Microeconomics

INTERNATIONAL /

EDITION

□

Microeconomics

EIGHTH EDITION

Robert S. Pindyck • Daniel L. Rubinfeld

ALWAYS LEARNING PEARSON

LIST OF EXAMPLES

1. 1 The Market for Sweeteners 10

1.2 A Bicycle Is a Bicycle. Or Is It? 11

1.3 The Price of Eggs and the Price of a College

Education 13

1.4 The Minimum Wage 14

2.1 The Price of Eggs and the Price of a College

Education Revisited 28

2.2 W age Inequality in the United States 29

2.3 The Long-Run Behavior of Natural Resources

Prices 29

2.4 The Effects of 9 /1 1 on the Supply and Dem and for

New York City Office Space 31

2.5 The M arket for W heat 37

2.6 The Demand for G asoline and Autom obiles 43

2.7 The W eather in Brazil and the Price of Coffee in

New York 46

2.8 The Behavior of Copper Prices 52

2.9 Upheaval in the World Oil Market 54

2.10 Price Controls and Natural Gas Shortages 59

3.1 Designing New Automobiles (I) 77

3.2 C an M oney Buy Happiness? 81

3.3 Designing New Autom obiles (II) 88

3.4 Consum er Choice of Health Care 90

3.5 A College Trust Fund 92

3.6 Revealed Preference for Recreation 94

3.7 M arginal Utility and Happiness 97

3.8 The Bias in the CPI 105

4.1 Consum er Expenditures in the United States 117

4.2 The Effects of a Gasoline Tax 122

4.3 The A ggregate Demand for W heat 128

4.4 The Demand for H ousing 129

4.5 The Long-Run Demand for G asoline 131

4.6 The Value of Clean Air 134

4.7 Facebook 138

4.8 The Demand for Ready-to-Eat Cereal 142

5.1 Deterring Crim e 164

5.2 Business Executives and the Choice of Risk 169

5.3 The Value of Title Insurance When Buying a

House 173

5.4 The Value of Inform ation in an Online C onsum er

Electronics Market 175

5.5 Doctors, Patients, and the Value of Inform ation 1

5.6 Investing in the Stock M arket 183

5.7 The Housing Price Bubble (I) 186

5.8 The Housing Price Bubble (II) 188

5.9 Selling a House 192

5.10 New York City Taxicab Drivers 196

6.1 A Production Function for Health Care 211

6.2 M althus and the Food Crisis 212

6.3 Labor Productivity and the Standard of Living 2

6.4 A Production Function for W heat 221

6.5 Returns to Scale in the Carpet Industry 225

7.1 Choosing the Location for a New Law S<chcK)l

Building 232

7.2 Sunk, Fixed, and Variable Costs: C om puters,

Softw are, and Pizzas 235

7.3 The Short-Run Cost of Alum inum Smellting 240

7.4 The Effect of Effluent Fees on Input Cho>ices 247

7.5 Reducing the Use of Energy 251

7.6 Econom ies of Scope in the Trucking Ind ustry 26(

7.7 The Learning Curve in Practice 264

7.8 C ost Functions for Electric Power 268

8.1 Condom inium s versus Cooperatives in

New York City 283

8.2 The Short-Run Output Decision o f an A.luminum

Sm elting Plant 290

8.3 Som e Cost Considerations for Managers> 291

8.4 TheShort-RunPrixiuctionofPetroleum P'roducts ;

8.5 The Short-Run W orld Supply of C o p p er 297

8.6 Constant-, Increasing-, and D ecreasing-C ost

Industries: Coffee, Oil, and A utom obile« 310

8.7 The Supply of Taxicabs in New York 3 1 2

8.8 The Long-Run Supply of Housing 313

9.1 Price Controls and Natural Gas Shortag'es 322

9.2 The Market for Human Kidneys 325

9.3 Airline Regulation 330

9.4 Supporting the Price of W heat 335

9.5 Whv C an't 1 Find a Taxi? 338

LIST OF EXAMPLES

9.6 The Sugar Quota 3-42

9.7 A Tax :>n Gasoline 349

10.1 Aslra-Merck Prices Prilosec 364

10.2 Elasticties of Demand for Stift Drinks 370

10.3 M arkio Pricing; Supermarkets to Designer jeans 372

10.4 The Prcin g of Videos 374

10.5 M onofsony Power in U.S. M anufacturing 388

10.6 A Phone Call about Prices 392

10.7 Go Diiectly to Jail. Don't Pass Go. 393

10.8 The United States and the European Union versus

MicroH)ft 394

11.1 The E on om ics of Coupons and Rebates 408

11.2 Airlim Fares 409

11.3 How to Price a Best-Selling Novel 413

11.4 Pricini; Cellular Phone Service

11.5 The Ccmplete Dinner versus a la Carte: A

Restaurant's Pricing Problem 427

11.6 A dverising in Practice 432

12.1 Monopolistic Com petition in the Markets for Colas

and Coffee 455

12.2 A Pricn g Problem for Procter & G am ble 467

12.3 P ro cte'& Gam ble in a Prisoners'D ilem m a 471

12.4 Price leadership and Price Rigidity in Commercial

Bankirg 475

12.5 The Prces of C ollege Textbooks 476

12.6 The Cirtelization o f Intercollegiate Athletics 480

12.7 The M lk Cartel 481

13.1 Acquinng a Com pany 490

13.2 O lig o p listic Cooperation in the W ater Meter

In d u sfy 501

13.3 Com pttition and Collusion in the Airline

In d u sfy 501

13.4 W al-M irtStores'Preem ptivelnvestm entStrategy 509

13.5 DuPort Deters Entry in the Titanium Dioxide

In dusfv 514

13.6 D iapeiW ars 515

13.7 A uctioiing Legal Services 522

13.8 Intem<t Auctions 522

14.1 T h e D<mand for Jet Fuel 536

14.2 Labor Supply for One- and Two-Earner

H ouseholds 541

14.3 Pay in the M ilitary 545

14.4 Monopsony I’ower in the Market for Baseball

Players 548

14.5 Teenage Labor M arkets and the Minimum W age 549

14.6 The Decline of Private-Sector Unionism 553

14.7 W age Inequality Revisited 554

15.1 The Value of Lost Earnings 563

15.2 The Yields on Corporate Bonds 567

15.3 The Value of a New York City Taxi M edallion 573

15.4 Capital Investm ent in the Disposable Diaper

Industry 576

15.5 Choosing an Air C onditioner and a New Car 579

15.5 Should You G o to Business School? 582

15.6 How Depletable are Depletable Resources? 587

16.1 The Global M arket for Ethanol 598

16.2 "C ontagion" across Stock M arkets around the

W orld 600

16.3 Trading Tasks and iPod Production 621

16.4 The Costs and Benefits of Special Protection 622

16.5 Inefficiency in the Health Care System 626

17.1 M edicare 636

17.2 Lemons in M ajor League Baseball 637

17.3 W orking into the Night 642

17.4 Reducing Moral Hazard: W arranties of Animal

Health 645

17.5 CEO Salaries 647

17.6 Managers of Nonprofit Hospitals as Agents 649

17.7 Efficiencv W ages at Ford M otor Com pany 656

18.1 The Costs and Benefits of Sulfur Dioxide

Emissions 665

18.2 Reducing Sulfur Dioxide Em issions in Beijing 672

18.3 Emissions Trading and Clean Air 673

18.4 Regulating Municipal Solid W astes 678

18.5 Global W arm ing 682

18.6 The Coase Theorem at W ork 687

18.7 Crawfish Fishing in Louisiana 689

18.8 The Demand for Clean Air 693

A. 1 The Demand for Coal 706

MICROECONOMICS

THE PEARSON SERIES IN ECONOMICS

Abel/Bernanke/Croushore

Macroeconomics*

Bade/Parkin

Foundations o f 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/

Vintng/Weimer

Cosi-Benefit Analysis

Boyer

Principles o f Transportation

Economics

Branson

Macroeconomic Theory and

Policy

Brock/Adams

The Structure of American

Industry

Bruce

Public Finance and the

American Economy

Carlton/Perloff

Modern Industr/a/

Organization

Case/Fair/Oster

Princ/pies of Economics*

Caves/Frankel/Jones

World Trade and Payments:

An Introduction

Chapman

Environmental Economics:

Theory. Application, and

Policy

Cooter/Ulen

Law & Economics

Downs

An Ecdnomic Theoi^.ol^

Democracy .

Ehrenberg/Smith *

Modem Labor Economics

Ekelund/Ressler/ToKifon

Economics*

Farnham

Economics for Managers

Folland/Goodman/Stano

The Economics of Hea/th and

Hea/th Care

Fort

Sports Economics

Froyen

Macroeconomics

Fusfeld

The Age o f the Economist

Gerber

/nternationa/ Economics*

Gonzalez-Rivera

Forecasting for Economics

and Business

Gordon

Macroeconomics*

Greene

Econometric Ana/ysis

Gregory

Essentials o f Economics

Gregory/Stuart

Russian and Soviet Economic

Perfonnance and Structure

Hartwick/Olewiler

The Economics of Natura/

Resource Use

Heilbfoner/Milberg

The Making o f 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

/nternationa/ Economics

Jehfe/Reny

Advanced Microeconomic

Theory

Johnson-Lans

A Hea/th 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/Schimlng

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 o f 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 Modem

Introduction

Nafziger

The Economics o f Developing

Countries

O'Sullivan/Sheffrin/Perez

Economics: Principles,

Applications and Tools*

Parkin

Economics*

Pertoff

Microeconomics*

Microeconomics; Theory and

Applications with Calculus*

Perman/Common/

McGilvray/Ma

Natural Resources and

Environmental Economics

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

Rationa/ 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

Introduction to Econometrics,

Brief Edition

Studenmund

Using Econometrics: A

Practical Guide

Tietenberg/Lewis

Environmental an d Natural

Resource Economics

Environmental Economics

and Policy

Todaro/Smith

Economic Development

Waldman

Microeconomics

Waldman/Jensen

Industrial Organization:

Theory and Practice

Weil

Economic Growth

Williamson

Macroeconomics

* denotes MyEconLab titles Visit www.myeconlab.com to learn more

MICROECONOMICS

EIGHTH EDITION

Robert S. Pindyck

Massachusetts Institute o f Technology

Daniel L Rubinfeld

University o f California, Berkeley

PEARSON

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10 98765432

PEARSON ISBN 10: 0-13-304170-0

ISBN 13:978-0-13-304170-5

O CxCXX>0000000000<XXXXX>

To our daughters,

ooooooooooooooooooooo

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￾stanhal improvements and lots of new examples.

Robert S. Pindyck is the Bank of Tokyo-Mitsubishi Ltd. Professor of Economics

and Finance in the Sloan School of Management at M.l.T. Daniel L. 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.Ds from M.I.T., 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, competiHon 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.mit.edu/rpindyck/www

and http://www.law.berkeley.edu/faculty/rubinfeldd.

BRIEF CONTENTS

• PART O N E

Introduction: Markets and Prices 1

1 Preliminaries 3

2 The Basics of Supply and Demand 21

• PART T W O

Producers, Consumers, and Competitive Markets 65

3 Consumer Behavior 67

4 Individual and Market Demand III

5 Uncertainty and Consumer Behavior 159

6 Production 201

T The Cost of Production 229

8 Profit Maximization and Competitive Supply 279

9 The Analysis of Competitive Markets 317

• P A R T T H R E E

Market Structure and Competitive Strategy 355

10 Market Power: Monopoly and Monopsony 357

1 1 Pricing with Market Power 399

1 2 Monopolistic Competition and Oligopoly 451

1 3 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