**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