ID#12001089EPR MICROECONOMICS THE PEARSON SERIES IN ECONOMICS Abel/Bernanke/Croushore Fort Krugman/Obstfeld/Melitz Pindyck/Rubinfeld Macroeconomics* Sports Economics International Economics: Microeconomics* Bade/Parkin Froyen Theory & Policy* Riddell/Shackelford/Stamos/ Foundations of Economics* Macroeconomics Laidler Schneider Berck/Helfand Fusfeld The Demand for Money Economics: A Tool for Critically The Economics of the The Age of the Economist Leeds/von Allmen Understanding Society Environment Gerber The Economics of Sports Ritter/Silber/Udell Bierman/Fernandez International Economics* Leeds/von Allmen/Schiming Principles of Money, Banking & Game Theory with Economic González-Rivera Economics* Financial Markets* Applications Forecasting for Economics Lipsey/Ragan/Storer Roberts Blanchard and Business Economics* The Choice: A Fable of Free Macroeconomics* Gordon Lynn Trade and Protection Blau/Ferber/Winkler Macroeconomics* Economic Development: Rohlf The Economics of Women, Greene Theory and Practice for a Introduction to Economic Men and Work Econometric Analysis Divided World Reasoning Boardman/Greenberg/ Gregory Miller Ruffin/Gregory Vining/Weimer Essentials of Economics Economics Today* Principles of Economics Cost-Benefit Analysis Understanding Modern Sargent Gregory/Stuart Boyer Russian and Soviet Economic Economics Rational Expectations and Principles of Transportation Performance and Structure Miller/Benjamin Inflation Economics The Economics of Macro Sawyer/Sprinkle Hartwick/Olewiler Branson The Economics of Natural Issues International Economics Macroeconomic Theory and Resource Use Miller/Benjamin/North Scherer Policy The Economics of Public Issues Industry Structure, Strategy, Heilbroner/Milberg Brock/Adams The Making of the Economic Mills/Hamilton and Public Policy The Structure of American Society Urban Economics Schiller Industry Mishkin The Economics of Poverty Heyne/Boettke/Prychitko Bruce The Economic Way of The Economics of Money, and Discrimination Public Finance and the Thinking Banking, and Financial Sherman American Economy Markets* Market Regulation Hoffman/Averett Carlton/Perloff Women and the Economy: The Economics of Money, Silberberg Modern Industrial Family, Work, and Pay Banking, and Financial Markets, Principles of Microeconomics Organization Business School Edition* Stock/Watson Holt Case/Fair/Oster Markets, Games and Strategic Macroeconomics: Policy and Introduction to Econometrics Principles of Economics* Behavior Practice* Introduction to Econometrics, Caves/Frankel/Jones Hubbard/O’Brien Murray Brief Edition World Trade and Payments: Economics* Econometrics: A Modern Studenmund An Introduction Introduction Using Econometrics: A Money, Banking, and the Chapman Financial System* Nafziger Practical Guide Environmental Economics: The Economics of Developing Tietenberg/Lewis Hubbard/O’Brien/Rafferty Theory, Application, and Countries Environmental and Natural Macroeconomics* Policy O’Sullivan/Sheffrin/Perez Resource Economics Hughes/Cain Cooter/Ulen Economics: Principles, Environmental Economics American Economic History Law & Economics Applications and Tools* and Policy Husted/Melvin Downs Parkin Todaro/Smith International Economics An Economic Theory of Economics* Economic Development Jehle/Reny Democracy Perloff Advanced Microeconomic Waldman Ehrenberg/Smith Microeconomics* Microeconomics Theory Modern Labor Economics Microeconomics: Theory and Johnson-Lans Waldman/Jensen Ekelund/Ressler/Tollison Applications with Calculus* Industrial Organization: A Health Economics Primer Economics* Perman/Common/ Theory and Practice Keat/Young Farnham McGilvray/Ma Weil Managerial Economics Economics for Managers Natural Resources and Economic Growth Klein Folland/Goodman/Stano Environmental Economics Mathematical Methods for Williamson The Economics of Health and Phelps Macroeconomics Economics Health Care Health Economics * denotes MyEconLab titles Visit www.com to learn more MICROECONOMICS EIGHTH EDITION Robert S. Pindyck Massachusetts Institute of Technology Daniel L. Rubinfeld University of California, Berkeley Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editorial Director: Sally Yagan Image Manager: Rachel Youdelman Editor in Chief: Donna Battista Photo Researcher: Melody English Executive Acquisitions Editor: Adrienne D’Ambrosio Text Permissions Supervisor: Michael Joyce Editorial Project Manager: Sarah Dumouchelle Media Director: Susan Schoenberg Editorial Assistant: Elissa Senra-Sargent Executive Media Producer: Melissa Honig VP/Director of Marketing: Patrice Jones Content Lead, MyEconLab: Noel Lotz Director of Marketing: Maggie Moylan Supplements Editors: Alison Eusden and Kathryn Dinovo Executive Marketing Manager: Lori DeShazo Full-Service Project Management: Integra Marketing Assistant: Kim Lovato Printer/Binder: R. Donnelley/Willard Senior Managing Editor: Nancy H.
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To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290. Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks. Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps. Library of Congress Cataloging-in-Publication Data Pindyck, Robert S.5–dc23 2011049296 10 9 8 7 6 5 4 3 2 1 ISBN 10: 0-13-285712-X ISBN 13: 978-0-13-285712-3 To our daughters, Maya, Talia, and Shira Sarah and Rachel ABOUT THE AUTHORS The authors, back again for a new edition, reflect on their years of successful textbook collaboration.
Pindyck is on the right and Rubinfeld on the left. R evising a textbook every three or four years is hard work, and the last edition was well-liked by students. “So why is our publisher pushing for a new edition?” the authors wondered. “Were some of the examples becoming stale? Or might it have something to do with the used book market?” Could be both.
In any case, here they are again, with a new edition that has sub- stantial improvements and lots of new examples. Pindyck is the Bank of Tokyo-Mitsubishi Ltd. Professor of Economics and Finance in the Sloan School of Management at M. Rubinfeld is the Robert L.
Bridges Professor of Law and Professor of Economics Emeritus at the University of California, Berkeley, and Professor of Law at NYU. Both received their Ph., Pindyck in 1971 and Rubinfeld in 1972. Professor Pindyck’s research and writing have covered a variety of topics in microeconom- ics, including the effects of uncertainty on firm behavior and market structure; the behavior of natural resource, commodity, and financial markets; environmen- tal economics; and criteria for investment decisions. Professor Rubinfeld, who served as chief economist at the Department of Justice in 1997 and 1998, is the author of a variety of articles relating to antitrust, competition policy, law and economics, law and statistics, and public economics.
Pindyck and Rubinfeld are also co-authors of Econometric Models and Economic Forecasts, another best-selling textbook that makes a perfect gift (birthdays, weddings, bar mitzvahs, you name it) for the man or woman who has every- thing. (Buy several—bulk pricing is available.) These two authors are always looking for ways to earn some extra spending money, so they enrolled as human subjects in a double-blind test of a new hair restoration medication. Rubinfeld strongly suspects that he is being given the placebo. This is probably more than you want to know about these authors, but for further information, see their Web sites: http://web.edu/rpindyck/www vi and http://www.edu/faculty/rubinfeldd.
BRIEF CONTENTS • PART ONE Introduction: Markets and Prices 1 1 Preliminaries 3 2 The Basics of Supply and Demand 21 • PART TWO Producers, Consumers, and Competitive Markets 65 3 Consumer Behavior 67 4 Individual and Market Demand 111 5 Uncertainty and Consumer Behavior 159 6 Production 201 7 The Cost of Production 229 8 Profit Maximization and Competitive Supply 279 9 The Analysis of Competitive Markets 317 • PART THREE Market Structure and Competitive Strategy 355 10 Market Power: Monopoly and Monopsony 357 11 Pricing with Market Power 399 12 Monopolistic Competition and Oligopoly 451 13 Game Theory and Competitive Strategy 487 14 Markets for Factor Inputs 529 15 Investment, Time, and Capital Markets 559 • PART FOUR Information, Market Failure, and the Role of Government 593 16 General Equilibrium and Economic Efficiency 595 17 Markets with Asymmetric Information 631 18 Externalities and Public Goods 661 Appendix: The Basics of Regression 700 Glossary 708 Answers to Selected Exercises 718 Photo Credits 731 Index 732 vii This page intentionally left blank CONTENTS Preface xvii • P A RT ONE Summary 60 Introduction: Markets and Prices 1 Questions for Review 61 Exercises 62 1 Preliminaries 3 1.1 The Themes of Microeconomics 4 Trade-Offs 4 • P A R T TWO Prices and Markets 5 Producers, Consumers, and Theories and Models 5 Competitive Markets 65 Positive versus Normative Analysis 6 1.2 What Is a Market? 7 3 Consumer Behavior 67 Competitive versus Noncompetitive Markets 8 Consumer Behavior 67 Market Price 8 3.1 Consumer Preferences 69 Market Definition—The Extent of a Market 9 Market Baskets 69 1.3 Real versus Nominal Prices 12 Some Basic Assumptions about Preferences 70 1.4 Why Study Microeconomics? 16 Indifference Curves 71 Corporate Decision Making: The Toyota Prius 16 Indifference Maps 72 Public Policy Design: Fuel Efficiency Standards for The Shape of Indifference Curves 73 the Twenty-First Century 17 The Marginal Rate of Substitution 74 Summary 18 Perfect Substitutes and Perfect Questions for Review 19 Complements 75 Exercises 19 3.2 Budget Constraints 82 The Budget Line 82 2 The Basics of Supply and The Effects of Changes in Income Demand 21 and Prices 84 2.1 Supply and Demand 22 3.3 Consumer Choice 86 The Supply Curve 22 Corner Solutions 89 The Demand Curve 23 3.2 The Market Mechanism 25 3.5 Marginal Utility and Consumer Choice 95 2.3 Changes in Market Equilibrium 26 Rationing 98 2.4 Elasticities of Supply and Demand 33 *3.6 Cost-of-Living Indexes 100 Point versus Arc Elasticities 36 Ideal Cost-of-Living Index 101 2.5 Short-Run versus Long-Run Elasticities 39 Laspeyres Index 102 Demand 40 Paasche Index 103 Supply 45 Price Indexes in the United Statics: Chain *2.6 Understanding and Predicting the Effects of Weighting 104 Changing Market Conditions 48 Summary 105 2.7 Effects of Government Intervention—Price Questions for Review 106 Controls 58 Exercises 107 ix x • CONTENTS 4 Individual and Market 5 Uncertainty and Consumer Demand 111 Behavior 159 4.1 Describing Risk 160 Price Changes 112 Probability 160 The Individual Demand Curve 112 Expected Value 161 Income Changes 114 Variability 161 Normal versus Inferior Goods 115 Decision Making 163 Engel Curves 116 5.2 Preferences Toward Risk 165 Substitutes and Complements 118 Different Preferences Toward Risk 166 4.2 Income and Substitution Effects 119 5.3 Reducing Risk 170 Substitution Effect 120 Diversification 170 Income Effect 121 Insurance 171 A Special Case: The Giffen Good 122 The Value of Information 174 4.4 The Demand for Risky Assets 176 From Individual to Market Demand 124 Assets 176 Elasticity of Demand 126 Risky and Riskless Assets 177 Speculative Demand 129 Asset Returns 177 4.