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Microeconomics, 3rd Edition

by Besanko, David, Northwestern Univ.; Braeutigam, Ronald R., Northwestern University

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Copyright, iv
About the Authors, v
Preface, vi
Acknowledgments, xi
Brief Contents, xiii
Contents, xiv
Part 1. INTRODUCTION TO MICROECONOMICS, 1
Chapter 1. ANALYZING ECONOMIC PROBLEMS, 1
Microeconomics and Global Warming, 1
1.1. Why Study Microeconomics?, 3
1.2. Three Key Analytical Tools, 4
Constrained Optimization, 5
LEARNING-BY-DOING EXERCI 1.1. Constrained Optimization: The Farmer’s Fence, 6
LEARNING-BY-DOING EXERCI 1.2. Constrained Optimization: Consumer Choice, 7
Equilibrium Analysis, 11
Comparative Statics, 12
LEARNING-BY-DOING EXERCI 1.3. Comparative Statics with Market Equilibrium in the U.S. Market for Corn, 14
LEARNING-BY-DOING EXERCI 1.4. Comparative Statics with Constrained Optimization, 16
1.3. Positive and Normative Analysis, 16
Chapter 2. DEMAND AND SUPPLY ANALYSIS, 22
What Gives with the Price of Corn?, 22
2.1. Demand, Supply, and Market Equilibrium, 25
Demand Curves, 26
LEARNING-BY-DOING EXERCI 2.1. Sketching a Demand Curve, 27
Supply Curves, 28
LEARNING-BY-DOING EXERCI 2.2. Sketching a Supply Curve, 28
Market Equilibrium, 29
LEARNING-BY-DOING EXERCI 2.3. Calculating Equilibrium Price and Quantity, 30
Shifts in Supply and Demand, 31
LEARNING-BY-DOING EXERCI 2.4. Comparative Statics on the Market Equilibrium, 33
2.2. Price Elasticity of Demand, 38
LEARNING-BY-DOING EXERCI 2.5. Price Elasticity of Demand, 40
Elasticities along Specific Demand Curves, 41
LEARNING-BY-DOING EXERCI 2.6. Elasticities along Special Demand Curves, 43
Price Elasticity of Demand and Total Revenue, 43
Determinants of the Price Elasticity of Demand, 43
Market-Level versus Brand-Level Price Elasticities of Demand, 45
2.3. Other Elasticities, 46
Income Elasticity of Demand, 46
Cross-Price Elasticity of Demand, 47
Price Elasticity of Supply, 49
2.4. Elasticity in the Long Run versus the Short Run, 50
Greater Elasticity in the Long Run Than in the Short Run, 50
Greater Elasticity in the Short Run Than in the Long Run, 50
2.5. Back-of-the-Envelope Calculations, 55
Fitting Linear Demand Curves Using Quantity, Price, and Elasticity Information, 55
Identifying Supply and Demand Curves on the Back of an Envelope, 56
Identifying the Price Elasticity of Demand from Shifts in Supply, 59
Appendix: Price Elasticity of Demand along a Constant Elasticity Demand Curve, 68
Part 2. CONSUMER THEORY, 69
Chapter 3. CONSUMER PREFERENCES AND THE CONCEPT OF UTILITY, 69
Why Do You Like What You Like?, 69
3.1. Representations of Preferences, 71
Assumptions about Consumer Preferences, 71
Ordinal and Cardinal Ranking, 72
3.2. Utility Functions, 73
Preferences with a Single Good: The Concept of Marginal Utility, 73
Preferences with Multiple Goods: Marginal Utility, Indifference Curves, and the Marginal Rate of Substitution, 77
LEARNING-BY-DOING EXERCI 3.1. Marginal Utility, 78
LEARNING-BY-DOING EXERCI 3.2. Marginal Utility That Is Not Diminishing, 79
LEARNING-BY-DOING EXERCI 3.3. Indifference Curves with Diminishing MRS_x,y, 86
LEARNING-BY-DOING EXERCI 3.4. Indifference Curves with Increasing MRS_x,y, 87
Special Utility Functions, 87
Chapter 4. CONSUMER CHOICE, 98
How Much of What You Like Should You Buy?, 98
4.1. The Budget Constraint, 100
How Does a Change in Income Affect the Budget Line?, 102
How Does a Change in Price Affect the Budget Line?, 102
LEARNING-BY-DOING EXERCI 4.1. Good News/Bad News and the Budget Line, 105
4.2. Optimal Choice, 105
Using the Tangency Condition to Understand When a Basket Is Not Optimal, 107
Finding an Optimal Consumption Basket, 108
LEARNING-BY-DOING EXERCI 4.2. Finding an Interior Optimum, 109
Two Ways of Thinking About Optimality, 109
Corner Points, 111
LEARNING-BY-DOING EXERCI 4.3. Finding a Corner Point Solution, 112
LEARNING-BY-DOING EXERCI 4.4. Corner Point Solution with Perfect Substitutes, 113
4.3. Consumer Choice with Composite Goods, 114
Application: Coupons and Cash Subsidies, 114
Application: Joining a Club, 118
Application: Borrowing and Lending, 120
Application: Quantity Discounts, 123
4.4. Revealed Preference, 125
Are Observed Choices Consistent with Utility Maximization?, 126
LEARNING-BY-DOING EXERCI 4.5. Consumer Choice That Fails to Maximize Utility, 127
LEARNING-BY-DOING EXERCI 4.6. Other Uses of Revealed Preference, 129
Appendix: The Mathematics of Consumer Choice, 135
Chapter 5. THE THEORY OF DEMAND, 136
Does It Pay to Raise Prices?, 137
5.1. Optimal Choice and Demand, 138
The Effects of a Change in Price, 138
The Effects of a Change in Income, 140
LEARNING-BY-DOING EXERCI 5.1. A Normal Good Has a Positive Income Elasticity of Demand, 144
The Effects of a Change in Price or Income: An Algebraic Approach, 145
LEARNING-BY-DOING EXERCI 5.2. Finding a Demand Curve (No Corner Points), 146
LEARNING-BY-DOING EXERCI 5.3. Finding a Demand Curve (with a Corner Point Solution), 147
5.2. Change in the Price of a Good: Substitution Effect and Income Effect, 148
The Substitution Effect, 148
The Income Effect, 150
Income and Substitution Effects When Goods Are Not Normal, 151
LEARNING-BY-DOING EXERCI 5.4. Finding Income and Substitution Effects Algebraically, 154
LEARNING-BY-DOING EXERCI 5.5. Income and Substitution Effects with a Price Increase, 156
LEARNING-BY-DOING EXERCI 5.6. Income and Substitution Effects with a Quasi-Linear Utility Function, 157
5.3. Change in the Price of a Good: The Concept of Consumer Surplus, 159
Understanding Consumer Surplus from the Demand Curve, 159
LEARNING-BY-DOING EXERCI 5.7. Consumer Surplus: Looking at the Demand Curve, 160
Understanding Consumer Surplus from the Optimal Choice Diagram: Compensating Variation and Equivalent Variation, 161
LEARNING-BY-DOING EXERCI 5.8. Compensating and Equivalent Variations with No Income Effect, 164
LEARNING-BY-DOING EXERCI 5.9. Compensating and Equivalent Variations with an Income Effect, 166
5.4. Market Demand, 168
5.5. Network Externalities, 170
5.6. The Choice of Labor and Leisure, 173
As Wages Rise, Leisure First Decreases, Then Increases, 173
The Backward-Bending Supply of Labor, 175
LEARNING-BY-DOING EXERCI 5.10. The Demand for Leisure and the Supply of Labor, 177
5.7. Consumer Price Indices, 178
Part 3. PRODUCTION AND COST THEORY, 185
Chapter 6. INPUTS AND PRODUCTION FUNCTIONS, 185
Can They Do It Better and Cheaper?, 186
6.1. Introduction to Inputs and Production Functions, 187
6.2. Production Functions with a Single Input, 189
Total Product Functions, 189
Marginal and Average Product, 190
Relationship Between Marginal and Average Product, 194
6.3. Production Functions with More Than One Input, 194
Total Product and Marginal Product with Two Inputs, 194
Isoquants, 196
LEARNING-BY-DOING EXERCI 6.1. Deriving the Equation of an Isoquant, 200
Economic and Uneconomic Regions of Production, 200
Marginal Rate of Technical Substitution, 201
LEARNING-BY-DOING EXERCI 6.2. Relating the Marginal Rate of Technical Substitution to Marginal Products, 203
6.4. Substitutability among Inputs, 203
Describing a Firm’s Input Substitution Opportunities Graphically, 204
Elasticity of Substitution, 206
Special Production Functions, 208
6.5. Returns to Scale, 212
Definitions, 212
LEARNING-BY-DOING EXERCI 6.3. Returns to Scale for a Cobb–Douglas Production Function, 213
Returns to Scale versus Diminishing Marginal Returns, 214
6.6. Technological Progress, 216
LEARNING-BY-DOING EXERCI 6.4. Technological Progress, 217
Appendix: The Elasticity of Substitution for a Cobb–Douglas Production Function, 223
Chapter 7. COSTS AND COST MINIMIZATION, 225
What’s Behind the Self-Service Revolution?, 225
7.1. Cost Concepts for Decision Making, 227
Opportunity Cost, 227
Economic versus Accounting Costs, 230
Sunk (Unavoidable) versus Nonsunk (Avoidable) Costs, 231
LEARNING-BY-DOING EXERCI 7.1. Using the Cost Concepts for a College Campus Business, 232
7.2. The Cost-Minimization Problem, 233
Long Run versus Short Run, 234
The Long-Run Cost-Minimization Problem, 234
Isocost Lines, 235
Graphical Characterization of the Solution to the Long-Run Cost-Minimization Problem, 235
LEARNING-BY-DOING EXERCI 7.2. Finding an Interior Cost-Minimization Optimum, 237
Corner Point Solutions, 238
LEARNING-BY-DOING EXERCI 7.3. Finding a Corner Point Solution with Perfect Substitutes, 239
7.3. Comparative Statics Analysis of the Cost-Minimization Problem, 240
Comparative Statics Analysis of Changes in Input Prices, 240
Comparative Statics Analysis of Changes in Output, 243
Summarizing the Comparative Statics Analysis: The Input Demand Curves, 246
LEARNING-BY-DOING EXERCI 7.4. Deriving the Input Demand Curves from a Production Function, 247
The Price Elasticity of Demand for Inputs, 247
7.4. Short-Run Cost Minimization, 250
Characterizing Costs in the Short Run, 250
Cost Minimization in the Short Run, 252
Comparative Statics: Short-Run Input Demand versus Long-Run Input Demand, 253
LEARNING-BY-DOING EXERCI 7.5. Short-Run Cost Minimization with One Fixed Input, 253
More Than One Variable Input in the Short Run, 254
LEARNING-BY-DOING EXERCI 7.6. Short-Run Cost Minimization with Two Variable Inputs, 254
Appendix: Advanced Topics in Cost Minimization, 260
Chapter 8. COST CURVES, 263
How Can HiSense Get a Handle on Costs?, 263
8.1. Long-Run Cost Curves, 265
Long-Run Total Cost Curve, 265
LEARNING-BY-DOING EXERCI 8.1. Finding the Long-Run Total Cost Curve from a Production Function, 266
How Does the Long-Run Total Cost Curve Shift When Input Prices Change?, 267
Long-Run Average and Marginal Cost Curves, 270
LEARNING-BY-DOING EXERCI 8.2. Deriving Long-Run Average and Marginal Cost Curves from a Long-Run Total Cost Curve, 271
8.2. Short-Run Cost Curves, 279
Short-Run Total Cost Curve, 279
LEARNING-BY-DOING EXERCI 8.3. Deriving a Short-Run Total Cost Curve, 280
Relationship Between the Long-Run and the Short-Run Total Cost Curves, 281
Short-Run Average and Marginal Cost Curves, 282
Relationships Between the Long-Run and the Short-Run Average and Marginal Cost Curves, 283
LEARNING-BY-DOING EXERCI 8.4. The Relationship Between Short-Run and Long-Run Average Cost Curves, 285
8.3. Special Topics in Cost, 288
Economies of Scope, 288
Economies of Experience: The Experience Curve, 290
8.4. Estimating Cost Functions, 293
Constant Elasticity Cost Function, 293
Translog Cost Function, 294
Appendix: Shephard’s Lemma and Duality, 301
Part 4. PERFECT COMPETITION, 304
Chapter 9. PERFECTLY COMPETITIVE MARKETS, 304
How Many Roses Should a Rose Grower Grow?, 305
9.1. What Is Perfect Competition?, 306
9.2. Profit Maximization by a Price-Taking Firm, 307
Economic Profit versus Accounting Profit, 307
The Profit-Maximizing Output Choice for a Price-Taking Firm, 309
9.3. How the Market Price Is Determined: Short-Run Equilibrium, 312
The Price-Taking Firm’s Short-Run Cost Structure, 312
Short-Run Supply Curve for a Price-Taking Firm When All Fixed Costs Are Sunk, 314
LEARNING-BY-DOING EXERCI 9.1. Deriving the Short-Run Supply Curve for a Price-Taking Firm, 316
Short-Run Supply Curve for a Price-Taking Firm When Some Fixed Costs Are Sunk and Some Are Nonsunk, 316
LEARNING-BY-DOING EXERCI 9.2. Deriving the Short-Run Supply Curve for a Price-Taking Firm with Some Nonsunk Fixed Costs, 318
Short-Run Market Supply Curve, 319
Short-Run Perfectly Competitive Equilibrium, 324
LEARNING-BY-DOING EXERCI 9.3. Short-Run Market Equilibrium, 324
Comparative Statics Analysis of the Short-Run Equilibrium, 325
9.4. How the Market Price Is Determined: Long-Run Equilibrium, 329
Long-Run Output and Plant-Size Adjustments by Established Firms, 329
The Firm’s Long-Run Supply Curve, 330
Free Entry and Long-Run Perfectly Competitive Equilibrium, 331
LEARNING-BY-DOING EXERCI 9.4. Calculating a Long-Run Equilibrium, 332
Long-Run Market Supply Curve, 332
Constant-Cost, Increasing-Cost, and Decreasing-Cost Industries, 335
What Does Perfect Competition Teach Us?, 341
9.5. Economic Rent and Producer Surplus, 341
Economic Rent, 342
Producer Surplus, 345
LEARNING-BY-DOING EXERCI 9.5. Calculating Producer Surplus, 350
Economic Profit, Producer Surplus, Economic Rent, 351
Appendix: Profit Maximization Implies Cost Minimization, 358
Chapter 10. COMPETITIVE MARKETS: APPLICATIONS, 360
Is Support a Good Thing?, 361
10.1. Introduction, 362
10.2. The Invisible Hand, 363
10.3. Excise Taxes, 364
LEARNING-BY-DOING EXERCI 10.1. Impact of an Excise Tax, 368
Incidence of a Tax, 368
10.4. Subsidies, 372
LEARNING-BY-DOING EXERCI 10.2. Impact of a Subsidy, 374
10.5. Price Ceilings (Maximum Price Regulation), 374
LEARNING-BY-DOING EXERCI 10.3. Impact of a Price Ceiling, 381
10.6. Price Floors (Minimum Price Regulation), 382
LEARNING-BY-DOING EXERCI 10.4. Impact of a Price Floor, 387
10.7. Production Quotas, 389
LEARNING-BY-DOING EXERCI 10.5. Comparing the Impact of an Excise Tax, a Price Floor, and a Production Quota, 392
10.8. Price Supports in the Agricultural Sector, 392
Acreage Limitation Programs, 393
Government Purchase Programs, 393
10.9. Import Quotas and Tariffs, 396
Quotas, 396
Tariffs, 400
LEARNING-BY-DOING EXERCI 10.6. Effects of an Import Tariff, 403
Part 5. MARKET POWER, 412
Chapter 11. MONOPOLY AND MONOPSONY, 412
How Do Firms Play Monopoly?, 413
11.1. Profit Maximization by a Monopolist, 414
The Profit-Maximization Condition, 414
A Closer Look at Marginal Revenue: Marginal Units and Inframarginal Units, 417
Average Revenue and Marginal Revenue, 418
LEARNING-BY-DOING EXERCI 11.1. Marginal and Average Revenue for a Linear Demand Curve, 420
The Profit-Maximization Condition Shown Graphically, 420
LEARNING-BY-DOING EXERCI 11.2. Applying the Monopolist’s Profit-Maximization Condition, 422
A Monopolist Does Not Have a Supply Curve, 422
11.2. The Importance of Price Elasticity of Demand, 423
Price Elasticity of Demand and the Profit-Maximizing Price, 423
Marginal Revenue and Price Elasticity of Demand, 424
Marginal Cost and Price Elasticity of Demand: The Inverse Elasticity Pricing Rule, 425
LEARNING-BY-DOING EXERCI 11.3. Computing the Optimal Monopoly Price for a Constant Elasticity Demand Curve, 426
LEARNING-BY-DOING EXERCI 11.4. Computing the Optimal Monopoly Price for a Linear Demand Curve, 426
The Monopolist Always Produces on the Elastic Region of the Market Demand Curve, 427
The IEPR Applies Not Only to Monopolists, 428
Quantifying Market Power: The Lerner Index, 430
11.3. Comparative Statics for Monopolists, 430
Shifts in Market Demand, 430
LEARNING-BY-DOING EXERCI 11.5. Computing the Optimal Price Using the Monopoly Midpoint Rule, 432
Shifts in Marginal Cost, 432
11.4. Monopoly with Multiple Plants and Markets, 435
Output Choice with Two Plants, 435
LEARNING-BY-DOING EXERCI 11.6. Determining the Optimal Output, Price, and Division of Production for a Multiplant Monopolist, 437
Output Choice with Two Markets, 437
LEARNING-BY-DOING EXERCI 11.7. Determining the Optimal Output and Price for a Monopolist Serving Two Markets, 438
Profit Maximization by a Cartel, 438
11.5. The Welfare Economics of Monopoly, 440
The Monopoly Equilibrium Differs from the Perfectly Competitive Equilibrium, 440
Monopoly Deadweight Loss, 441
Rent-Seeking Activities, 442
11.6. Why Do Monopoly Markets Exist?, 442
Natural Monopoly, 442
Barriers to Entry, 444
11.7. Monopsony, 445
The Monopsonist’s Profit-Maximization Condition, 446
LEARNING-BY-DOING EXERCI 11.8. Applying the Monopsonist’s Profit-Maximization Condition, 447
An Inverse Elasticity Pricing Rule for Monopsony, 448
Monopsony Deadweight Loss, 449
Chapter 12. CAPTURING SURPLUS, 455
Why Did Your Ticket Cost So Much Less Than Mine?, 455
12.1. Capturing Surplus, 457
12.2. First-Degree Price Discrimination: Making the Most from Each Consumer, 459
LEARNING-BY-DOING EXERCI 12.1. Capturing Surplus: Uniform Pricing versus First-Degree Price Discrimination, 461
LEARNING-BY-DOING EXERCI 12.2. Where Is the Marginal Revenue Curve with First-Degree Price Discrimination?, 462
12.3. Second-Degree Price Discrimination: Quantity Discounts, 463
Block Pricing, 464
LEARNING-BY-DOING EXERCI 12.3. Increasing Profits with a Block Tariff, 466
Subscription and Usage Charges, 469
12.4. Third-Degree Price Discrimination: Different Prices for Different Market Segments, 470
Two Different Segments, Two Different Prices, 470
LEARNING-BY-DOING EXERCI 12.4. Third-Degree Price Discrimination in Railroad Transport, 472
Screening, 473
LEARNING-BY-DOING EXERCI 12.5. Third-Degree Price Discrimination for Airline Tickets, 474
Third-Degree Price Discrimination with Capacity Constraints, 475
LEARNING-BY-DOING EXERCI 12.6. Price Discrimination Subject to Capacity Constraints, 476
Implementing the Scheme of Price Discrimination: Building “Fences”, 477
12.5. Tying (Tie-In Sales), 481
Bundling, 482
Mixed Bundling, 484
12.6. Advertising, 486
LEARNING-BY-DOING EXERCI 12.7. Markup and Advertising-to-Sales Ratio, 488
Part 6. IMPERFECT COMPETITION AND STRATEGIC BEHAVIOR, 495
Chapter 13. MARKET STRUCTURE AND COMPETITION, 495
Is Competition Always the Same? If Not, Why Not?, 495
13.1. Types of Market Structures, 497
13.2. Oligopoly with Homogeneous Products, 498
The Cournot Model of Oligopoly, 498
LEARNING-BY-DOING EXERCI 13.1. Computing a Cournot Equilibrium, 501
LEARNING-BY-DOING EXERCI 13.2. Computing the Cournot Equilibrium for Two or More Firms with Linear Demand, 505
The Bertrand Model of Oligopoly, 506
Why Are the Cournot and Bertrand Equilibria Different?, 508
The Stackelberg Model of Oligopoly, 509
13.3. Dominant Firm Markets, 511
LEARNING-BY-DOING EXERCI 13.3. Computing the Equilibrium in the Document Firm Model, 513
13.4. Oligopoly with Horizontally Differentiated Products, 514
What Is Product Differentiation?, 514
Bertrand Price Competition with Horizontally Differentiated Products, 518
LEARNING-BY-DOING EXERCI 13.4. Computing a Bertrand Equilibrium with Horizontally Differentiated Products, 521
13.5. Monopolistic Competition, 523
Short-Run and Long-Run Equilibrium in Monopolistically Competitive Markets, 524
Price Elasticity of Demand, Margins, and Number of Firms in the Market, 525
Do Prices Fall When More Firms Enter?, 526
Appendix: The Cournot Equilibrium and the Inverse Elasticity Pricing Rule, 535
Chapter 14. GAME THEORY AND STRATEGIC BEHAVIOR, 536
What’s in a Game?, 536
14.1. The Concept of Nash Equilibrium, 538
A Simple Game, 538
The Nash Equilibrium, 539
The Prisoners’ Dilemma, 539
Dominant and Dominated Strategies, 540
LEARNING-BY-DOING EXERCI 14.1. Finding the Nash Equilibrium: Coke versus Pepsi, 543
Games with More Than One Nash Equilibrium, 544
LEARNING-BY-DOING EXERCI 14.2. Finding All of the Nash Equilibria in a Game, 546
Mixed Strategies, 547
Summary: How to Find All the Nash Equilibria in a Simultaneous-Move Game with Two Players, 548
14.2. The Repeated Prisoners’ Dilemma, 549
14.3. Sequential-Move Games and Strategic Moves, 554
Analyzing Sequential-Move Games, 555
LEARNING-BY-DOING EXERCI 14.3. An Entry Game, 556
The Strategic Value of Limiting One’s Options, 557
Part 7. SPECIAL TOPICS, 568
Chapter 15. RISK AND INFORMATION, 568
What Are My Chances of Winning?, 568
15.1. Describing Risky Outcomes, 570
Lotteries and Probabilities, 570
Expected Value, 571
Variance, 572
15.2. Evaluating Risky Outcomes, 574
Utility Functions and Risk Preferences, 574
LEARNING-BY-DOING EXERCI 15.1. Computing the Expected Utility for Two Lotteries for a Risk-Averse Decision Maker, 576
Risk-Neutral and Risk-Loving Preferences, 577
LEARNING-BY-DOING EXERCI 15.2. Computing the Expected Utility for Two Lotteries: Risk-Neutral and Risk-Loving Decision Makers, 578
15.3. Bearing and Eliminating Risk, 579
Risk Premium, 579
LEARNING-BY-DOING EXERCI 15.3. Computing the Risk Premium from a Utility Function, 581
When Would a Risk-Averse Person Choose to Eliminate Risk? The Demand for Insurance, 582
LEARNING-BY-DOING EXERCI 15.4. The Willingness to Pay for Insurance, 583
Asymmetric Information in Insurance Markets: Moral Hazard and Adverse Selection, 583
15.4. Analyzing Risky Decisions, 586
Decision Tree Basics, 586
Decision Trees with a Sequence of Decisions, 588
The Value of Information, 591
15.5. Auctions, 593
Types of Auctions and Bidding Environments, 593
Auctions When Bidders Have Private Values, 594
LEARNING-BY-DOING EXERCI 15.5. Verifying the Nash Equilibrium in a First-Price Sealed-Bid Auction with Private Values, 596
Auctions When Bidders Have Common Values: The Winner’s Curse, 598
Chapter 16. GENERAL EQUILIBRIUM THEORY, 607
How Do Gasoline Taxes Affect the Economy?, 607
16.1. General Equilibrium Analysis: Two Markets, 610
LEARNING-BY-DOING EXERCI 16.1. Finding the Prices at a General Equilibrium with Two Markets, 613
16.2. General Equilibrium Analysis: Many Markets, 613
The Origins of Supply and Demand in a Simple Economy, 613
The General Equilibrium in Our Simple Economy, 619
LEARNING-BY-DOING EXERCI 16.2. Finding the Conditions for a General Equilibrium with Four Markets, 621
Walras’ Law, 622
16.3. General Equilibrium Analysis: Comparative Statics, 623
16.4. The Efficiency of Competitive Markets, 628
What Is Economic Efficiency?, 628
Exchange Efficiency, 629
LEARNING-BY-DOING EXERCI 16.3. Checking the Conditions for Exchange Efficiency, 632
Input Efficiency, 634
Substitution Efficiency, 636
Pulling the Analysis Together: The Fundamental Theorems of Welfare Economics, 638
16.5. Gains from Free Trade, 640
Free Trade Is Mutually Beneficial, 640
Comparative Advantage, 643
Appendix: Deriving the Demand and Supply Curves for General Equilibrium in Figure 16.9 and Learning-by-Doing Exercise 16.2, 649
Chapter 17. EXTERNALITIES AND PUBLIC GOODS, 655
When Does the Invisible Hand Fail?, 655
17.1. Introduction, 657
17.2. Externalities, 657
Negative Externalities and Economic Efficiency, 658
LEARNING-BY-DOING EXERCI 17.1. The Efficient Amount of Pollution, 661
LEARNING-BY-DOING EXERCI 17.2. Emissions Fee, 664
Positive Externalities and Economic Efficiency, 670
Property Rights and the Coase Theorem, 672
LEARNING-BY-DOING EXERCI 17.3. The Coase Theorem, 674
17.3. Public Goods, 675
Efficient Provision of a Public Good, 676
LEARNING-BY-DOING EXERCI 17.4. Optimal Provision of a Public Good, 678
The Free Rider Problem, 678
Mathematical Appendices, 686
Solutions to Selected Problems, 705
Glossary, G-1
Index, I-1

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