Microeconomics: An Integrated Approach by David Besanko
This second edition of "Microeconomics" is filled with learning by doing problems that give students a chance to make economics their own. These fully worked out problems provide a step by step road map to help students solve numerical problems. Each problem correlates to similar practice problems at the end of each chapter. In addition, the authors include many extensive real world examples in the text. These examples are contemporary applications of the theory and are longer and more extensive to show the evolution of the example. Each chapter opens with an example to draw readers into the topic.
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DAVID BESANKO is the Alvin J. Huss Distinguished Professor of Management and Strategy at the Kellogg School of Management at Northwestern University. He received his AB in Political Science from Ohio University in 1977, his MS in Managerial Economics and Decision Sciences from Northwestern University in 1982. Before joining the Kellogg faculty in 1991, Professor Besanko was a member of the faculty of the School of Business at Indiana University from 1982 to 1991. In addition, in 1985, he held a post-doctorate position on the Economics Staff at Bell Communications Research. Professor Besanko teaches courses in the fields of Management and Strategy, Competitive Strategy, and Managerial Economics. In 1995, the graduating class at Kellogg awarded Professor Besanko the L.G. Lavengood Professor of the Year, the highest teaching honor a faculty member at Kellogg can receive. RONALD R. BRAEUTIGAM is the Harvey Kapnick Professor of Business Institutions in the Department of Economics at Northwestern University. He is Associate Dean for Undergraduate Studies in the Weinberg College of Arts and Sciences. He received a BS in Petroleum Engineering from the University of Tulsa in 1970 and then attended Stanford University and the California Institute of Technology, and he has also held an appointment as a Senior Research Fellow at the Wissenschaftszentrum Berlin (Science Center Berlin). He has also worked in both government and industry, beginning his career as a petroleum engineer with Standard Oil of Indiana (now BP), serving as research economist in The White House office of Telecommunications Policy, and as an economic consultant to Congress, many government agencies and private firms on matters of pricing, costing, managerial strategy, antitrust, and regulation.
Table of Contents
PART1. INTRODUCTION TO MICROECONOMICS.CHAPTER 1.A ANALYZING ECONOMIC PROBLEMS.Is the New Economy Really New?1.1 Why Study Microeconomics?1.2 Three Key Analytical Tools.Constrained Optimization.Equilibrium Analysis.Comparative Statics.1.3 Positive and Normative Analysis.LEARNING-BY-DOING EXERCISES.1.1 Constrained Optimization: The Farmera s Fence.1.2 Constrained Optimization: Consumer Choice.1.3 Comparative Statics with Market Equilibrium in the U.S. Market for Corn.1.4 Comparative Statics with Constrained Optimization.CHAPTER 2.A DEMAND AND SUPPLY ANALYSIS.What Gives with the Price of Corn?2.1 Demand, Supply, and Market Equilibrium.Demand Curves.Supply Curves.Market Equilibrium.Shifts in Supply and Demand.2.2 Price Elasticity of Demand.Elasticities along Specific Demand Curves.Price Elasticity of Demand and Total Revenue.Determinants of the Price Elasticity of Demand.Market-Level versus Brand-Level Price Elasticities of Demand.2.3 Other Elasticities.Income Elasticity of Demand.Cross-Price Elasticity of Demand.Price Elasticity of Supply.2.4 Elasticity in the Long Run versus the Short Run.Greater Elasticity in the Long Run Than in the Short Run.Greater Elasticity in the Short Run Than in the Long Run.2.5 Back-of-the-Envelope Calculations.Fitting Linear Demand Curves Using Quantity, Price, and Elasticity Information.Identifying Supply and Demand Curves on the Back of an Envelope.Identifying the Price Elasticity of Demand from Shifts in Supply.APPENDIX Price Elasticity of Demand along a Constant Elasticity Demand Curve.LEARNING-BY-DOING EXERCISES.2.1 Sketching a Demand Curve.2.2 Sketching a Supply Curve.2.3 Calculating Equilibrium Price and Quantity.2.4 Comparative Statics on the Market Equilibrium.2.5 Price Elasticity of Demand.2.6 Elasticities along Special Demand Curves.PART 2. CONSUMER THEORY.CHAPTER 3. CONSUMER PREFERENCES AND THE CONCEPT OF UTILITY.Why Do You Like What You Like?3.1 Representations of Preferences.Assumptions about Consumer Preferences.Ordinal and Cardinal Ranking.3.2 Utility Functions.Preferences with a Single Good: The Concept of Marginal Utility.Preferences with Multiple Goods: Marginal Utility, Indifference Curves, and the Marginal Rate of Substitution.Special Utility Functions.LEARNING-BY-DOING EXERCISES.3.1 Marginal Utility.3.2 Marginal Utility That Is Not Diminishing.3.3 Indifference Curves with Diminishing MRSx,y.3.4 Indifference Curves with Increasing MRSx,y.CHAPTER 4.A CONSUMER CHOICE.How Much of What You Like Should You Buy?4.1 The Budget Constraint.How Does a Change in Income Affect the Budget Line?How Does a Change in Price Affect the Budget Line?4.2 Optimal Choice.Using the Tangency Condition to Understand When a Basket Is Not Optimal.Finding an Optimal Consumption Basket.Two Ways of Thinking About Optimality.Corner Points.4.3 Consumer Choice with Composite Goods.Application: Coupons and Cash Subsidies.Application: Joining a Club.Application: Borrowing and Lending.Application: Quantity Discounts.4.4 Revealed Preference.Are Observed Choices Consistent with Utility Maximization?APPENDIX.A The Mathematics of Consumer Choice.LEARNING-BY-DOING EXERCISES.4.1 Good News/Bad News and the Budget Line.4.2 Finding an Interior Optimum.4.3 Finding a Corner Point Solution.4.4 Corner Point Solution with Perfect Substitutes.4.5 Consumer Choice That Fails to Maximize Utility.4.6 Other Uses of Revealed Preference.CHAPTER 5. THE THEORY OF DEMAND.Does It Pay To Raise Prices?5.1 Optimal Choice and Demand.The Effects of a Change in Price.The Effects of a Change in Income.The Effects of a Change in Price or Income: An Algebraic Approach.5.2 Change in the Price of a Good: Substitution Effect and Income Effect.The Substitution Effect.The Income Effect.Income and Substitution Effects When Goods Are Not Normal.5.3 Change in the Price of a Good: The Concept of Consumer Surplus.Understanding Consumer Surplus from the Demand Curve.Understanding Consumer Surplus from the Optimal Choice Diagram:Compensating Variation and Equivalent Variation.5.4 Market Demand.5.5 Network Externalities.5.6 The Choice of Labor and Leisure.As Wages Rise, Leisure First Decreases, Then Increases.The Backward-Bending Supply of Labor.5.7 Consumer Price Indices.LEARNING-BY-DOING EXERCISES.5.1 A Normal Good Has a Positive Income Elasticity of Demand.5.2 Finding a Demand Curve (No Corner Points).5.3 Finding a Demand Curve (with a Corner Point Solution).5.4 Finding Income and Substitution Effects Algebraically.5.5 Income and Substitution Effects with a Price Increase.5.6 Income and Substitution Effects with a Quasi-Linear Utility Function.5.7 Consumer Surplus: Looking at the Demand Curve.5.8 Compensating and Equivalent Variations with No Income Effect.5.9 Compensating and Equivalent Variations with an Income Effect.PART 3. PRODUCTION AND COST THEORY.CHAPTER 6.A INPUTS AND PRODUCTION FUNCTIONS.Can They Make It Better And Cheaper?6.1 Introduction to Inputs and Production Functions.6.2 Production Functions with a Single Input.Total Product Functions.Marginal and Average Product.Relationship Between Marginal and Average Product.6.3 Production Functions with More Than One Input.Total Product and Marginal Product with Two Inputs.Isoquants.Economic and Uneconomic Regions of Production.Marginal Rate of Technical Substitution.6.4 Substitutability among Inputs.Describing a Firma s Input Substitution Opportunities Graphically.Elasticity of Substitution.Special Production Functions.6.5 Returns to Scale.Definitions.Returns to Scale versus Diminishing Marginal Returns.6.6 Technological Progress.APPENDIX. The Elasticity of Substitution for a Cobba Douglas Production Function.LEARNING-BY-DOING EXERCISES.6.1 Deriving the Equation of an Isoquant.6.2 Relating the Marginal Rate of Technical Substitution to Marginal Products.6.3 Returns to Scale for a Cobba Douglas Production Function.6.4 Technological Progress.CHAPTER 7. COSTS AND COST MINIMIZATION.Whata s Behind the Self-Service Revolution?7.1 Cost Concepts for Decision Making.Opportunity Cost.Economic versus Accounting Costs.Sunk (Unavoidable) versus Nonsunk (Avoidable) Costs.7.2 The Cost-Minimization Problem.Long Run Versus Short Run.The Long-Run Cost-Minimization Problem.Isocost Lines.Graphical Characterization of the Solution to the Long-Run Cost-Minimization Problem.Corner Point Solutions.7.3 Comparative Statics Analysis of the Cost-Minimization Problem.Comparative Statics Analysis of Changes in Input Prices.Comparative Statics Analysis of Changes in Output.Summarizing the Comparative Statics Analysis: The Input Demand Curves.The Price Elasticity of Demand for Inputs.7.4 Short-Run Cost Minimization.Characterizing Costs in the Short Run.Cost Minimization in the Short Run.Comparative Statics: Short-Run Input Demand versus Long-Run Input Demand.More Than One Variable Input with One Fixed Input.APPENDIX. Advanced Topics in Cost Minimization.LEARNING-BY-DOING EXERCISES.7.1 Using the Cost Concepts for a College Campus Business.7.2 Finding an Interior Cost-Minimization Optimum.7.3 Finding a Corner Point Solution with Perfect Substitutes.7.4 Deriving the Input Demand Curve from a Production Function.7.5 Short-Run Cost Minimization with One Fixed Input.7.6 Short-Run Cost Minimization with Two Variable Inputs.CHAPTER 8. COST CURVES.How Can HiSense Get a Handle on Costs?8.1 Long-Run Cost Curves.Long-Run Total Cost Curve.How Does the Long-Run Total Cost Curve Shift When Input Prices Change?Long-Run Average and Marginal Cost Curves.8.2 Short-Run Cost Curves.Short-Run Total Cost Curve.Relationship Between the Long-Run and the Short-Run Total Cost Curves.Short-Run Average and Marginal Cost Curves.Relationships Between the Long-Run and the Short-Run Averageand Marginal Cost Curves.8.3 Special Topics in Cost.Economies of Scope.Economies of Experience: The Experience Curve.8.4 Estimating Cost Functions.Constant Elasticity Cost Function.Translog Cost Function.APPENDIX. Shepharda s Lemma and Duality.LEARNING-BY-DOING EXERCISES.8.1 Finding the Long-Run Total Cost Curve from a Production Function.8.2 Deriving Long-Run Average and Marginal Cost Curves from a Long-Run Total Cost Curve.8.3 Deriving a Short-Run Total Cost Curve.8.4 The Relationship Between Short-Run and Long-Run Average Cost Curves.PART 4. PERFECT COMPETITION.CHAPTER 9. PERFECTLY COMPETITIVE MARKETS.How Many Roses Should a Rose Grower Grow?9.1 What Is Perfect Competition?9.2 Profit Maximization by a Price-Taking Firm.Economic Profit versus Accounting Profit.The Profit-Maximizing Output Choice for a Price-Taking Firm.9.3 How the Market Price Is Determined: Short-Run Equilibrium.The Price-Taking Firma s Short-Run Cost Structure.Short-Run Supply Curve for a Price-Taking Firm When All Fixed CostsAre Sunk.Short-Run Supply Curve for a Price-Taking Firm When Some FixedCosts Are Sunk and Some Are Nonsunk.Short-Run Market Supply Curve.Short-Run Perfectly Competitive Equilibrium.Comparative Statics Analysis of the Short-Run Equilibrium.9.4 How the Market Price Is Determined: Long-Run Equilibrium.Long-Run Output and Plant-Size Adjustments by Established Firms.The Firma s Long-Run Supply Curve.Free Entry and Long-Run Perfectly Competitive Equilibrium.Long-Run Market Supply Curve.Constant-Cost, Increasing-Cost, and Decreasing-Cost Industries.What Does Perfect Competition Teach Us?9.5 Economic Rent and Producer Surplus.Economic Rent.Producer Surplus.Economic Profit, Producer Surplus, Economic Rent.APPENDIX. Profit Maximization Implies Cost.Minimization.LEARNING-BY-DOING EXERCISES.9.1 Deriving the Short-Run Supply Curve for a Price-Taking Firm.9.2 Deriving the Short-Run Supply Curve for a Price-Taking Firm with Some Nonsunk Fixed Costs.9.3 Short-Run Market Equilibrium.9.4 Calculating a Long-Run Equilibrium.9.5 Calculating Producer Surplus.CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS.Is Support a Good Thing?10.1 Introduction.10.2 The Invisible Hand.10.3 Excise Taxes.Incidence of a Tax.10.4 Subsidies.10.5 Price Ceilings (Maximum Price Regulation).10.6 Price Floors (Minimum Price Regulation).10.7 Production Quotas.10.8 Price Supports in the Agricultural Sector.Acreage Limitation Programs.Government Purchase Programs.10.9 Import Quotas and Tariffs.Quotas.Tariffs.LEARNING-BY-DOING EXERCISES.10.1 Impact of an Excise Tax.10.2 Impact of a Subsidy.10.3 Impact of a Price Ceiling.10.4 Impact of a Price Floor.10.5 Comparing the Impact of an Excise Tax, a Price Floor, and a Production Quota.10.6 Effects of an Import Tariff.PART 5. MARKET POWER.CHAPTER 11. MONOPOLY AND MONOPSONY.How Do Firms Play Monopoly?11.1 Profit Maximization by a Monopolist.The Profit-Maximization Condition.A Closer Look at Marginal Revenue: Marginal Units and Inframarginal Units.Average Revenue and Marginal Revenue.The Profit-Maximization Condition Shown Graphically.A Monopolist Does Not Have a Supply Curve.11.2 The Importance of Price Elasticity of Demand.Price Elasticity of Demand and the Profit-Maximizing Price.Marginal Revenue and Price Elasticity of Demand.Marginal Cost and Price Elasticity of Demand: The Inverse Elasticity Pricing Rule.The Monopolist Always Produces on the Elastic Region of the Market Demand Curve.The IEPR Applies Not Only to Monopolists.Quantifying Market Power: The Lerner Index.11.3 Comparative Statics for Monopolists.Shifts in Market Demand.Shifts in Marginal Cost.11.4 Multiplant Monopoly.Output Choice with Two Plants.Profit Maximization by a Cartel.11.5 The Welfare Economics of Monopoly.The Monopoly Equilibrium Differs from the Perfectly CompetitiveEquilibrium.Monopoly Deadweight Loss.Rent-Seeking Activities.11.6 Why Do Monopoly Markets Exist?Natural Monopoly.Barriers to Entry.11.7 Monopsony.The Monopsonista s Profit-Maximization Condition.An Inverse Elasticity Pricing Rule for Monopsony.Monopsony Deadweight Loss.LEARNING-BY-DOING EXERCISES.11.1 Marginal and Average Revenue for a Linear Demand Curve.11.2 Applying the Monopolista s Profit-Maximization Condition.11.3 Computing the Optimal Monopoly Price for a Constant Elasticity Demand Curve.11.4 Computing the Optimal Monopoly Price for a Linear Demand Curve.11.5 Computing the Optimal Price Using the Monopoly Midpoint Rule.11.6 Determining the Optimal Output, Price, and Division of Production for a Multiplant Monopolist.11.7 Applying the Monopsonista s Profit-Maximization Condition.CHAPTER 12.A CAPTURING SURPLUS.Why Did Your Ticket Cost So Much Less Than Mine?12.1 Capturing Surplus.12.2 First-Degree Price Discrimination: Making the Most from Each Consumer.12.3 Second-Degree Price Discrimination:A Quantity Discounts.Block Pricing.Subscription and Usage Charges.12.4 Third-Degree Price Discrimination: Different Prices for Different Market Segments.Two Different Segments, Two Different Prices.Screening.12.5 Tying (Tie-In Sales).Bundling.Mixed Bundling.12.6 Advertising.LEARNING-BY-DOING EXERCISES.12.1 Capturing Surplus: Uniform Pricing versus First-Degree Price Discrimination.12.2 Where Is the Marginal Revenue Curve with First-DegreePrice Discrimination?12.3 Increasing Profits with a Block Tariff.12.4 Third-Degree Price Discrimination in Railroad Transport.12.5 Third-Degree Price Discrimination for Airline Tickets.12.6 Markup and Advertising-to-Sales Ratio.PART 6. IMPERFECT COMPETITION AND STRATEGIC BEHAVIORCHAPTER 13. MARKET STRUCTURE AND COMPETITION.Is Competition Always the Same? If Not, Why Not?13.1 Types of Market Structures.13.2 Oligopoly with Homogeneous Products.The Cournot Model of Oligopoly.The Bertrand Model of Oligopoly.Why Are the Cournot and Bertrand Equilibria Different?The Stackelberg Model of Oligopoly.13.3 Dominant Firm Markets.13.4 Oligopoly with Horizontally Differentiated Products.What Is Product Differentiation?Bertrand Price Competition with Horizontally Differentiated Products.13.5 Monopolistic Competition.Short-Run and Long-Run Equilibrium in Monopolistically Competitive Markets.Price Elasticity of Demand, Margins, and Number of Firms in the Market.Do Prices Fall When More Firms Enter?APPENDIX The Cournot Equilibrium and the Inverse Elasticity Pricing Rule.LEARNING-BY-DOING EXERCISES.13.1 Computing a Cournot Equilibrium.13.2 Computing the Cournot Equilibrium for Two or More Firms with Linear Demand.13.3 Computing a Bertrand Equilibrium with Horizontally Differentiated Products.CHAPTER 14 GAME THEORY AND STRATEGIC BEHAVIOR.Whata s in a Game?14.1 The Concept of Nash Equilibrium.A Simple Game.The Nash Equilibrium.The Prisonersa Dilemma.Dominant and Dominated Strategies.Games with More Than One Nash Equilibrium.Mixed Strategies.Summary: How to Find All the Nash Equilibria in a Simultaneous-Move Game with Two Players.14.2 The Repeated Prisonersa Dilemma.14.3 Sequential-Move Games and Strategic Moves.Analyzing Sequential-Move Games.The Strategic Value of Limiting Onea s Options.LEARNING-BY-DOING EXERCISES.14.1 Finding the Nash Equilibrium: Coke versus Pepsi.14.2 Finding All of the Nash Equilibria in a Game.14.3 An Entry Game.PART 7. SPECIAL TOPICS.CHAPTER 15.A RISK AND INFORMATION.What Are My Chances of Winning?15.1 Describing Risky Outcomes.Lotteries and Probabilities.Expected Value.Variance.15.2 Evaluating Risky Outcomes.Utility Functions and Risk Preferences.Risk-Neutral and Risk-Loving Preferences.15.3 Bearing and Eliminating Risk.Risk Premium.When Would a Risk-Averse Person Choose to Eliminate Risk?The Demand for Insurance.Asymmetric Information in Insurance Markets: Moral Hazard and Adverse Selection.15.4 Analyzing Risky Decisions.Decision Tree Basics.Decision Trees with a Sequence of Decisions.The Value of Information.15.5 Auctions.Types of Auctions and Bidding Environments.Auctions When Bidders Have Private Values.Auctions When Bidders Have Common Values: The Winnera s Curse.LEARNING-BY-DOING EXERCISES.15.1 Computing the Expected Utility for Two Lotteries for a Risk-Averse Decision Maker.15.2 Computing the Expected Utility for Two Lotteries: Risk-Neutral and Risk-Loving Decision Makers.15.3 Computing the Risk Premium from a Utility Function.15.4 The Willingness to Pay for Insurance.15.5 Verifying the Nash Equilibrium in a First-Price Sealed-Bid Auction with Private Values.CHAPTER 16. GENERAL EQUILIBRIUM THEORY.How Do Things Balance Out?16.1 General Equilibrium Analysis: Two Markets.16.2 General Equilibrium Analysis: Many Markets.The Origins of Supply and Demand in a Simple Economy.The General Equilibrium in Our Simple Economy.Walrasa Law.16.3 General Equilibrium Analysis: Comparative Statics.16.4 The Efficiency of Competitive Markets.What Is Economic Efficiency?Exchange Efficiency.Input Efficiency.Substitution Efficiency.Pulling the Analysis Together: The Fundamental Theoremsof Welfare Economics.16.5 Gains from Free Trade.Free Trade Is Mutually Beneficial.Comparative Advantage.APPENDIX. Deriving the Demand and Supply Curves forGeneral Equilibrium in Figure 16.9 and Learning-By-DoingExercise 16.2.LEARNING-BY-DOING EXERCISES.16.1 Finding the Prices at a General Equilibrium with Two Markets.16.2 Finding the Conditions for a General Equilibrium with Four Markets.CHAPTER 17. EXTERNALITIES AND PUBLIC GOODS.When Does the Invisible Hand Fail?17.1 Introduction.17.2 Externalities.Negative Externalities and Economic Efficiency.Positive Externalities and Economic Efficiency.Property Rights and the Coase Theorem.17.3 Public Goods.Efficient Provision of a Public Good.The Free Rider Problem.LEARNING-BY-DOING EXERCISES.17.1 The Efficient Amount of Pollution.17.2 Emissions Fee.17.3 The Coase Theorem.17.4 Optimal Provision of a Public Good.Mathematical Appendix.Solutions to Selected Problems.Glossary.Photo Credits.Index.
Microeconomics: An Integrated Approach by David Besanko
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