INSEAD Library

Doriot: for 2014-2015 courses

Includes bibliographical references and index and glossary

Digitized

Microeconomics Contents Preface iii APPLICATION: Gas Lines APPLICATION: Minimum Wage Lawin Puerto Rico Why Supply Need Not Equal Demand 2.6 When to Use the Supply-and-Demand Model Summary Problems Math Problems CHAPTER 3 Applying the Supplyand-Demand Model 3.1 How Shapes of Demand and Supply Curves Matter 3.2 Sensitivity of Quantity Demanded to Price Price Elasticity of Demand Elasticity Along the Demand Curve Other Demand Elasticities APPLICATION: Demanding Rail Safety 3.3 Sensitivity of Quantity Supplied to Price The Elasticity of Supply Elasticity Along the Supply Curve 3.4 Long Run Versus Short Run Demand Elasticities over Time Supply Elasticities over Time 3.5 Effects of a Sales Tax Two Types of Sales Tax Equilibrium Effects of a Specific Tax APPLICATION: Discouraging Smoking Tax Incidence of a Specific Tax SOLVED PROBLEM 3.1 APPLICATION: Gasoline Taxes as a Revenue Source Equilibrium Is the Same No Matter Who Is Taxed Ad Valorem and Specific Taxes Have Similar Effects SOLVED PROBLEM 3.2 APPLICATION: Incidence of Federal Ad Valorem Taxes Summary Problems Math Problems Part Two CONSUMER THEORY CHAPTER 4 Consumer Choice 4.1 Preferences Properties of Consumer Preferences 80 81 82 41 44 44 45 47 47 48 50 51 53 53 55 58 60 61 61 63 63 64 64 65 65 65 67 69 70 72 73 74 75 77 78 79 79 CHAPTER 1 Introduction 1 1.1 Microeconomics: The Allocation of Scarce Resources 1 Trade-offs 2 Who Makes the Decisions 2 APPLICATION: Oregon Decides Which Medical Treatments to Provide 2 Prices Determine Allocations 3 APPLICATION: Tax on Fast-Food Containers 4 1.2 Models 4 APPLICATION: Income Threshold Model and China 5 Simplifications by Assumption 5 Testing Theories Positive Versus Normative 1.3 Uses of Microeconomic Models Uses of Microeconomics by Individuals and Governments APPLICATION: Putting Saturn in Orbit Summary Part One SUPPLY AND DEMAND CHAPTER 2 Supply and Demand 2.1 Demand The Demand Curve The Demand Function Summing Demand Curves APPLICATION: Aggregating the Demand for Cling Peaches 2.2 Supply The Supply Curve The Supply Function Summing Supply Curves Effects of Government Import Policies on Supply Curves SOLVED PROBLEM 2.1 14 15 16 19 21 6 7 9 9 10 13 22 22 23 26 26 27 28 2.3 Market Equilibrium 29 Using a Graph to Determine the Equilibrium 30 Using Math to Determine the Equilibrium 30 Market Forces Drive the Market to Equilibrium 31 2.4 Shocking the Equilibrium 32 Effects of a Shift in the Demand Curve 32 Effects of a Shift in the Supply Curve 34 SOLVED PROBLEM 2.2 2.5 Effects of Government Interventions Policies That Shift Supply Curves SOLVED PROBLEM 2.3 APPLICATION: American Steel Quotas Policies That Cause Demands to Differ from Supply 34 35 36 37 38 39 Preference Maps 83 SOLVED PROBLEM 4.1 86 APPLICATION: Indifference Curves Between Food and Clothing 90 Utility Utility Function Ordinal Preferences Utility and Indifference Curves Utility and Marginal Utility Utility and Marginal Rates of Substitution 4.3 Budget Constraint Slope of the Budget Constraint Purchasing Fractional Quantities Effect of a Change in Price on Consumption Effect of a Change in Income on Consumption SOLVED PROBLEM 4.2 4.4 Consumer's Constrained Choice The Consumer's Optimum Bundle SOLVED PROBLEM 4.3 APPLICATION: Substitution Effects in Canada Optimal Bundles Are on Convex Sections of Indifference Curves Buy Where More Is Better SOLVED PROBLEM 4.4 Food Stamps APPLICATION: Food Stamp Experiments Summary Problems Math Problems CHAPTER 5 Applying Consumer Theory 5.1 Deriving Demand Curves 5.2 How Income Changes Shift Demand Curves A Rise in Income Shifts the Demand Curve SOLVED PROBLEM 5.1 4.2 91 92 93 93 94 94 96 97 99 99 100 100 101 102 104 106 107 108 108 110 112 113 114 115 116 117 120 120 122 SOLVED PROBLEM 5.3 APPLICATION: Leisure-Income Choices of Textile Workers Shape of the Labor Supply Curve APPLICATION: Estimated Labor Supply Curves Income Tax Rates and Labor Supply APPLICATION: Effects of Tax Cuts Summary Problems Math Problems Part Three THEORY OF THE FIRM CHAPTER 6 Firms and Production 6.1 The Ownership and Management of Firms Ownership of Firms The Management of Firms What Owners Want 6.2 Production Production Functions Time and the Variability of Inputs 6.3 Short-Run Production: One Variable and One Fixed Input Total Product Marginal Product of Labor Average Product of Labor Graphing the Product Curves Law of Diminishing Marginal Returns APPLICATION: Malthus and Mass Starvation 148 149 151 152 152 155 155 156 157 158 160 160 161 161 162 162 163 164 164 165 166 166 169 170 Consumer Theory and Income Elasticities 124 APPLICATION: Income Elasticities of Demand for Cars 127 5.3 Effects of a Price Change 129 Income and Substitution Effects with a Normal Good 130 Income and Substitution Effects with an Inferior Good 132 APPLICATION: International Comparison of Substitution and Income Effects 135 SOLVED PROBLEM 5.2 136 5.4 Cost-of-Living Adjustments Inflation Indexes Effects of Inflation Adjustments APPLICATION: The Total CPI Bias 5.5 Deriving Labor Supply Curves Labor-Leisure Choice Income and Substitution Effects 137 137 139 143 144 144 145 6.4 Long-Run Production: Two Variable Inputs 171 Isoquants 172 APPLICATION: A Semiconductor Integrated Circuit Isoquant 176 Substituting Inputs 178 SOLVED PROBLEM 6.1 180 6.5 Returns to Scale Constant, Increasing, and Decreasing Returns to Scale SOLVED PROBLEM 6.2 APPLICATION: Returns to Scale in Manufacturing Varying Returns to Scale 6.6 Productivity and Technical Change Relative Productivity APPLICATION: German Versus British Productivity Innovations APPLICATION: Nonneutral Technical Change in Pin Manufacturing APPLICATION: Automobile Manufacturing Innovations Summary Problems Math Problems 181 181 183 183 186 187 187 188 189 190 191 192 192 193 CHAPTER 7 Costs 7.1 Measuring Costs Economic Cost APPLICATION: Opportunity Cost of Waiting Time Capital Costs APPLICATION: Swarthmore College's Cost of Capital 7.2 Short-Run Costs SR Cost Measures SR Cost Curves Production Functions and the Shapes of Cost Curves APPLICATION: SR Cost Curves of a Printing Firm Effects of Taxes on Costs SOLVED PROBLEM 7.1 SR Cost Summary 7.3 Long-Run Costs Input Choice APPLICATION: Rice Milling in Java SOLVED PROBLEM 7.2 How LR Cost Varies with Output SOLVED PROBLEM 7.3 The Shape of LR Cost Curves APPLICATION: Average Cost of Cement Firms Estimating Cost Curves Versus Introspection 7.4 Lower Costs in the Long Run LR Average Cost as the Envelope of SR Average Cost Curves APPLICATION: LR Cost Curves in Printing and Oil Pipelines APPLICATION: Choosing an Ink-Jet or a Laser Printer SR and LR Expansion Paths How Learning by Doing Lowers Costs APPLICATION: Learning by Doing in Computer Chips 7.5 Cost of Producing Multiple Goods Summary Problems Math Problems Part Four PERFECT COMPETITION CHAPTER 8 Competitive Firms and Markets 8.1 Competition Price Taking Why the Firm's Demand Curve Is Horizontal Why We Study Competition 8.2 Profit Maximization Profit APPLICATION: Breaking Even on Christmas Trees Two Steps to Maximizing Profit 195 196 196 197 197 199 199 199 201 204 207 207 209 211 212 212 218 221 221 223 224 227 228 229 229 230 232 233 235 235 237 240 240 241 8.3 Competition in the Short Run SR Competitive Profit Maximization SOLVED PROBLEM 8.1 SOLVED PROBLEM 8.2 SR Firm Supply Curve 251 251 254 257 257 SR Market Supply Curve 260 SR Competitive Equilibrium 262 8.4 Competition in the Long Run 265 LR Competitive Profit Maximization 265 LR Firm Supply Curve 265 LR Market Supply Curve 266 APPLICATION: Threat of Entry in Shipping 268 APPLICATION: Upward-Sloping LR Supply Curve of Cotton 271 APPLICATION: Slope of LR Market Supply Curves 275 LR Competitive Equilibrium 276 SOLVED PROBLEM 8.3 8.5 Zero Profit for Competitive Firms in the Long Run Zero LR Profit with Free Entry Zero LR Profit When Entry Is Limited Competitive Firms' Need to Maximize Profit Summary Problems Math Problems CHAPTER 9 Applying the Competitive Model 9.1 Consumer Welfare Measuring Consumer Welfare Using a Demand Curve APPLICATION: Consumer Surplus from Television Effect of a Price Change on Consumer Surplus SOLVED PROBLEM 9.1 9.2 Producer Welfare Measuring Producer Surplus Using a Supply Curve Using Producer Surplus SOLVED PROBLEM 9.2 9.3 Competition Maximizes Welfare Producing Less Than the Competitive Output Lowers Welfare Producing More Than the Competitive Output Lowers Welfare APPLICATION: Deadweight Loss of Christmas Presents 9.4 Policies That Shift Supply Curves Restricting the Number of Firms APPLICATION: Taxicab Medallions Excluding Certain Groups from Owning Firms 290 292 294 294 296 296 297 298 300 301 302 303 305 306 278 279 279 280 282 282 283 284 285 286 286 289 242 243 243 243 245 245 246 247 248 APPLICATION: Discriminating Against Groups Raising Entry and Exit Costs APPLICATION: Job Termination Laws 9.5 Policies That Create a Wedge Between Supply and Demand Welfare Effects of a Sales Tax Welfare Effects of a Price Floor SOLVED PROBLEM 9.3 APPLICATION: International Cost of Agricultural Subsidies Welfare Effects of a Price Ceiling SOLVED PROBLEM 9.4 9.6 Comparing Both Types of Policies: Imports Free Trade Versus a Ban on Imports Free Trade Versus a Tariff Free Trade Versus a Quota APPLICATION: Japanese Nontariff Barriers Rent Seeking Summary Problems Math Problems CHAPTER 10 General Equilibrium and Economic Welfare 10.1 General Equilibrium Feedback Between Competitive Markets APPLICATION: Sin Taxes Minimum Wages with Incomplete Coverage 307 308 310 310 310 312 314 Efficiency Equity Efficiency Versus Equity Summary Problems Math Problems Part Five MARKET POWER AND MARKET STRUCTURE CHAPTER 11 Monopoly 11.1 Monopoly Profit Maximization Marginal Revenue A Monopoly Chooses Price or Quantity Graphical Approach Mathematical Approach APPLICATION: Toying with Profits and Losses 11.2 Market Power Market Power and the Shape of the Demand Curve Lerner Index APPLICATION: Humana Hospitals Causes of Market Power APPLICATION: Airport Monopolies 11.3 Effects of a Shift of the Demand Curve 11.4 Welfare Effects of Monopoly 359 361 365 366 367 368 369 370 370 374 375 378 378 380 380 381 382 382 384 385 386 317 318 318 319 320 322 324 325 325 327 328 329 330 331 332 335 336 APPLICATION: U.S. Minimum Wage Laws and Teenagers 338 SOLVED PROBLEM 10.1 339 10.2 Trading Between Two People 341 Endowments Mutually Beneficial Trades SOLVED PROBLEM 10.2 Bargaining Ability 10.3 Competitive Exchange Competitive Equilibrium Competition Is Efficient Any Efficient Allocation Is Obtainable by Using Competition 10.4 Production and Trading Comparative Advantage SOLVED PROBLEM 10.3 Efficient Product Mix Competition APPLICATION: Auto Trade Barriers 10.5 Efficiency and Equity Role of the Government APPLICATION: Distribution of Wealth in the United States 341 342 345 345 346 346 348 349 349 350 352 354 355 357 358 358 359 Graphing the Welfare Loss 386 APPLICATION: Deadweight Loss of the U.S. Postal Service 388 SOLVED PROBLEM 11.1 390 Welfare Effects of Ad Valorem Versus Specific Taxes 391 11.5 Cost Advantages That Create Monopolies Sources of Cost Advantages Natural Monopoly SOLVED PROBLEM 11.2 APPLICATION: Electric Power Utilities 11.6 Government Actions That Create Monopolies Barriers to Entry Patents APPLICATION: A Drug Patent 11.7 Government Actions That Reduce Market Power Regulating Monopolies SOLVED PROBLEM 11.3 Increasing Competition APPLICATION: Ending the Monopoly in Telephone Service Dominant Firm and Competitive Fringe Summary 393 393 394 396 396 397 397 398 399 403 403 405 409 409 410 412 Problems Math Problems CHAPTER 12 Oligopoly and Monopolistic Competition 12.1 Market Structures 412 413 414 415 Summary Problems Math Problems CHAPTER 13 Pricing 457 458 459 460 461 462 464 467 468 468 469 470 470 470 472 473 474 475 475 475 476 477 480 480 482 483 485 486 486 488 489 491 491 493 494 494 495 496 498 499 499 499 13.1 Price Setting Bertrand Equilibrium with Identical Products 12.2 Game Theory 417 A Bertrand Equilibrium with Differentiated Single-Period, Two-Firm, QuantityProducts Setting Game 417 SOLVED PROBLEM 13.1 Why Firms Do Not Cooperate in a Differentiating Products Single-Period Game 419 APPLICATION: Toothbrushes Collusion in Repeated Games 420 APPLICATION: Designer Glasses APPLICATION: Oligopoly Competition APPLICATION: Welfare Gain from New among Governments 421 Cereals 12.3 Cooperative Oligopoly Models 422 13.2 Why and How Firms Price Discriminate Laws Against Cartels 422 Why Price Discrimination Pays APPLICATION: Tacit Collusion in Long-Distance APPLICATION: Disneyland Prices Service 423 Who Can Price Discriminate Why Cartels Form 424 Preventing Resales Why Cartels Fail 426 Not All Price Differences Are Price Maintaining Cartels 426 Discrimination APPLICATION: Bad Bakers 427 Types of Price Discrimination APPLICATION: A Government-Created Cartel 428 13.3 Perfect Price Discrimination How a Firm Perfectly Price Discriminates Entry and Cartel Success 429 Perfect Price Discrimination Is Efficient APPLICATION: Bail Bonds 430 but Hurts Consumers Mergers 430 APPLICATION: Tagamet Revisited APPLICATION: Airline Mergers 430 SOLVED PROBLEM 13.2 12.4 Cournot Model of Noncooperative Transaction Costs and Perfect Price Oligopoly 431 Discrimination A Cournot Model of an Airline Market 431 13.4 Quantity Discrimination Comparing the Cournot and Cartel APPLICATION: Block Pricing by Water Models 436 Utilities The Cournot Equilibrium Varies with the Number of Firms APPLICATION: Appliances 438 440 12.5 Stackelberg Model of Noncooperative Behavior Stackelberg Game Tree Stackelberg Graphical Model Why Moving Sequentially Is Essential Strategic Trade Policy APPLICATION: Airbus and Boeing SOLVED PROBLEM 12.1 12.6 Comparison of Collusive, Cournot, Stackelberg, and Competitive Equilibria 12.7 Monopolistic Competition Monopolistically Competitive Equilibrium Fixed Costs and the Number of Firms SOLVED PROBLEM 12.2 APPLICATION: Entry and Airline Prices 440 441 443 443 445 449 450 13.5 Multimarket Price Discrimination Multimarket Price Discrimination with Two Groups SOLVED PROBLEM 13.3 APPLICATION: Generics and Brand-Name Loyalty Identifying Groups APPLICATION: Getting Consumers to Identify Themselves Welfare Effects of Multimarket Price Discrimination APPLICATION: Taking Women to the Cleaners 13.6 Two-Part Tariffs A Two-Part Tariff with Identical Consumers A Two-Part Tariff with Nonidentical Consumers APPLICATION: Warehouse Stores 13.7 Tie-in Sales Requirement Tie-in Sales APPLICATION: IBM 451 452 453 454 456 456 Bundling Summary Problems Math Problems CHAPTER 14 Strategy 14.1 Preventing Entry: Simultaneous Decisions Room for Two Firms Room for Only One Firm Summary of the Simultaneous Decision Entry Game SOLVED PROBLEM 14.1 14.2 Preventing Entry: Sequential Decisions To Act or Not to Act? APPLICATION: Government Deterrence Commitment and Entry Prevention SOLVED PROBLEM 14.2 Commitment and Fixed Costs SOLVED PROBLEM 14.3 14.3 Creating and Using Cost Advantages Lowering Marginal Cost but Raising Total Cost Learning by Doing 500 502 503 504 505 506 507 508 509 509 510 511 513 514 518 518 524 525 525 527 Long-Run Factor Demand Factor-Market Demand Competitive Factor-Market Equilibrium 15.2 Effect of Monopolies on Factor Markets Market Structure and Factor Demands A Model of Market Power in Input and Output Markets APPLICATION: Record Prices APPLICATION: Union Monopoly Power SOLVED PROBLEM 15.2 15.3 Monopsony Monopsony Profit Maximization APPLICATION: Monopsony Wage Setting Welfare Effects of Monopsony SOLVED PROBLEM 15.3 Monopsony Price Discrimination APPLICATION: Monopsony Price Discrimination 15.4 Vertical Integration Stages of Production Degree of Vertical Integration APPLICATION: Outsourcing Produce or Buy APPLICATION: Vertical Integration of Auto Manufacturers APPLICATION: Aluminum APPLICATION: Cutting Off Oxygen Summary Problems Math Problems CHAPTER 16 Interest Rates, Investments, and Capital Markets 16.1 Comparing Money Today to Money in the Future Interest Rates APPLICATION: Usury Interest Rates Connect the Present and Future APPLICATION: Power of Compounding Stream of Payments SOLVED PROBLEM 16.1 APPLICATION: Saving for Retirement Inflation and Discounting 553 554 557 557 557 558 561 563 565 566 566 569 569 570 572 572 573 573 574 575 576 576 578 580 581 581 582 583 584 584 585 588 589 590 592 593 594 Raising Rivals' Costs 527 APPLICATION: Buttering Up Legislatures 528 APPLICATION: Preventing Customers from Switching 530 Raising All Firms' Costs 530 Advantages and Disadvantages to Moving First 531 Summary on Preventing Entry 532 APPLICATION: Evidence on Strategic Entry Deterrence 532 14.4 Advertising Promotional Activities Monopoly Advertising APPLICATION: Smoking Gun Evidence? APPLICATION: O.J. Trial Effect Strategic Advertising APPLICATION: Pink Toothbrush APPLICATION: Secret Ingredients Summary Problems Math Problems Part Six FACTOR MARKETS CHAPTER 15 Factor Markets and Vertical Integration 15.1 Competitive Factor Market Short-Run Factor Demand of a Firm SOLVED PROBLEM 15.1 APPLICATION: Thread Mill 545 546 546 551 551 534 534 534 535 537 539 539 539 542 542 544 APPLICATION: Winning the Lottery 596 16.2 Choices over Time 597 APPLICATION: Comparing Two Contracts 597 Investing SOLVED PROBLEM 16.2 SOLVED PROBLEM 16.3 Rate of Return on Bonds 598 600 601 601 Durability 602 APPLICATION: Durability of Phone Poles 602 SOLVED PROBLEM 16.4 Human Capital 16.3 Exhaustible Resources When to Sell an Exhaustible Resource Price of a Scarce Exhaustible Resource APPLICATION: Redwood Trees Why Price May Be Constant or Fall 604 605 607 607 608 611 613 APPLICATION: Loans, Defaults, and Usury Laws 651 Summary Problems Math Problems CHAPTER 18 Externalities, Commons, and Public Goods 18.1 Externalities APPLICATION: Michael Jordan's Positive Externalities 18.2 The Inefficiency of Competition with Externalities Supply-and-Demand Analysis SOLVED PROBLEM 18.1 APPLICATION: Taxes on Fuels Cost-Benefit Analysis APPLICATION: Emissions Standard for Ozone 18.3 Market Structure and Externalities Monopoly and Externalities Monopoly Versus Competitive Welfare with Externalities SOLVED PROBLEM 18.2 Taxing Externalities in Noncompetitive Markets 18.4 Allocating Property Rights to Reduce Externalities Coase Theorem Markets for Pollution APPLICATION: Sulfur Dioxide Market 18.5 Common Property Overuse of Common Property APPLICATION: Extensive Overfishing Solving the Commons Problem APPLICATION: For Whom the Bridge Tolls APPLICATION: Claiming Lobster Fisheries 18.6 Public Goods Types of Goods Markets for Public Goods Reducing Free Riding APPLICATION: Free Riding on Water Valuing Public Goods Summary Problems Math Problems CHAPTER 19 Asymmetric Information 652 653 654 655 656 657 657 658 663 663 664 665 669 669 669 671 671 672 672 675 676 677 677 679 680 680 681 682 682 683 686 687 688 690 690 691 692 16.4 Capital Markets, Interest Rates, and Investments 614 Increased Savings Encourages More Investment 615 Increased Government Demand Discourages Private Investment 616 APPLICATION: Taking from Future Generations 617 Summary 618 Problems 618 Math Problems 618 Part Seven UNCERTAINTY, MISSING MARKETS, AND LIMITED 620 621 621 623 624 624 626 627 628 630 631 631 633 CHAPTER 17 Uncertainty 17.1 Degree of Risk Probability Expected Value SOLVED PROBLEM 17.1 Variance and Standard Deviation 17.2 Decisionmaking under Uncertainty Expected Utility Risk Averse SOLVED PROBLEM 17.2 Risk Neutral Risk Preferring APPLICATION: Gambling 17.3 Avoiding Risk 637 Just Say No 637 Obtain Information 637 APPLICATION: Bond Ratings 638 Diversify 638 APPLICATION: Checking Correlations 640 APPLICATION: Laws Limiting Diversification 641 Insure SOLVED PROBLEM 17.3 APPLICATION: Flight Insurance APPLICATION: Natural Disasters 17.4 Investing under Uncertainty Investing Depends on Attitudes Toward Risk APPLICATION: Premium for a Riskier Investment Investing with Uncertainty and Discounting Investing with Altered Probabilities 641 642 644 645 646 646 648 649 649 19.1 Problems Due to Asymmetric Information 693 19.2 Responses to Adverse Selection 694 Controlling Opportunistic Behavior Through Universal Coverage 694 Equalizing Information 695 APPLICATION: Risky Occupations and Hobbies 696 19.3 How Ignorance about Quality Drives Out High-Quality Goods Lemons Market with Fixed Quality SOLVED PROBLEM 19.1 Lemons Market with Variable Quality Limiting Lemons APPLICATION: Recycling Lemons APPLICATION: Wholesale Market for Cherries 19.4 Price Discrimination Due to False Beliefs about Quality APPLICATION: Multiple Brand Names 19.5 Market Power from Price Ignorance Tourist-Trap Model SOLVED PROBLEM 19.2 Advertising and Prices APPLICATION: Advertising Lowers Prices 19.6 Problems Arising from Ignorance When Hiring Information about Employment Risks Cheap Talk Education as a Signal SOLVED PROBLEM 19.3 APPLICATION: Wages Rise with Education Screening by Employers Summary Problems Math Problems Contingent Contract Rewards Linked 697 697 700 701 702 702 706 706 707 708 709 711 711 712 712 712 714 715 717 720 722 723 724 725 to a Firm's Success 749 APPLICATION: Australian Compensation 750 20.5 Monitoring Bonding SOLVED PROBLEM 20.3 Deferred Payments Efficiency Wages APPLICATION: Deferred Payments Versus Efficiency Wages in Fast-Food Restaurants After-the-Fact Monitoring APPLICATION: Abusing Leased Cars APPLICATION: Savings and Loans Moral Hazards 750 752 753 754 755 757 758 759 760 20.6 Checks on Principals 761 APPLICATION: Performance Termination Contracts 762 20.7 Contract Choice Summary Problems Math Problems APPENDIXES APPENDIX 2A: Regressions APPENDIX 3A: Effects of a Specific Tax on Equilibrium APPENDIX 4A: Utility and Indifference Curves APPENDIX 4B: Maximizing Utility APPENDIX 5A: Labor-Leisure Model APPENDIX 5B: The Slutsky Equation APPENDIX 6A: Cobb-Douglas Production Function APPENDIX 7A: Norwegian Printing Firm's SR Cost Curves APPENDIX 7B: Minimizing Cost APPENDIX 8A: A Competitive Firm's Demand Curve APPENDIX 8B: Profit Maximization APPENDIX12A: Cournot Equilibrium APPENDIX 12B: Stackelberg Equilibrium APPENDIX 13A: Perfect Price Discrimination APPENDIX 13B: Multimarket Price Discrimination APPENDIX 14A: Profit-Maximizing Advertising and Production APPENDIX 15A: Factor Demands APPENDIX 15B: Monopsony APPENDIX 18A: Welfare Effects of Pollution in a Competitive Market Answers to Selected Problems Definitions References Credits Index A-1 A-3 A-4 A-6 A-8 A-9 A-10 A-11 A-12 A-14 A-16 A-17 A-20 A-20 A-21 A-22 A-23 A-24 A-25 A-27 A-35 A-41 A-48 A-49 765 766 767 768 CHAPTER 20 Contracts and Moral Hazards 726 20.1 Principal-Agent Problem 727 A Model 727 Types of Contracts 728 Efficiency 729 20.2 Production Efficiency 730 Efficient Contract 730 Full Information 731 SOLVED PROBLEM 20.1 736 Asymmetric Information 736 APPLICATION: Contracts and Productivity in Agriculture 738 20.3 Trade-off Between Efficiency in Production and in Risk Bearing Contracts and Efficiency Choosing the Best Contract APPLICATION: Medical Partnerships SOLVED PROBLEM 20.2 739 739 742 743 744 20.4 Payments Linked to Production or Profit 746 Piece-Rate Hire Contracts 747 APPLICATION: Pleased to Be Paid by the Piece 747