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Microeconomic theory
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Microeconomic
Basic Principles and Extensions
Fourth Edition
Walter Nicholson
Microeconomic Theory
Basic Principles and Extensions
Fourth Edition
Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn
Microeconomic Theory
Basic Principles and Extensions
Fourth Edition
Walter Nicholson
Amherst College
The Dryden Press
Chicago Fort Worth San Francisco Philadelphia
Montreal Toronto London Sydney Tokyo
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Text Type: 10/12 Sabon
Library o f Congress Cataloging-in-Publicadon D ata
Nicholson, Walter.
M icroeconom ic theory.
Includes bibliographies and index.
1. M icroeconom ics. 1. Title.
H B 172.N 49 1989 3 3 8 .5 8 8 -25663
ISBN 0 -0 3 -0 2 1 6 6 9 -9
Printed in the United States of America
9 0 -0 3 9 -9 8 7 6 5 4 3 2
Copyright © 1989, 1985, 1 9 7 8 ,1 9 7 2 by The Dryden Press, a division of H olt,
Rinehart and W inston, Inc.
All rights reserved. N o part of this publication may be reproduced or transmitted in
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To Emily H. Walker and her grandchildren, Kate, David, Tory, and Paul.
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Preface
As in prior editions, the primary goal of this fourth edition of Microeconomic
Theory: Basic Principles and Extensions is to provide a comprehensive and
intuitive approach to microeconomic theory using elementary calculus as an
analytical tool. This edition, however, represents a major revision and, I hope,
a substantial improvement on the previous versions. The primary change in
this edition has been a reorganization in the structure of the book:
• Efficiency concepts and their relationships to competitive markets are
now covered much earlier in the text. This reorganization provides a
complete development of the model of general competitive equilibrium
early in the text and thereby helps to sharpen and clarify the discussions
of market imperfections that follow. This new structure also seems to
follow current teaching practices better than the previous approach,
which left general equilibrium ideas until the book’s final chapters.
Four other major changes in this edition serve to update the book and make it
more suitable for students’ needs:
• A greater emphasis on topics from the theory of information and uncertainty including new chapters on Information and Competitive Equilibrium (Chapter 17) and Strategy and Game Theory (Chapter 20);
• Inclusion of a number of numerical and algebraic examples that illustrate
in a concrete way the theoretical concepts being introduced;
• Major revisions to the problems in the book together with the inclusion
of new “Extension” problems that ask the student to pursue a particular
theoretical point in somewhat greater detail than is possible within the
body of the text; and
• Availability of an innovative student workbook (written by David Stapleton of Dartmouth College) that offers additional insights into the material being covered. Workbook problems are of varying levels of difficulty
and include many that lead the student through the solutions in a stepby-step manner.
This edition also incorporates many minor improvements in presentation
throughout. The most important of these are the inclusion of more results from
duality theory— a topic first approached seriously in the third edition, and a
greater attention to general equilibrium results so that students can visualize
what is happening “elsewhere” in the economy. Despite this somewhat sharper
theoretical focus, the goal in this revision has been to continue to provide a
generally intuitive approach to most topics. By proceeding in this way, I hope
that the book will continue to be accessible to any student with a mathematical
bent who has had some introductory economics.
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ACKNOWLEDGMENTS
Although the 25 chapters in this book represent an increase of four over the
number in the prior edition, only two of these are truly new. The remaining
expansion represents an attempt to divide some of the more difficult material
in the text into more nearly bite-sized chapters and to follow an organizational
scheme that reflects most course outlines. Still, covering all of the chapters in
the book in a single term of 1 2 -1 4 weeks may be too rushed for many users.
For those wishing to stress only core concepts, I would recommend a focus
on Chapters 3 - 7 (Demand), Chapters 10—12 (Costs and Supply), Chapters
1 4 -1 6 (Perfect Competition), and Chapters 18—19 (Imperfect Competition).
Other topics can then be added to these basic ones to meet the needs of individual instructors.
As with previous editions, a Solutions Manual is provided to instructors
with complete, worked-out answers to the text problems. Brief descriptions
overview the nature of the problems in each chapter, and each individual problem has its own statement noting its significance and level of difficulty.
Detailed reviews by the following people were a great help to me in preparing
this fourth edition: Douglas K. Agbetsiafa, Indiana University at South Bend;
Keith Brown, Purdue University; Tran Dung, Wright State University; Belton
Fleisher, Ohio State University; Carroll B. Foster, University o f California,
Lajolla; Christopher Grandy, Barnard College, Columbia University; Kala
Krishna, Harvard University; Anthony Marino, University o f Southern California; Pat McCarthy, Purdue University; Jack Meyer, Michigan State University; Charles Plourde, York University; Charles F. Revier, Colorado State University; Joaquim Silvestre, University o f California, Davis; Susan Vroman,
Georgetoum University; and Meng-Hua Ye, George Washington University. I
have tried to incorporate most of the suggestions since they invariably served
to make some of my muddled thoughts clearer. I have also benefited greatly
from conversations about the book with Bernie Saffran (Swarthmore), David
Stapleton (Dartmouth), and Frank Westhoff and Beth Yarbrough (Amherst).
Many other friends and colleagues (and even competing authors) have made
helpful suggestions about the book, and for these I am also grateful. The book
remains my own production, however, and none of these individuals are responsible for the errors I have been too bullheaded to change.
Happi Cramer of Word-for-Word, Inc., created most of this edition out of
my illegible scrawl, and she deserves great credit for keeping things organized.
At The Dryden Press, Liz Widdicombe provided her usual careful oversight for
this edition and offered the occasional prod to keep things on track. Joanne
Smith greatly helped with many facets of the text’s development. Holly Crawford and Teresa Chartos organized the production of the book with remarkable good humor given the complexities involved. Pat Lewis caught several
errors at the copyediting stage. I appreciate all of this help— producing the
book would have been impossible without it. Once again my wife (Susan) and
children (Kate, David, Tory, and Paul) suffered through the final stages of getSố hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn
ting the book out. Although they are old hands at this sort of thing, they
surely be starting to wonder when it will all end!
Walter Nicholson
Amherst, Massachusetts
December 1988
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About the Author
Walter Nicholson is professor of economics at Amherst College. He received a
B. A. degree in mathematics from Williams College and a Ph.D. in economics
from the Massachusetts Institute of Technology. Professor Nicholson’s primary
research interests focus on the econometric analysis of labor market policies.
He has published many articles on unemployment, social insurance and welfare policy, and the domestic impact of international trade. He is currently
chair of the Economics Committee for the Graduate Record Examination in
Economics and is also the author of Intermediate Microeconomics and Its Application, fourth edition (The Dryden Press, 1987). Professor Nicholson lives
in Amherst, Massachusetts. He and his wife, Susan, are beginning the process
of paying college tuition bills for their four children.
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Contents
P A R T I I n t r o d u c t i o n ............................................................................. 1
1 ECONOMIC MODELS .......................................................................................... 3
Theoretical Models .................................................................................................... 3
Verification of Economic Models .......................................................................... 4
General Features of Economic Models ................................................................. 6
Development of the Economic Theory of Value ................................................ 9
Outline of the Book ............................................................................................... 20
Summary ............................................................1 ................................................... 21
Application Economic Models and the Limits-to-Growth Debate ....... 22
Suggested Readings ................................................................................................. 24
2 THE MATHEMATICS OF OPTIMIZATION .............................................. 27
Maximization of a Function of One Variable ...................................................28
Functions of Several Variables ...............................................................................34
Maximization of Functions of Several Variables .......................................... ...37
Implicit Functions ......................................................................................................40
The Envelope Theorem .............................................................................................42
Constrained Maximization ................................................................................. ...46
Envelope Theorem in Constrained-Maximum Problems ............................ ...54
Maximization without Calculus ........................................................................ ...54
Summary ......................................................................................................................56
Application Optimization in the Sciences: Snell’s Law ............................ 57
Suggested Readings, Problems ............................................................................ 59
Appendix to Chapter 2 Second-Order Conditions .......................................63
Functions of a Single Independent Variable .......................................................63
Functions of Two Independent Variables ............................................................65
Functions of Two Independent Variables Subject to a Linear
Constraint ................................................................................................................. ...67
Suggested Readings ................................................................................................. ...70
P A R T II C h o i c e a n d D e m a n d .................................................... 72
3 PREFERENCES AND UTILITY ......................................................................... 75
Axioms of Rational Choice .................................................................................. 76
Utility .......................................................................................................................... 77
Trades and Substitution ......................................................................................... 80
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An Alternative Derivation: Marginal Utility ................................................... 88
Examples of Utility Functions .............................................................................. 91
Summary .................................................................................................................. 95
Application Transitivity ..................................................................................... 96
Suggested Readings, Problems ............................................................................ 97
Extensions Odd Preferences .......................................................................... 100
4 UTILITY MAXIMIZATION AND CHOICE .............................................. 103
An Initial Survey .....................................................................................................104
The Two-Good Case: A Graphic Analysis ..................................................... ..105
The «-Goqd Case ................................................................................................. ..109
Indirect Utility Function .......................................................................................116
Dual to the Utility-Maximum Problem .......................................................... ..117
Summary ...................................................................................................................121
Application The Lump-Sum Principle ......................................................... 121
Suggested Readings, Problems .......................................................................... 124
Extensions Useful Forms o f Utility Functions ........................................... 128
5 EFFECTS OF CHANGES IN INCOME OR IN A GOOD’S PRICE ... 131
Homogeneity of Demand Functions ..................................................................131
Changes in Income ............................................................................................... ..132
Changes in a Good’s Price ................................................................................. ..136
The Individual’s Demand Curve .........................................................................141
A Mathematical Development of Response to Price Changes ....................145
Revealed Preference and the Substitution Effect .............................................149
Consumer Surplus ................................................................................................. ..152
Summary ................................................................................................................. ..156
Application Substitution Effects and the Consumer Price Index ......... 157
Suggested Readings, Problems ........................................................................... 158
Extensions Shephard’s Lemma and Roy’s Identity .................................. 161
6 DEMAND RELATIONSHIPS BETWEEN GOODS .................................. 163
The Two-Good Case ............................................................................................ 163
Relations among Many Goods ........................................................................... 164
Net Substitutes and Complements .................................................................... 167
Composite Commodities ...................................................................................... 168
Attributes of Goods and Implicit Prices ......................................................... 170
Summary .................................................................................................................. 175
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Application Houses and Their Characteristics .......................................... 176
Suggested Readings, Problems .......................................................................... 177
Extensions Separable Utility .......................................................................... 180
7 MARKET DEMAND AND ELASTICITY ................................................... 183
Market Demand Curves ...................................................................................... 183
Elasticity .................................................................................................................. 187
Relationships among Elasticities ...................................................................... 191
Types of Demand Curves .................................................................................... 193
Summary ................................................................................................................ 197
Application Empirical Studies of Market Demand .................................. 198
Suggested Readings, Problems .......................................................................... 203
Extensions Theoretical Issues in Market Demand Analysis .................. 207
PART III Additional Applications of the Theory
of Choice 2io
8 EXCHANGE .......................................................................................................... 213
The Gains from Voluntary Trade .......................................................................213
Edgeworth Box Diagram .......................................................................................216
Exchange with Initial Endowments and the Distribution of Gains from
Trade ..........................................................................................................................222
Viable Bargains and the Core ..............................................................................224
Efficient Trading with Equilibrium Prices .........................................................226
Summary ...................................................................................................................231
Application Black Markets and Voluntary Exchange ............................. 231
Suggested Readings, Problems .......................................................................... 233
9 CHOICE IN UNCERTAIN SITUATIONS .................................................... 237
Probability and Expected Value ...........................................................................238
Fair Games and the Expected Utility Hypothesis ...........................................240
The Von Neumann-Morgenstern Theorem ......................................................242
Risk Aversion .......................................................................................................... ..245
Measuring Risk Aversion ................................................................................... ..248
The State-Preference Approach to Choice under Uncertainty ....................250
The Economics of Information .............................................................................254
Summary ................................................................................................................. ..258
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Application The Value of Information ......................................................... 258
Suggested Readings, Problems .......................................................................... 261
Extensions Mean-Variance Analysis o f Choices Involving Risk ........... 264
P A R T I V P r o d u c t i o n a n d S u p p ly ......................................... 268
10 PRODUCTION FUNCTIONS .......................................................................... 271
Variations in One Input ...................................................................................... ..272
Isoquant Maps and the Rate of Technical Substitution .............................. ..278
Returns to Scale .......................................................................................................282
The Elasticity of Substitution ............................................................................ ..285
Some Common Production Functions ............................................................ ..287
Technical Progress ................................................................................................. ..293
Summary ...................................................................................................................298
Application Production Functions ................................................................ 299
Suggested Readings, Problems .......................................................................... 301
Extensions Many Input Production Functions ........................................... 304
11 COSTS OF PRODUCTION .............................................................................. 307
Definitions of Costs ................................................................................................3 07
Cost-Minimizing Input Choices ...........................................................................310
Cost Functions ................................................................... :....................................317
Changes in Input Prices .........................................................................................321
Short-Run, Long-Run Distinction ......................................................................327
Summary ................................................................................................................. ..340
Application The Measurement of Long-Run Costs .................................. 341
Suggested Readings, Problems ........................................................................... 344
Extensions Input Substitutability .................................................................. 348
12 PROFIT MAXIMIZATION AND SUPPLY .................................................. 351
The Nature and Behavior of Firms .................................................................... 351
Profit Maximization .............................................................................................. 352
Marginal Revenue .................................................................................................. 356
Short-Run Supply by a Price-Taking Firm ...................................................... 359
Profit Maximization and Input Demand ......................................................... 363
The Controversy over the Profit-Maximization Hypothesis ...................... 367
Summary .................................................................................................................. 368
Application Markup Pricing ........................................................................... 369
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Suggested Readings, Problems .......................................................................... 370
Extensions Profit Functions ............................................................................ 373
13 ALTERNATIVE MODELS OF THE FIRM ................................................. 375
Revenue Maximization ........................................................................................375
Contracts within Firms ..........................................................................................378
Organization of Firms ............................................................................................379
Contracts with Workers ...................................................................................... ..381
Contracts with Managers .....................................................................................387
Nonprofit Organizations .................................................................................... ..392
Summary ................................................................................................................ ..393
Application The Market for Firms ................................................................ 394
Suggested Readings, Problems .......................................................................... 397
P A R T V P e r f e c t C o m p e t i t i o n ................................................... 402
14 PARTIAL EQUILIBRIUM MODELS OF COMPETITIVE PRICE
DETERMINATION ............................................................................................ 405
Timing of the Supply Response ........................................................................ 405
Pricing in the Very Short Run ............................................................................ 405
Short-Run Price Determination ........................................................................ 407
Shifts in Supply and Demand Curves: A Graphic Analysis ....................... 412
Mathematical Model of Supply and Demand ................................................ 416
Tax Incidence Analysis ........................................................................................ 418
The Long Run ........................................................................................................
Long-Run Equilibrium: Constant-Cost Case ................................................ 422
Shape of the Long-Run Supply Curve .............................................................. 424
Long-Run Elasticity of Supply ........................................................................... 426
Comparative Statics Analysis of Long-Run Equilibrium ........................... 428
Summary ................................................................................................................. 431
Application Price Controls and Shortages .................................................. 432
Suggested Readings, Problems ........................................................................... 435
15 GENERAL COMPETITIVE EQUILIBRIUM .............................................. 439
Perfectly Competitive Price System .....................................................................440
An Illustration of General Equilibrium ..............................................................441
A Simple Graphical Model of General Equilibrium ......................................442
General Equilibrium Modeling and the Corn Laws Debate ..................... ..454
Existence of General Equilibrium Prices ......................................................... ..455
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