budget Line 116
4.2 Finding an Interior Optimum 121
4.3 Finding a Corner Point Solution 125
4.4 Corner Point Solution with Perfect Substitutes 126
4.5 Consumer Choice That Fails to Maximize Utility 140
4.6 Other Uses of Revealed Preference 142
4.7 Finding an Interior Optimum Using the Method of
Lagrange 148
4.8 Finding a Corner Point Solution Using the Method
of Lagrange 149
CHAPTER 5 The Theory of Demand 163
Why Understanding the Demand for Cigarettes
Is Important for Public Policy
5.1 Optimal Choice and Demand 165
The Effects of a Change in Price 165
The Effects of a Change in Income 168
The Effects of a Change in Price or Income: An Algebraic
Approach 173
5.2 Change in the Price of a Good: Substitution Effect
and Income Effect 175
The Substitution Effect 176
The Income Effect 176
Income and Substitution Effects When Goods Are Not
Normal 178
5.3 Change in the Price of a Good: The Concept of
Consumer Surplus 186
Understanding Consumer Surplus from the Demand
Curve 186
Understanding Consumer Surplus from the Optimal Choice
Diagram: Compensating Variation and Equivalent
Variation 188
5.4 Market Demand 195
Market Demand with Network Externalities 197
5.5 The Choice of Labor and Leisure 200
As Wages Rise, Leisure First Decreases, then Increases 200
The Backward-Bending Supply of Labor 202
5.6 Consumer Price Indices 206
LEARNING-BY-DOING EXERCISES
5.1 A Normal Good Has a Positive Income Elasticity
of Demand 172
5.2 Finding a Demand Curve (No Corner Points) 173
5.3 Finding a Demand Curve (with a Corner Point
Solution) 174
5.4 Finding Income and Substitution Effects
Algebraically 181
5.5 Income and Substitution Effects with a Price
Increase 183
5.6 Income and Substitution Effects with a Quasilinear
Utility Function 184
5.7 Consumer Surplus: Looking at the Demand Curve 187
5.8 Compensating and Equivalent Variations with No Income
Effect 191
5.9 Compensating and Equivalent Variations with an Income
Effect 193
5.10 The Demand for Leisure and the Supply of Labor 204
PART 3 PRODUCTION AND COST THEORY
CHAPTER 6 Inputs and Production
Functions 216
Can They Do It Better and Cheaper?
6.1 Introduction to Inputs and Production
Functions 218
6.2 Production Functions with a Single Input 220
Total Product Functions 221
Marginal and Average Product 222
Relationship Between Marginal and Average Product 226
6.3 Production Functions with More Than One
Input 227
Total Product and Marginal Product with Two Inputs 227
Isoquants 229
Economic and Uneconomic Regions of Production 233
Marginal Rate of Technical Substitution 233
6.4 Substitutability Among Inputs 236
Describing a Firm’s Input Substitution Opportunities
Graphically 237
Elasticity of Substitution 239
Special Production Functions 242
6.5 Returns to Scale 248
Definitions 248
Returns to Scale Versus Diminishing Marginal Returns 251
6.6 Technological Progress 251
APPENDIX The Elasticity of Substitution for a
Cobb–Douglas Production Function 261
LEARNING-BY-DOING EXERCISES
6.1 Deriving the Equation of an Isoquant 232
6.2 Relating the Marginal Rate of Technical Substitution
to Marginal Products 236
6.3 Calculating the Elasticity of Substitution from a
Production Function 240
6.4 Returns to Scale for a Cobb–Douglas Production
Function 250
6.5 Technological Progress 253
CHAPTER 7 Costs and Cost Minimization
263
What’s Behind the Self-Service Revolution?
7.1 Cost Concepts for Decision Making 265
Opportunity Cost 266
Economic versus Accounting Costs 269
Sunk (Unavoidable) versus Nonsunk (Avoidable) Costs 269
7.2 The Cost-Minimization Problem 272
Long Run versus Short Run 272
The Long-Run Cost-Minimization Problem 272
Isocost Lines 273
Graphical Characterization of the Solution to the Long-Run
Cost-Minimization Problem 274
Corner Point Solutions 277
7.3 Comparative Statics Analysis of the
Cost-Minimization Problem 278
Comparative Statics Analysis of Changes in Input Prices 278
Comparative Statics Analysis of Changes in Output 282
Summarizing the Comparative Statics Analysis: The Input
Demand Curves 283
The Price Elasticity of Demand for Inputs 285
7.4 Short-Run Cost Minimization 289
Characterizing Costs in the Short Run 289
Cost Minimization in the Short Run 291
Comparative Statics: Short-Run Input Demand versus
Long-Run Input Demand 292
More Than One Variable Input in the Short Run 293
7.5 Minimizing Long-Run Costs Using Lagrange
Multipliers 295
APPENDIX Advanced Topics in Cost Minimization 307
LEARNING-BY-DOING EXERCISES
7.1 Using the Cost Concepts for a College Campus
Business 270
7.2 Finding an Interior Cost-Minimization Optimum 276
7.3 Finding a Corner Point Solution with Perfect
Substitutes 277
7.4 Deriving the Input Demand Curves from a Production
Function 285
7.5 Short-Run Cost Minimization with One Fixed
Input 293
7.6 Short-Run Cost Minimization with Two Variable
Inputs 294
7.7 Finding an Interior Optimum Using the Method
of Lagrange 299
7.8 Finding a Corner Point Solution Using the Method
of Lagrange 300
CHAPTER 8 Cost Curves 310
How Can Hisense Get a Handle on Costs?
8.1 Long-Run Cost Curves 312
Long-Run Total Cost Curve 312
How Does the Long-Run Total Cost Curve Shift When Input
Prices Change? 314
Long-Run Average and Marginal Cost Curves 316
8.2 Short-Run Cost Curves 328
Short-Run Total Cost Curve 328
Relationship Between the Long-Run and the Short-Run
Total Cost Curves 328
Short-Run Average and Marginal Cost Curves 331
Relationships Between the Long-Run and the Short-Run
Average and Marginal Cost Curves 332
When Are Long-Run and Short-Run Average
and Marginal Costs Equal, and When Are
They Not? 333
8.3 Special Topics in Cost 336
Economies of Scope 336
Economies of Experience: The Experience Curve 340
8.4 Estimating Cost Functions 343
Constant Elasticity Cost Function 343
Translog Cost Function 343
APPENDIX Shephard’s Lemma and Duality 350
LEARNING-BY-DOING EXERCISES
8.1 Finding the Long-Run Total Cost Curve from
a Production Function 314
8.2 Deriving Long-Run Average and Marginal Cost Curves
from a Long-Run Total Cost Curve 319
8.3 Deriving a Short-Run Total Cost Curve 329
8.4 The Relationship between Short-Run and Long-Run
Average Cost Curves 334
PART 4 PERFECT COMPETITION
CHAPTER 9 Perfectly Competitive Markets 354
A Rose Is a Rose Is a Rose
9.1 What is Perfect Competition? 357
9.2 Profit Maximization by a Price-Taking Firm 359
Economic Profit versus Accounting Profit 359
The Profit-Maximizing Output Choice for a Price-Taking
Firm 361
9.3 How the Market Price Is Determined: Short-Run
Equilibrium 364
The Price-Taking Firm’s Short-Run Cost Structure 364
Short-Run Supply Curve for a Price-Taking Firm When All
Fixed Costs Are Sunk 366
Short-Run Supply Curve for a Price-Taking Firm When Some
Fixed Costs Are Sunk and Some Are Nonsunk 368
Short-Run Market Supply Curve 372
Short-Run Perfectly Competitive Equilibrium 375
Comparative Statics Analysis of the Short-Run
Equilibrium 376
9.4 How the Market Price is Determined: Long-Run
Equilibrium 382
Long-Run Output and Plant-Size Adjustments by Established
Firms 382
The Firm’s Long-Run Supply Curve 383
Free Entry and Long-Run Perfectly Competitive
Equilibrium 384
Long-Run Market Supply Curve 386
Constant-Cost, Increasing-Cost, and Decreasing-Cost
Industries 387
What Does the Theory of Perfect Competition
Teach Us? 395
9.5 Economic Rent and Producer Surplus 396
Economic Rent 396
Producer Surplus 399
Economic Profit, Producer Surplus,
Economic Rent 405
APPENDIX Profit Maximization Implies Cost
Minimization 413
LEARNING-BY-DOING EXERCISES
9.1 Deriving the Short-Run Supply Curve for a Price-Taking
Firm 368
9.2 Deriving the Short-Run Supply Curve for a Price-Taking
Firm with Some Nonsunk Fixed Costs 370
9.3 Short-Run Market Equilibrium 376
9.4 Calculating a Long-Run Equilibrium 385
9.5 Calculating Producer Surplus 404
CHAPTER 10 Competitive Markets:
Applications 415
Is Support a Good Thing?
10.1 The Invisible Hand, Excise Taxes, and
Subsidies 417
The Invisible Hand 418
Excise Taxes 419
Incidence of a Tax 423
Subsidies 427
10.2 Price Ceilings and Floors 429
Price Ceilings 430
Price Floors 438
10.3 Production Quotas 443
10.4 Price Supports in the Agricultural Sector 447
Acreage Limitation Programs 447
Government Purchase Programs 449
10.5 Import Quotas and Tariffs 451
Quotas 451
Tariffs 455
LEARNING-BY-DOING EXERCISES
10.1 Impact of an Excise Tax 422
10.2 Impact of a Subsidy 429
10.3 Impact of a Price Ceiling 436
10.4 Impact of a Price Floor 441
10.5 Comparing the Impact of an Excise Tax, a Price Floor,
and a Production Quota 446
10.6 Effects of an Import Tariff 458
PART 5 MARKET POWER
CHAPTER 11 Monopoly and Monopsony 468
Why Do Firms Play Monopoly?
11.1 Profit Maximization
by a Monopolist 470
The Profit-Maximization Condition 470
A Closer Look at Marginal Revenue: Marginal Units and
Inframarginal Units 474
Average Revenue and Marginal Revenue 475
The Profit-Maximization Condition Shown
Graphically 477
A Monopolist Does Not Have A Supply Curve 479
11.2 The Importance of Price Elasticity of
Demand 480
Price Elasticity of Demand and the Profit-Maximizing
Price 480
Marginal Revenue and Price Elasticity of Demand 481
Marginal Cost and Price Elasticity of Demand: The Inverse
Elasticity Pricing Rule 483
The Monopolist Always Produces on the Elastic Region
of the Market Demand Curve 484
The IEPR Applies not Only to Monopolists 486
Quantifying Market Power: The Lerner Index 487
11.3 Comparative Statics for Monopolists 488
Shifts in Market Demand 488
Shifts in Marginal Cost 491
11.4 Monopoly with Multiple Plants and
Markets 493
Output Choice with two Plants 494
Output Choice with two Markets 495
Profit Maximization by a Cartel 496
11.5 The Welfare Economics of Monopoly 499
The Monopoly Equilibrium Differs from the Perfectly
Competitive Equilibrium 499
Monopoly Deadweight Loss 501
Rent-Seeking Activities 501
11.6 Why Do Monopoly Markets Exist? 501
Natural Monopoly 502
Barriers to Entry 503
11.7 Monopsony 505
The Monopsonist’s Profit-Maximization Condition 505
An Inverse Elasticity Pricing Rule for Monopsony 507
Monopsony Deadweight Loss 508
LEARNING-BY-DOING EXERCISES
11.1 Marginal and Average Revenue for a Linear Demand
Curve 477
11.2 Applying the Monopolist’s Profit-Maximization
Condition 479
11.3 Computing the Optimal Monopoly Price for a Constant
Elasticity Demand Curve 483
11.4 Computing the Optimal Monopoly Price for a Linear
Demand Curve 484
11.5 Computing the Optimal Price Using the Monopoly
Midpoint Rule 490
11.6 Determining the Optimal Output, Price, and Division
of Production for a Multiplant Monopolist 495
11.7 Determining the Optimal Output and Price for
a Monopolist Serving Two Markets 496
11.8 Applying the Monopsonist’s Profit-Maximization
Condition 507
11.9 Applying the Inverse Elasticity Rule for
a Monopsonist 508
CHAPTER 12 Capturing Surplus 515
Why Did Your Carpet or Your Airline Ticket Cost
So Much Less Than Mine?
12.1 Capturing Surplus 517
12.2 First-Degree Price Discrimination:
Making the
Most from Each Consumer 520
12.3 Second-Degree Price Discrimination: Quantity
Discounts 525
Block Pricing 525
Subscription and Usage Charges 528
12.4 Third-Degree Price Discrimination: Different
Prices for Different Market Segments 531
Two Different Segments, Two Different Prices 531
Screening 534
Third-Degree Price Discrimination with Capacity
Constraints 536
Implementing the Scheme of Price Discrimination: Building
“Fences” 538
12.5 Tying (Tie-In Sales) 543
Bundling 544
Mixed Bundling 546
12.6 Advertising 548
LEARNING-BY-DOING EXERCISES
12.1 Capturing Surplus: Uniform Pricing versus First-Degree
Price Discrimination 522
12.2 Where Is the Marginal Revenue Curve with First-Degree
Price Discrimination? 523
12.3 Increasing Profits with a Block Tariff 527
12.4 Third-Degree Price Discrimination in Railroad
Transport 533
12.5 Third-Degree Price Discrimination for Airline
Tickets 535
12.6 Price Discrimination Subject to Capacity
Constraints 537
12.7 Markup and Advertising-to-Sales Ratio 551
PART 6 IMPERFECT COMPETITION AND STRATEGIC BEHAVIOR
CHAPTER 13 Market Structure and
Competition 558
Is Competition Always the Same? If Not, Why Not?
13.1 Describing and Measuring Market Structure 560
13.2 Oligopoly with Homogeneous
Products 563
The Cournot Model of Oligopoly 563
Cournot Equilibrium and the IEPR 571
The Bertrand Model of Oligopoly 571
Why are the Cournot and Bertrand Equilibria Different? 573
The Stackelberg Model of Oligopoly 574
13.3 Dominant Firm Markets 576
13.4 Oligopoly with Horizontally Differentiated
Products 579
What is Product Differentiation? 579
Bertrand Price Competition with Horizontally Differentiated
Products 582
13.5 Monopolistic Competition 588
Short-Run and Long-Run Equilibrium in Monopolistically
Competitive Markets 588
Price Elasticity of Demand, Margins, and Number
of Firms in the Market 590
Do Prices Fall When More Firms Enter? 590
APPENDIX The Cournot Equilibrium and the Inverse
Elasticity Pricing Rule 600
LEARNING-BY-DOING EXERCISES
13.1 Computing a Cournot Equilibrium 566
13.2 Computing the Cournot Equilibrium for Two or More
Firms with Linear Demand 570
13.3 Computing the Equilibrium in the Dominant Firm
Model 578
13.4 Computing a Bertrand Equilibrium with Horizontally
Differentiated Products 586
CHAPTER 14 Game Theory and Strategic
Behavior 601
What’s in a Game?
14.1 The Concept of Nash Equilibrium 603
A Simple Game 603
The Nash Equilibrium 604
The Prisoners’ Dilemma 604
Dominant and Dominated Strategies 605
Games with more Than One Nash Equilibrium 609
Mixed Strategies 615
Summary: How to Find All the Nash Equilibria in a
Simultaneous-Move Game with Two Players 616
14.2 The Repeated Prisoners’ Dilemma 617
14.3 Sequential-Move Games and Strategic
Moves 622
Analyzing Sequential-Move Games 623
The Strategic Value of Limiting One’s Options 624
LEARNING-BY-DOING EXERCISES
14.1 Finding the Nash Equilibrium: Coke versus Pepsi 608
14.2 Finding All of the Nash Equilibria in a Game 612
14.3 An Entry Game 625
CHAPTER 15 Risk and Information 637
Risky Business?
15.1 Describing Risky Outcomes 639
Lotteries and Probabilities 639
Expected Value 641
Variance 641
15.2 Evaluating Risky Outcomes 644
Utility Functions and Risk Preferences 644
Risk-Neutral and Risk-Loving Preferences 647
15.3 Bearing and Eliminating Risk 650
Risk Premium 650
When Would a Risk-Averse Person Choose to Eliminate Risk?
the Demand for Insurance 653
Asymmetric Information: Moral Hazard and Adverse
Selection 656
Prospect Theory and Loss Aversion: An Alternative to
Expected Utility Theory 662
15.4 Analyzing Risky Decisions 665
Decision Tree Basics 665
Decision Trees with a Sequence of Decisions 668
The Value of Information 670
15.5 Auctions 672
Types of Auctions and Bidding Environments 672
Auctions When Bidders Have Private Values 673
Auctions When Bidders Have Common Values: The Winner’s
Curse 677
LEARNING-BY-DOING EXERCISES
15.1 Computing the Expected Utility for Two Lotteries
for a Risk-Averse Decision Maker 647
15.2 Computing the Expected Utility for Two Lotteries:
Risk-Neutral and Risk-Loving Decision Makers 649
15.3 Computing the Risk Premium from a Utility
Function 653
15.4 The Willingness to Pay for Insurance 654
15.5 Verifying the Nash Equilibrium in a First-Price Sealed-Bid
Auction with Private Values 675
CHAPTER 16 General Equilibrium Theory 686
How Do Gasoline Taxes Affect the Economy?
16.1 General Equilibrium Analysis: Two
Markets 688
16.2 General Equilibrium Analysis: Many
Markets 692
The Origins of Supply and Demand in a Simple
Economy 692
The General Equilibrium in Our Simple Economy 698
Walras’ Law 702
16.3 General Equilibrium Analysis: Comparative
Statics 703
16.4 The Efficiency of Competitive Markets 707
What Is Economic Efficiency? 707
Exchange Efficiency 708
Input Efficiency 714
Substitution Efficiency 716
Does the General Competitive Equilibrium Satisfy
Substitution Efficiency? 717
Pulling the Analysis Together: The Fundamental Theorems of
Welfare Economics 719
16.5 Gains From Free Trade 720
Free Trade Is Mutually Beneficial 720
Comparative Advantage 724
APPENDIX Deriving the Demand and Supply
Curves for the General Equilibrium in
Figure 16.10 and Learning-By-Doing
Exercises 16.2 730
LEARNING-BY-DOING EXERCISES
16.1 Finding the Prices at a General Equilibrium with Two
Markets 692
16.2 Finding the Conditions for a General Equilibrium
with Four Markets 701
16.3 Checking the Conditions for Exchange Efficiency 712
CHAPTER 17 Externalities and Public
Goods 736
When Does the Invisible Hand Fail?
17.1 Introduction 738
17.2 Externalities 740
Negative Externalities and Economic Efficiency 742
Positive Externalities and Economic Efficiency 756
Property Rights and the Coase Theorem 760
17.3 Public Goods 762
Efficient Provision of a Public Good 763
The Free-Rider Problem 766
LEARNING-BY-DOING EXERCISES
17.1 The Efficient Amount of Pollution 745
17.2 Emissions Fee 748
17.3 The Coase Theorem 761
17.4 Optimal Provision of a Public Good 765
Mathematical Appendix A-1
Solutions to Selected Problems S-1
Glossary G-1
Index I-1