with Calculus Microeconomics Microeconomics with Calculus GLOBAL GLOBAL EDITION EDITION Jeffrey M. Perloff

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1 Microeconomics with Calculus 3e uses calculus, algebra, and graphs to present microeconomic theory, and then encourages you to apply the theory to real-world, global problems. Updated! Revised coverage of Consumer Theory, Behavioral Economics, and Pricing New! Increased number of solved problems, and updated applications THIRD EDITION New! Many new end-of-chapter exercises, with all exercises now organized by topic Microeconomics with Calculus This Global Edition has been edited to include enhancements making it more relevant to students outside the United States. The editorial team at Pearson has worked closely with educators around the globe to include: Perloff This is a special edition of an established title widely used by colleges and universities throughout the world. Pearson published this exclusive edition for the benefit of students outside the United States and Canada. If you purchased this book within the United States or Canada you should be aware that it has been imported without the approval of the Publisher or Author. Pearson International Edition GLOBAL EDITION GLOBAL EDITION GLOBAL EDITION Microeconomics with Calculus THIRD EDITION Jeffrey M. Perloff

2 ThE PEarson series in Economics Abel/Bernanke/Croushore Macroeconomics* Bade/Parkin Foundations of Economics* Berck/Helfand The Economics of the Environment Bierman/Fernandez Game Theory with Economic Applications Blanchard Macroeconomics* Blau/Ferber/Winkler The Economics of Women, Men and Work Boardman/Greenberg/Vining/ Weimer Cost-Benefit Analysis Boyer Principles of Transportation Economics Branson Macroeconomic Theory and Policy Brock/Adams The Structure of American Industry Bruce Public Finance and the American Economy Carlton/Perloff Modern Industrial Organization Case/Fair/Oster Principles of Economics* Caves/Frankel/Jones World Trade and Payments: An Introduction Chapman Environmental Economics: Theory, Application, and Policy Cooter/Ulen Law & Economics Downs An Economic Theory of Democracy Ehrenberg/Smith Modern Labor Economics Farnham Economics for Managers Folland/Goodman/Stano The Economics of Health and Health Care Fort Sports Economics Froyen Macroeconomics Fusfeld The Age of the Economist Gerber International Economics* González-Rivera Forecasting for Economics and Business Gordon Macroeconomics* Greene Econometric Analysis Gregory Essentials of Economics Gregory/Stuart Russian and Soviet Economic Performance and Structure Hartwick/Olewiler The Economics of Natural Resource Use Heilbroner/Milberg The Making of the Economic Society Heyne/Boettke/Prychitko The Economic Way of Thinking Hoffman/Averett Women and the Economy: Family, Work, and Pay Holt Markets, Games and Strategic Behavior Hubbard/O Brien Economics* Money, Banking, and the Financial System* Hubbard/O Brien/Rafferty Macroeconomics* Hughes/Cain American Economic History Husted/Melvin International Economics Jehle/Reny Advanced Microeconomic Theory Johnson-Lans A Health Economics Primer Keat/Young Managerial Economics Klein Mathematical Methods for Economics Krugman/Obstfeld/Melitz International Economics: Theory & Policy* Laidler The Demand for Money Leeds/von Allmen The Economics of Sports Leeds/von Allmen/Schiming Economics* Lipsey/Ragan/Storer Economics* Lynn Economic Development: Theory and Practice for a Divided World Miller Economics Today* Understanding Modern Economics Miller/Benjamin The Economics of Macro Issues Miller/Benjamin/North The Economics of Public Issues Mills/Hamilton Urban Economics Mishkin The Economics of Money, Banking, and Financial Markets* The Economics of Money, Banking, and Financial Markets, Business School Edition* Macroeconomics: Policy and Practice* Murray Econometrics: A Modern Introduction Nafziger The Economics of Developing Countries O Sullivan/Sheffrin/Perez Economics: Principles, Applications and Tools* Parkin Economics* Perloff Microeconomics* Microeconomics: Theory and Applications with Calculus* Phelps Health Economics Pindyck/Rubinfeld Microeconomics* Riddell/Shackelford/Stamos/ Schneider Economics: A Tool for Critically Understanding Society Ritter/Silber/Udell Principles of Money, Banking & Financial Markets* Roberts The Choice: A Fable of Free Trade and Protection Rohlf Introduction to Economic Reasoning Ruffin/Gregory Principles of Economics Sargent Rational Expectations and Inflation Sawyer/Sprinkle International Economics Scherer Industry Structure, Strategy, and Public Policy Schiller The Economics of Poverty and Discrimination Sherman Market Regulation Silberberg Principles of Microeconomics Stock/Watson Introduction to Econometrics Studenmund Using Econometrics: A Practical Guide Tietenberg/Lewis Environmental and Natural Resource Economics Environmental Economics and Policy Todaro/Smith Economic Development Waldman Microeconomics Waldman/Jensen Industrial Organization: Theory and Practice Walters/Walters/Appel/Callahan/Centanni/Maex/O Neill Econversations: Today s Students Discuss Today s Issues Weil Economic Growth Williamson Macroeconomics *denotes MyEconLab titles Visit to learn more

3 Microeconomics with Calculus, Global Edition - PDF - PDF Table of Contents Cover Microeconomics with Calculus Brief Contents Contents Preface Introduction Microeconomics: The Allocation of Scarce Resources Trade-Offs Who Makes the Decisions How Prices Determine Allocations Application Fat Tax Models Application Income Threshold Model and China Simplifications by Assumption Testing Theories Maximizing Subject to Constraints Positive Versus Normative Uses of Microeconomic Models Supply and Demand Challenge Quantities and Prices of Genetically Modified Foods Demand The Demand Function Summing Demand Functions Application Aggregating the Demand for Broadband Service

4 Supply The Supply Function Summing Supply Functions How Government Import Policies Affect Supply Curves Market Equilibrium Finding the Market Equilibrium Forces That Drive a Market to Equilibrium Shocking the Equilibrium: Comparative Statics Comparative Statics with Discrete (Relatively Large) Changes Comparative Statics with Small Changes Solved Problem 2.1 Why the Shapes of Demand and Supply Curves Matter Elasticities Demand Elasticity Solved Problem 2.2 Supply Elasticity Application Volcanic Eruptions and Africas Cut Flower Market Solved Problem 2.3 Long Run Versus Short Run Application Oil Drilling in the Arctic National Wildlife Refuge Solved Problem 2.4 Effects of a Sales Tax Two Types of Sales Taxes Equilibrium Effects of a Specific Tax

5 How Specific Tax Effects Depend on Elasticities Solved Problem 2.5 Application Subsidizing Ethanol The Same Equilibrium No Matter Who Is Taxed The Similar Effects of Ad Valorem and Specific Taxes Quantity Supplied Need Not Equal Quantity Demanded Price Ceiling Application Price Controls Kill Price Floor When to Use the Supply-and-Demand Model Challenge Solution Quantities and Prices of Genetically Modified Foods Consumer Theory Challenge Why Americans Buy E-Books and Germans Do Not Preferences Properties of Consumer Preferences Transitivity Application You Cant Have Too Much Money Preference Maps Indifference Curves Solved Problem 3.1 Utility Utility Function Ordinal Preferences Utility and Indifference Curves Willingness to Substitute Between Goods Solved Problem 3.2

6 Application MRS Between Recorded Tracks and Live Music Curvature of Indifference Curves Solved Problem 3.3 Application Indifference Curves Between Food and Clothing Budget Constraint Constrained Consumer Choice Finding an Interior Solution Using Graphs Solved Problem 3.4 Finding an Interior Solution Using Calculus Solved Problem 3.5 Solved Problem 3.6 Solved Problem 3.7 Application Utility Maximization for Recorded Tracks and Live Music Finding Corner Solutions Minimizing Expenditure Solved Problem 3.8 Behavioral Economics Tests of Transitivity Endowment Effect Application How You Ask the Question Matters Salience Challenge Solution Why Americans Buy E-Books and Germans Do Not Demand Challenge Paying Employees to Relocate

7 Deriving Demand Curves System of Demand Functions Graphical Interpretation Application Quitting Smoking Effects of an Increase in Income How Income Changes Shift Demand Curves Solved Problem 4.1 Consumer Theory and Income Elasticities Application Fast-Food Engel Curve Solved Problem 4.2 Effects of a Price Increase Income and Substitution Effects with a Normal Good Solved Problem 4.3 Application Shipping the Good Stuff Away Income and Substitution Effects with an Inferior Good Solved Problem 4.4 Compensated Demand Curve Solved Problem 4.5 Slutsky Equation Cost-of-Living Adjustment Inflation Indexes Effects of Inflation Adjustments Application Fixing the CPI Substitution Bias Revealed Preference Recovering Preferences

8 Substitution Effect Challenge Solution Paying Employees to Relocate Consumer Welfare and Policy Analysis Challenge Child-Care Subsidies Consumer Welfare Willingness to Pay Application Willingness to Pay and Consumer Surplus on ebay Solved Problem 5.1 Expenditure Function and Consumer Welfare Indifference Curve Analysis Application Compensating Variation and Equivalent Variation for the Internet Comparing the Three Welfare Measures Solved Problem 5.2 Market Consumer Surplus Loss of Market Consumer Surplus from a Higher Price Markets in Which Consumer Surplus Losses Are Large Effects of Government Policies on Consumer Welfare Quotas Application Water Quota Food Stamps Application Food Stamps Versus Cash Deriving Labor Supply Curves Labor-Leisure Choice Solved Problem 5.3 Income and Substitution Effects Solved Problem 5.4

9 Shape of the Labor Supply Curve Application Working After Winning the Lottery Income Tax Rates and the Labor Supply Curve Challenge Solution Child-Care Subsidies Firms and Production Challenge Labor Productivity During Recessions The Ownership and Management of Firms Private, Public, and Nonprofit Firms The Ownership of For-Profit Firms The Management of Firms What Owners Want Production Production Functions Time and the Variability of Inputs Short-Run Production: One Variable and One Fixed Input Solved Problem 6.1 Interpretation of Graphs Solved Problem 6.2 Law of Diminishing Marginal Returns Application Malthus and the Green Revolution Long-Run Production: Two Variable Inputs Isoquants Application A Semiconductor Integrated Circuit Isoquant Substituting Inputs

10 Solved Problem 6.3 Diminishing Marginal Rates of Technical Substitution The Elasticity of Substitution Solved Problem 6.4 Returns to Scale Constant, Increasing, and Decreasing Returns to Scale Solved Problem 6.5 Application Returns to Scale in U.S. Manufacturing Varying Returns to Scale Productivity and Technical Change Relative Productivity Application U.S. Electric Generation Efficiency Innovations Application Tata Nanos Technical and Organizational Innovations Challenge Solution Labor Productivity During Recessions Costs Challenge Technology Choice at Home Versus Abroad Measuring Costs Opportunity Costs Application the Opportunity Cost of an MBA Solved Problem 7.1 Capital Costs Sunk Costs Short-Run Costs Short-Run Cost Measures Solved Problem 7.2 Short-Run Cost Curves Production Functions and the Shape of Cost Curves

11 Application Short-Run Cost Curves for a Japanese Beer Manufacturer Effects of Taxes on Costs Short-Run Cost Long-Run Costs Input Choice Solved Problem 7.3 Solved Problem 7.4 How Long-Run Cost Varies with Output Solved Problem 7.5 Solved Problem 7.6 The Shape of Long-Run Cost Curves Application Small Is Beautiful Estimating Cost Curves Versus Introspection Lower Costs in the Long Run Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves Application Choosing an Inkjet or Laser Printer Short-Run and Long-Run Expansion Paths How Learning by Doing Lowers Costs Application Learning by Drilling Cost of Producing Multiple Goods Application Economies of Scope Challenge Solution Technology Choice at Home Versus Abroad Competitive Firms and Markets Challenge The Rising Cost of Keeping On Truckin Perfect Competition Price Taking Why a Firms Demand Curve Is Horizontal Perfect Competition in the Chicago Commodity Exchange

12 Deviations from Perfect Competition Derivation of a Competitive Firms Demand Curve Why Perfect Competition Is Important Profit Maximization Profit Two Steps to Maximizing Profit Competition in the Short Run Short-Run Competitive Profit Maximization Solved Problem 8.1 Application Oil, Oil Sands, and Oil Shale Shutdowns Short-Run Firm Supply Curve Solved Problem 8.2 Short-Run Market Supply Curve Short-Run Competitive Equilibrium Solved Problem 8.3 Competition in the Long Run Long-Run Competitive Profit Maximization Long-Run Firm Supply Curve Application The Size of Ethanol Processing Plants Long-Run Market Supply Curve Application Fast-Food Firms Entry in Russia Application Upward-Sloping Long-Run Supply Curve for Cotton Application Reformulated Gasoline Supply Curves Solved Problem 8.4 Long-Run Competitive Equilibrium Challenge Solution The Rising Cost of Keeping On Truckin Applications of the Competitive Model Challenge Licensing Taxis Zero Profit for Competitive Firms in the Long Run Zero Long-Run Profit with Free Entry

13 Zero Long-Run Profit When Entry Is Limited Application Tiger Woods Rents The Need to Maximize Profit Producer Surplus Measuring Producer Surplus Using a Supply Curve Using Producer Surplus Solved Problem 9.1 Competition Maximizes Welfare Measuring Welfare Why Producing Less Than the Competitive Output Lowers Welfare Why Producing More Than the Competitive Output Lowers Welfare Application The Deadweight Loss of Christmas Presents Policies That Shift Supply Curves Policies That Create a Wedge Between Supply and Demand Curves Welfare Effects of a Sales Tax Welfare Effects of a Price Floor Solved Problem 9.2 Application How Big Are Farm Subsidies and Who Gets Them? Welfare Effects of a Price Ceiling Solved Problem 9.3 Application The Social Cost of a Natural Gas Price Ceiling Comparing Both Types of Policies: Trade Free Trade Versus a Ban on Imports Solved Problem 9.4 Free Trade Versus a Tariff Solved Problem 9.5

14 Free Trade Versus a Quota Rent Seeking Challenge Solution Licensing Taxis General Equilibrium and Economic Welfare Challenge Anti-Price Gouging Laws General Equilibrium Competitive Equilibrium in Two Interrelated Markets Application Partial-Equilibrium Versus Multimarket-Equilibrium Analysis in Corn and Soybean Markets Minimum Wages with Incomplete Coverage Solved Problem 10.1 Application Urban Flight Trading Between Two People Endowments Mutually Beneficial Trades Solved Problem 10.2 Deriving the Contract Curve Solved Problem 10.3 Bargaining Ability Competitive Exchange Competitive Equilibrium Solved Problem 10.4 The Efficiency of Competition Obtaining Any Efficient Allocation Using Competition Production and Trading

15 Comparative Advantage Solved Problem 10.5 Efficient Product Mix Competition Efficiency and Equity Role of the Government Application The Wealth and Income of the 1% Efficiency Equity Efficiency Versus Equity Theory of the Second Best Challenge Solution Anti-Price Gouging Laws Monopoly and Monopsony Challenge Pricing Apples ipad Monopoly Profit Maximization The Necessary Condition for Profit Maximization Marginal Revenue and the Demand Curves Solved Problem 11.1 Marginal Revenue Curve and the Price Elasticity of Demand An Example of Monopoly Profit Maximization Application Chinas New Monopolies Choosing Price or Quantity Effects of a Shift of the Demand Curve Market Power and Welfare Market Power and the Shape of the Demand Curve The Lerner Index

16 Solved Problem 11.2 Sources of Market Power Effect of Market Power on Welfare Taxes and Monopoly Effects of a Specific Tax Solved Problem 11.3 Welfare Effects of Ad Valorem Versus Specific Taxes Causes of Monopolies Cost Advantages Solved Problem 11.4 Government Actions That Create Monopolies Application Botox Patent Monopoly Government Actions That Reduce Market Power Regulating Monopolies Solved Problem 11.5 Application Natural Gas Regulation Increasing Competition Monopoly Decisions over Time and Behavioral Economics Network Externalities Network Externalities as an Explanation for Monopolies Application Critical Mass and ebay Introductory Prices: A Two-Period Monopoly Model Monopsony Monopsony Profit Maximization Solved Problem 11.6

17 Welfare Effects of Monopsony Challenge Solution Pricing Apples ipad Pricing and Advertising Challenge Sale Price Conditions for Price Discrimination Why Price Discrimination Pays Which Firms Can Price Discriminate Application Disneyland Pricing Preventing Resale Application Preventing Resale of Designer Bags Not All Price Differences Are Price Discrimination Types of Price Discrimination Perfect Price Discrimination How a Firm Perfectly Price Discriminates Graphical Analysis Calculus Analysis Solved Problem 12.1 Perfect Price Discrimination Is Efficient but Harms Some Consumers Application Botox Revisited Transaction Costs and Perfect Price Discrimination Application Google Uses Bidding for Ads to Price Discriminate Group Price Discrimination Group Price Discrimination with Two Groups Application Smuggling Prescription Drugs into the United States

18 Solved Problem 12.2 Identifying Groups Application Buying Discounts Solved Problem 12.3 Welfare Effects of Group Price Discrimination Group Price Discrimination Versus Competition Group Price Discrimination Versus Single-Price Monopoly Nonlinear Price Discrimination Two-Part Pricing Two-Part Pricing with Identical Consumers Two-Part Pricing with Differing Consumers Application Pricing itunes Tie-In Sales Requirement Tie-In Sales Application IBM Bundling Advertising Deciding Whether to Advertise How Much to Advertise Solved Problem 12.4 Application Super Bowl Commercials Challenge Solution Sale Price Game Theory Challenge Intel and AMDs Advertising Strategies Static Games Normal-Form Games Failure to Maximize Joint Profits Application Strategic Advertising

19 Multiple Equilibria Solved Problem 13.1 Mixed Strategies Application Parasites, Boomerangs, and Other Youths Solved Problem 13.2 Dynamic Games Repeated Game Sequential Game Solved Problem 13.3 Application First Mover Advantages and Disadvantages Auctions Elements of Auctions Bidding Strategies in Private-Value Auctions Winners Curse Application Bidders Curse Behavioral Game Theory Application GMs Ultimatum Challenge Solution Intel and AMDs Advertising Strategies Oligopoly Challenge Government Aircraft Subsidies Market Structures Cartels Why Cartels Succeed or Fail Application Catwalk Cartel Maintaining Cartels Application Market Power Versus Efficiency in Hospital Mergers Cournot Oligopoly Model The Duopoly Nash-Cournot Equilibrium

20 The Cournot Model with Many Firms The Cournot Model with Nonidentical Firms Solved Problem 14.1 Application Air Ticket Prices and Rivalry Solved Problem 14.2 Application Bottled Water Stackelberg Oligopoly Model Calculus Solution Graphical Solution Why Moving Sequentially Is Essential Strategic Trade Policy: An Application of the Stackelberg Model Solved Problem 14.3 Comparison of Collusive, Nash-Cournot, Stackelberg, and Competitive Equilibria Application Deadweight Losses in the Food and Tobacco Industries Bertrand Oligopoly Model Nash-Bertrand Equilibrium with Identical Products Nash-Bertrand Equilibrium with Differentiated Products Application Welfare Gain from Greater Toilet Paper Variety Monopolistic Competition Monopolistically Competitive Equilibrium Fixed Costs and the Number of Firms Solved Problem 14.4 Application Zoning Laws as a Barrier to Entry by Hotel Chains Challenge Solution Government Aircraft Subsidies Factor Markets Challenge Should You Go to College?

21 Factor Markets A Firms Short-Run Factor Demand Curve Solved Problem 15.1 Table of Contents A Firms Long-Run Factor Demand Curves Competitive Factor Markets Application Black Death Raises Wages Solved Problem 15.2 Capital Markets and Investing Interest Rates Discount Rate Stream of Payments Application Saving for Retirement Investing Solved Problem 15.3 Solved Problem 15.4 Durability Application Durability of Telephone Poles Time-Varying Discounting Application Falling Discount Rates and Self-Control Capital Markets, Interest Rates, and Investments Solved Problem 15.5 Exhaustible Resources When to Sell an Exhaustible Resource Price of a Scarce Exhaustible Resource Application Redwood Trees Why Price Might Not Rise Challenge Solution Should You Go to College? Uncertainty

22 Challenge Flight Insurance Assessing Risk Probability Expected Value Solved Problem 16.1 Variance and Standard Deviation Attitudes Toward Risk Expected Utility Theory Risk Aversion Solved Problem 16.2 Solved Problem 16.3 Risk Neutrality Risk Preference Application Gambling Degree of Risk Aversion Solved Problem 16.4 Reducing Risk Just Say No Application Harry Potters Magic Obtaining Information Application Weathering Bad Sales Diversification Application Employees Failure to Diversify Insurance Solved Problem 16.5 Application Limited Insurance for Natural Disasters Investing Under Uncertainty How Investing Depends on Attitudes Toward Risk Investing with Uncertainty and Discounting

23 Solved Problem 16.6 Behavioral Economics and Uncertainty Biased Assessment of Probabilities Application Biased Estimates Violations of Expected Utility Theory Prospect Theory Challenge Solution Flight Insurance Externalities and Public Goods Challenge Trade and Pollution Externalities Application Spam: A Negative Externality The Inefficiency of Competition with Externalities Supply-and-Demand Analysis Cost-Benefit Analysis Regulating Externalities Emissions Standard Application Reducing Pulp and Paper Mill Pollution Emissions Fee Solved Problem 17.1 Application Why Tax Drivers Benefits Versus Costs from Controlling Pollution Application Protecting Babies Emissions Fees Versus Standards Under Uncertainty Market Structure and Externalities Monopoly and Externalities Monopoly Versus Competitive Welfare with Externalities

24 Solved Problem 17.2 Taxing Externalities in Noncompetitive Markets Allocating Property Rights to Reduce Externalities Coase Theorem Application Buying a Town Markets for Pollution Application European Cap-and-Trade Policy Rivalry and Exclusion Open-Access Common Property Application for Whom the Bridge Tolls Club Goods Public Goods Application Radioheads Public Good Experiment Solved Problem 17.3 Reducing Free Riding Valuing Public Goods Application Whats Their Beef? Challenge Solution Trade and Pollution Information Challenge Dying to Work Problems Due to Asymmetric Information Responses to Adverse Selection Controlling Opportunistic Behavior Through Universal Coverage Equalizing Information Application Risky Hobbies How Ignorance About Quality Drives Out High-Quality Goods Lemons Market with Fixed Quality

25 Solved Problem 18.1 Lemons Market with Variable Quality Solved Problem 18.2 Limiting Lemons Application Changing a Firms Name Application Adverse Selection on ebay Motors Market Power from Price Ignorance Tourist-Trap Model Solved Problem 18.3 Advertising and Prices Problems Arising from Ignorance When Hiring Cheap Talk Education as a Signal Solved Problem 18.4 Screening in Hiring Challenge Solution Dying to Work Contract Theory Challenge Health Insurance Principal-Agent Problem A Model Types of Contracts Efficiency Application Selfless or Selfish Doctors? Production Efficiency Efficient Contract Full Information Solved Problem 19.1 Asymmetric Information

26 Application Contracts and Productivity in Agriculture Trade-Off Between Efficiency in Production and in Risk Bearing Contracts and Efficiency Solved Problem 19.2 Choosing the Best Contract Application Music Contracts: Changing Their Tunes Monitoring to Reduce Moral Hazard Bonding Solved Problem 19.3 Deferred Payments Efficiency Wages After-the-Fact Monitoring Application The Mortgage Market Meltdown Solved Problem 19.4 Contract Choice Checks on Principals Application Layoffs Versus Pay Cuts Challenge Solution Health Insurance Calculus Appendix Functions Properties of Functions Derivatives Maximum and Minimum Finding the Extrema of a Function Maximizing with Equality Constraints Maximizing with Inequality Constraints Duality Regression Appendix

27 Answers to Selected Problems Definitions References Sources for Applications and Challenges Index Credits