Daniel l. Rubinfeld

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Contents
Contents
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2 Producers g Consumers g and Competitive Markets 59
3
4
Consumei' Behavior 61
3.1 Consumer Preferences 62
Market Baskets 62
Some Basic Assumptions About Preferences 63
Indifference Curves 64
Indifference Maps 66
The Shapes of Ind!fference Curves 67
The Marginal Rate of Substitution 68
Pelfeet Substitutes nIld Pelfeet Complements 69
3.2 Budget Constraints 75
The Budget Line 75
The £.ffects of Changes in Income and Prices 77
3.3 Consumer Choice 79
Comer Solutions 84
3.4 Revealed Preference 86
3.5 Marginal Utility and Consumer Choice 89
*3.6 Cost-of-Living Indexes 92
Ideal Cost-of-Living Index 93
Laspeyres Index 94
Paasche Index 95
Chain-Weighted Indexes 96
Summary 98
Questions for Review 99
Exercises 99
4.1 Individual Demand 102
Price Changes 102
The Individllal Demand Curve 102
Income Changes 104
NOn/wI versus Inferior Goods 106
Engel Curves 106
Substitutes and Complements 109
4.2 Income and Substitution Effects 110
Substitution Effect 111
Income Effect 112
A Special Case: The G!ffen Good 113
4.3 Market Demand 116
From Individual to Market Demand 116
Elasticity of Demand 117
4.4 Consumer Surplus 123
Consumer Surplus and Demand 123
4.5 Nehvork Externalities 127
The Ba/ldwago/l Effect 127
The Sl10b Effect 129
*4.6 Empirical Estimation of Demand 131
Illtervie1L' aild Experimelltal Approaches to Demalld Determinatioll 131
The Statistical Approach to Demalld Estimation 132
The Form of the Demand Relationship 133
Summary 135
Questions for Review 136
Exercises 136
Appendix to Chapter 4: Demand Theory-A Mathematical Treatment 139
Utility Maximization 139
The Method of Lagrange Multipliers 140
TIle Equal Marginal Principle 141
lvIarginal Rate of Substitutioll 141
Marginal Utility ~f Income 142
An Example 143
Duality ill COllsumer Theory 144
Illcome and Sllbstitution Effects 145
Exercises 147
5 Uncertainty 149
5.1 Describing Risk 150
Probability 150
Expected Value 150
Variability 151
Decision Making 153
5.2 Preferences TO'ward Risk 155
D!fferent Preferences Toward Risk 157
5.3 Reducing Risk 161
Diversification 161
Insurance 162
The Value ~f Information 164
*5.4 The Demand for Risky Assets 166
Assets 166
Risky and Riskless Assets 166
Asset Retllrns 167
The Trade-Off Between Risk and Return 168
The Investor's Choice Probleln 169
Summary 174
Questions for Review 175
Exercises 175
6 177
6.1 The Teclmology of Production 178
The Production Function 178
6.2 Isoquants 179
Input Flexibility 180
Tile Short Run versus the Long RUil 180
6.3 Production with One Variable Input (Labor) 181
Auernge and Marginal Products 182