A TEXTBOOK OF MICROECONOMIC THEORY. Pankaj Tandon. Boston University

Transcription

1 A TEXTBOOK OF MICROECONOMIC THEORY Pankaj Tandon Boston University DSAGE j TEXTS bl ications.com London Orth) SlntEpore WMhlnQton DC * Borton

2 CONTENTS Preface About the Author xiii xv Chapter 1: Introduction to Microeconomic Theory The Two Central Ideas of Microeconomics Marshall's Demand-Supply Cross The Invisible Hand Theorem Thinking Likean Economist Think on the Margin Think in Terms of Opportunities Think in Terms of Equilibrium Plan of This Book 10 Chapter 2: Theory of Consumer Behaviour The Marshallian Theory of Demand The Budget Constraint Variations on the Budget Constraint The Utility Function Basic Properties of Utility Functions Graphical Representation of Utility Functions: Indifference Curves Some Specific Utility Functions The Consumer's Choice Problem Solving the Consumer's Choice Problem Graphically Solving the Consumer's Choice Problem Algebraically Comparative Statics on Demand Functions Changes in Budget Changes in Own-Price Changes in Another Good's Price: The Cross-Price Effect Final Properties of Demand Functions Homogeneity of the Demand Function Cournot Aggregation Interpretation of the Lagrange Multiplier The Lagrange Multiplier as the Marginal Utility of Money The Lagrange Multiplier in the Consumer's Expenditure Minimisation Problem 65

3 viii I A TEXTBOOK OF MICROECONOMIC THEORY The Marshallian Theory Revisited Revealed Preference Approach to Demand Theory 67 Chapter 3: Applications of Consumer Theory Taxes and Subsidies The Optimality of Lump-sum Taxation Cash Subsidies versus Food Subsidies Measuring the Consumer's Weifare Change Marshall's Consumer's Surplus Change The Hicksian Approach: The Compensating and Equivalent Variations in Income An Example to Calculate CV and EV An Alternative Approach to Calculating CV and EV Numerical Example CV, EV and the Change in Consumer's Surplus Weifare Analysis in the Revealed Preference Approach The Construction of Price Indices Laspeyres and Paasche Price Indices 'True' Price Indices 95 Chapter 4: Extensions of Consumer Theory Demand with Home Production The Labour Supply Decision The Basic Model Numerical Example: Cobb-Douglas Utility Applications of the Labour Supply Model Inter-Temporal Choice 117 Chapter 5: Production, Cost and Supply The Production Function Introduction to the Production Function and the Average and Marginal Products The Elasticity of Substitution Partial Elasticity of Substitution Returns to Scale Cost Functions Relationship between the Short- and Long-run Cost Curves Calculating the Cost Function: Examples 142

4 CONTENTS ix Cobb-Douglas Production Function Leontief Production Function Linear Production Function Profit Maximisation and Firm Supply Supply in the Long Run 157 Chapter 6: Markets in Partial Equilibrium The Market Demand Curve The Market Supply Curve Short versus Long Run External Economies and Diseconomies Market Equilibrium Weifare Economics of Market Equilibrium Analysing Market Interventions Price Supports and Subsidised Sales Price Floors and Price Ceilings laxes ExciseTaxes Sales Taxes Calculating the Effects of Commodity Taxes Three Basic Results on the Effects of Commodity Taxes in Competitive Markets Subsidies Input Markets The Demand for Labour The Capital Market and the Firm's Investment Decision Discounting, Present Value and Inter-temporal Aggregation 197 Chapter 7: General Equilibrium and Weifare Economics Pareto Efficiency The Social Allocation Problem Efficiency in Consumption Efficiency in Consumption and the Consumers' Contract Curve Other Types of Consumers' Contract Curves Competitive Equilibrium and Efficiency in Consumption 216

5 x I A TEXTBOOK OF MICROECONOMIC THEORY 7.4 Walras's Law Efficiency in Production Efficiency in Product-Mix The Optimality Theorems of Weifare Economics 229 Chapter 8: Uncertainty and Information Basics Risk Aversion The Expected Utility Hypothesis Risk aversion and Insurance Graphical Representation Using the Utility Function Graphical Representation Using State-Contingent Utility Decision Trees Market Solutions to the Problems of Uncertainty A Formula for the Cost of Risk Risk-Pooling Risk-Spreading Barriers to Efficiency in Risk Markets Correlated Risks Asymmetrie Information Methods to Overcome Inefficiencies in Risk Markets Screening Signalling 273 Chapter 9: Monopoly and Market Power Basic Monopoly Model Multi-Plant Monopoly Multiple Plants in the Long Run Comparing Monopoly to Perfect Competition Cartels: A Digression Variations to the Basic Model: Alternative Pricing Strategies Two-Part Pricing First-Degree Price Discrimination Third-Degree Price Discrimination Second-Degree Price Discrimination Limit (Entry-Deterring) Pricing Contestable Markets The Price Leadership Model Price Leadership in the Long Run 316

6 CONTENTS xi 9.4 Natural Monopoly and Regulation The Fundamental Pricing Problem in Natural Monopoly Marginal Cost Pricing and the Deficit Problem Average Cost Pricing Two-Part Pricing The Multi-Product Firm and Ramsey Pricing Peak-Load Pricing Rate-of-Return Regulation and the Averch-Johnson Effect The Problem of X-Inefficiency in Regulated and State-Owned Monopolies Price-Cap Regulation and Other Trends in Regulatory Policy Monopsony Basic Monopsony Model Alternative Pricing Strategies Bilateral Monopoly 335 Chapter 10: The Theory of Games Basics Static Games of Complete Information The Prisoners'Dilemma Battie of the Sexes Matching Pennies and Mixed Strategies Mixed Strategies in the Battie of the Sexes Game Sequential Games Repeated Games 359 Chapter 11: Market Structures between Competition and Monopoly Monopolistic Competition The Cournot Model The Basic Model Graphical Exposition of the Duopoly Gase Reaching the Cournot Equilibrium: A Dynamic Process An Example: The Gase of Linear Demand and Constant Costs Free Entry in Long-Run Cournot Equilibrium The Stackelberg Model and Strategie Behaviour The Best-Response Function Revisited The Stackelberg Model Entry Deterrence in the Stackelberg Model 382

7 xii I A TEXTBOOK OF MICROECONOMIC THEORY 11.4 Price Competition The Bertrand Model Capacity Constraints in the Bertrand Model Bertrand Competition with Increasing Marginal Cost Bertrand Competition with Differentiated Products Strategie Behaviour in the Bertrand Model 392 Chapter 12: Externalities and Public Goods Externalities The Allocation Problem under Externalities The Pigouvian Tax The Possibility of Abatement and Effluent Fees Relationship between Effluent Fees and Pigouvian laxes Positive Externalities The Coase Theorem Common Property Externalities Public Goods The Allocation Problem with Public Goods The Free Rider Problem and Demand Revelation Voting 432 Answers to Chapter-end Exercises Index A-1 1-1