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Russian and Soviet Economic Performance Economics Principles Applications Macroeconomics. and Structure and Tools, denotes titles Log onto www myeconlab com to learn more. 88851 00 FM pi xxxii 12 3 10 5 02 PM Page iii,TENTH EDITION. Principles of,Microeconomics,Karl E Case,Wellesley College. Ray C Fair,Yale University,Sharon M Oster,Yale University. Boston Columbus Indianapolis New York San Francisco Upper Saddle River. Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto. Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo. 88851 00 FM pi xxxii 12 3 10 5 02 PM Page iv,Dedicated To. Professor Richard A Musgrave,Professor Robert M Solow. Professor Richard Caves, Editor in Chief Donna Battista Image Manager Rachel Youdelman. AVP Executive Editor David Alexander Photo Researcher Diahanne Lucas Dowridge. Editorial Project Managers Melissa Pellerano Lindsey Full Service Project Management Composition GEX. Sloan Publishing Services, Editorial Assistant Megan Cadigan Typeface 10 12 Minion. AVP Executive Marketing Manager Lori DeShazo Text Permission Project Supervisor Michael Joyce. Marketing Assistant Kimberly Lovato Director of Media Susan Schoenberg. Managing Editor Nancy Fenton Content Lead MyEconLab Noel Lotz. Senior Production Project Manager Nancy Freihofer Senior Media Producer Melissa Honig. Senior Manufacturing Buyer Carol Melville Supplements Production Coordinator Alison Eusden. Senior Art Director Jonathan Boylan Printer Binder Courier Kendallville. Cover Design Jonathan Boylan Cover Printer Lehigh Phoenix. Credits and acknowledgments borrowed from other sources and reproduced with permission in this textbook appear. on appropriate page within text, Copyright 2012 2009 2007 2004 2003 Pearson Education Inc All rights reserved Manufactured in the United. States of America This publication is protected by Copyright and permission should be obtained from the publisher. prior to any prohibited reproduction storage in a retrieval system or transmission in any form or by any means. electronic mechanical photocopying recording or likewise To obtain permission s to use material from this work. please submit a written request to Pearson Education Inc Rights and Contracts Department 501 Boylston Street Suite. 900 Boston MA 02116 fax your request to 617 671 3447 or e mail at www pearsoned com legal permission htm. 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. Case Karl E, Principles of microeconomics Karl E Case Ray C Fair Sharon M Oster 10th ed. Includes index, ISBN 978 0 13 138885 7 0 13 138885 1 1 Microeconomics I Fair Ray C II Oster Sharon M III Title. HB172 C36 2012,338 5 dc22,2010049924,10 9 8 7 6 5 4 3 2 1. ISBN 13 978 0 13 138885 7,ISBN 10 0 13 138885 1,88851 00 FM pi xxxii 12 3 10 5 02 PM Page v. About the Authors, Karl E Case is Professor of Economics Emeritus at Wellesley College where he has taught for 34. years and served several tours of duty as Department Chair He is a Senior Fellow at the Joint. Center for Housing Studies at Harvard University and a founding partner in the real estate. research firm of Fiserv Case Shiller Weiss which produces the S P Case Shiller Index of home. prices He serves as a member of the Index Advisory Committee of Standard and Poor s and along. with Ray Fair he serves on the Academic Advisory Board of the Federal Reserve Bank of Boston. Before coming to Wellesley he served as Head Tutor in Economics director of undergradu. ate studies at Harvard where he won the Allyn Young Teaching Prize He was Associate Editor of. the Journal of Economic Perspectives and the Journal of Economic Education and he was a member. of the AEA s Committee on Economic Education, Professor Case received his B A from Miami University in 1968 spent three years on active. duty in the Army and received his Ph D in Economics from Harvard University in 1976. Professor Case s research has been in the areas of real estate housing and public finance He. is author or coauthor of five books including Principles of Economics Economics and Tax Policy. and Property Taxation The Need for Reform and he has published numerous articles in profes. sional journals, For the last 25 years his research has focused on real estate markets and prices He has authored. numerous professional articles many of which attempt to isolate the causes and consequences of. boom and bust cycles and their relationship to regional and national economic performance. Ray C Fair is Professor of Economics at Yale University He is a member of the Cowles. Foundation at Yale and a Fellow of the Econometric Society He received a B A in Economics. from Fresno State College in 1964 and a Ph D in Economics from MIT in 1968 He taught at. Princeton University from 1968 to 1974 and has been at Yale since 1974. Professor Fair s research has primarily been in the areas of macroeconomics and econometrics. with particular emphasis on macroeconometric model building He also has done work in the areas. of finance voting behavior and aging in sports His publications include Specification Estimation. and Analysis of Macroeconometric Models Harvard Press 1984 Testing Macroeconometric Models. Harvard Press 1994 and Estimating How the Macroeconomy Works Harvard Press 2004. Professor Fair has taught introductory and intermediate macroeconomics at Yale He has. also taught graduate courses in macroeconomic theory and macroeconometrics. Professor Fair s U S and multicountry models are available for use on the Internet free of. charge The address is http fairmodel econ yale edu Many teachers have found that having stu. dents work with the U S model on the Internet is a useful complement to an introductory. macroeconomics course, Sharon M Oster is the Dean of the Yale School of Management where she is also the Frederic. Wolfe Professor of Economics and Management Professor Oster joined Case and Fair as a coau. thor in the ninth edition of this book Professor Oster has a B A in Economics from Hofstra. University and a Ph D in Economics from Harvard University. Professor Oster s research is in the area of industrial organization She has worked on problems of. diffusion of innovation in a number of different industries on the effect of regulations on business. and on competitive strategy She has published a number of articles in these areas and is the author of. several books including Modern Competitive Analysis and The Strategic Management of Nonprofits. Prior to joining the School of Management at Yale Professor Oster taught for a number of. years in Yale s Department of Economics In the department Professor Oster taught introductory. and intermediate microeconomics to undergraduates as well as several graduate courses in indus. trial organization Since 1982 Professor Oster has taught primarily in the Management School. where she teaches the core microeconomics class for MBA students and a course in the area of com. petitive strategy Professor Oster also consults widely for businesses and nonprofit organizations. and has served on the boards of several publicly traded companies and nonprofit organizations. 88851 00 FM pi xxxii 12 3 10 5 02 PM Page vi,Brief Contents. PART I Introduction to Economics 1 PART III Market Imperfections and the. Role of Government 269,1 The Scope and Method of Economics 1. 2 The Economic Problem Scarcity and Choice 25 13 Monopoly and Antitrust Policy 269. 3 Demand Supply and Market Equilibrium 47 14 Oligopoly 293. 4 Demand and Supply Applications 79 15 Monopolistic Competition 313. 5 Elasticity 97 16 Externalities Public Goods and Social Choice 329. 17 Uncertainty and Asymmetric Information 353, PART II The Market System Choices 18 Income Distribution and Poverty 367. Made by Households and 19 Public Finance The Economics of Taxation 389. 6 Household Behavior and Consumer Choice 121 PART IV The World Economy 409. 7 The Production Process The Behavior of Profit 20 International Trade Comparative Advantage and. Maximizing Firms 147 Protectionism 409, 8 Short Run Costs and Output Decisions 167 21 Economic Growth in Developing and Transitional. 9 Long Run Costs and Output Decisions 189 Economies 433. 10 Input Demand The Labor and Land Markets 215 Glossary 455. 11 Input Demand The Capital Market and the,Investment Decision 233. 12 General Equilibrium and the Efficiency of Perfect Photo Credits 471. Competition 253,88851 00 FM pi xxxii 12 3 10 5 02 PM Page vii. PART I Introduction To Economics 1,3 Demand Supply and Market. Equilibrium 47,1 The Scope and Method of,Economics 1. Firms and Households The Basic Decision,Making Units 47. Why Study Economics 2 Input Markets and Output Markets The Circular. To Learn a Way of Thinking 2 Flow 48, To Understand Society 4 Demand in Product Output Markets 50. To Understand Global Affairs 5 Changes in Quantity Demanded versus Changes in. To Be an Informed Citizen 5 Demand 51, ECONOMICS IN PRACTICE iPod and the World 6 Price and Quantity Demanded The Law of. The Scope of Economics 6 Demand 51, Microeconomics and Macroeconomics 6 Other Determinants of Household Demand 54. The Diverse Fields of Economics 7 ECONOMICS IN PRACTICE Kindle in the College. ECONOMICS IN PRACTICE Trust and Gender 9,Shift of Demand versus Movement Along a. The Method of Economics 9,Demand Curve 56,Descriptive Economics and Economic Theory 10. From Household Demand to Market Demand 58,Theories and Models 10. Supply in Product Output Markets 60,Economic Policy 13. Price and Quantity Supplied The Law of,An Invitation 15. Summary 15 Review Terms and Concepts 16 Problems 16 Other Determinants of Supply 62. Appendix How to Read and Understand Graphs 17 Shift of Supply versus Movement Along a Supply. 2 The Economic Problem Scarcity,and Choice 25,From Individual Supply to Market Supply 65. Market Equilibrium 66,Excess Demand 66,Scarcity Choice and Opportunity Cost 26. Scarcity and Choice in a One Person Economy 26 Excess Supply 68. Scarcity and Choice in an Economy of Two or Changes in Equilibrium 69. More 27 ECONOMICS IN PRACTICE High Prices for, ECONOMICS IN PRACTICE Frozen Foods and Tomatoes 70. Opportunity Costs 28 Demand and Supply in Product Markets A. The Production Possibility Frontier 33 Review 72, The Economic Problem 38 Looking Ahead Markets and the Allocation of. Resources 72,ECONOMICS IN PRACTICE Trade Offs among the. Rich and Poor 39 ECONOMICS IN PRACTICE Why Do the Prices of. Economic Systems and the Role of Newspapers Rise 73. Government 39 Summary 74 Review Terms and Concepts 75 Problems 76. Command Economies 40,Laissez Faire Economies The Free Market 40. Mixed Systems Markets and Governments 42,Looking Ahead 42. Summary 43 Review Terms and Concepts 43 Problems 44. 88851 00 FM pi xxxii 12 3 10 5 02 PM Page viii,viii Contents. 4 Demand and Supply,Applications 79 5 Elasticity 97. Price Elasticity of Demand 98, The Price System Rationing and Allocating Slope and Elasticity 98. Resources 79 Types of Elasticity 99,Price Rationing 79 Calculating Elasticities 100. ECONOMICS IN PRACTICE Prices and Total Calculating Percentage Changes 100. Expenditure A Lesson From the Lobster Industry in Elasticity Is a Ratio of Percentages 101. 2008 2009 81 The Midpoint Formula 101, Constraints on the Market and Alternative Elasticity Changes Along a Straight Line Demand. Rationing Mechanisms 82 Curve 103, Prices and the Allocation of Resources 86 Elasticity and Total Revenue 105. Price Floor 86 The Determinants of Demand Elasticity 107. Supply and Demand Analysis An Oil Import Availability of Substitutes 107. Fee 86 The Importance of Being Unimportant 107, ECONOMICS IN PRACTICE The Price Mechanism at ECONOMICS IN PRACTICE Who Are the Elastic. Work for Shakespeare 87 Smokers 108, Supply and Demand and Market Efficiency 89 The Time Dimension 108. Consumer Surplus 89 ECONOMICS IN PRACTICE Elasticities at a. Producer Surplus 90 Delicatessen in the Short Run and Long Run 109. Competitive Markets Maximize the Sum of Other Important Elasticities 109. Producer and Consumer Surplus 91 Income Elasticity of Demand 110. Potential Causes of Deadweight Loss From Under Cross Price Elasticity of Demand 110. and Overproduction 92 Elasticity of Supply 111,Looking Ahead 93 Looking Ahead 111. Summary 93 Review Terms and Concepts 94 Problems 94 Summary 112 Review Terms and Concepts 112 Problems 113. Appendix Point Elasticity Optional 115,88851 00 FM pi xxxii 12 8 10 11 12 AM Page ix. Contents ix,PART II The Market System Choices Made by. Households and Firms 117 7 The Production Process The. Behavior of Profit Maximizing,6 Household Behavior and Consumer. Choice 121,The Behavior of Profit Maximizing Firms 148. Profits and Economic Costs 148, Household Choice in Output Markets 121 Short Run versus Long Run Decisions 150. The Determinants of Household Demand 122 The Bases of Decisions Market Price of Outputs. The Budget Constraint 122 Available Technology and Input Prices 151. The Equation of the Budget Constraint 125 The Production Process 152. The Basis of Choice Utility 126 Production Functions Total Product Marginal. Diminishing Marginal Utility 126 Product and Average Product 152. Allocating Income to Maximize Utility 127 Production Functions with Two Variable Factors of. The Utility Maximizing Rule 129 Production 155, Diminishing Marginal Utility and Downward ECONOMICS IN PRACTICE Learning about Growing. Sloping Demand 129 Pineapples in Ghana 156, Income and Substitution Effects 130 Choice of Technology 156. The Income Effect 130 ECONOMICS IN PRACTICE How Fast Should a. The Substitution Effect 131 Truck Driver Go 157, Household Choice in Input Markets 132 Looking Ahead Cost and Supply 158. The Labor Supply Decision 132 Summary 158 Review Terms and Concepts 159 Problems 159. ECONOMICS IN PRACTICE Substitution and Market Appendix Isoquants and Isocosts 162. Baskets 133,The Price of Leisure 134,Income and Substitution Effects of a Wage. Change 134,Saving and Borrowing Present versus Future. Consumption 135,ECONOMICS IN PRACTICE What Happens When. the Cost of Self Discovery Falls 136,A Review Households in Output and Input. Markets 137, Summary 138 Review Terms and Concepts 138 Problems 138. Appendix Indifference Curves 141,88851 00 FM pi xxxii 12 3 10 5 02 PM Page x. x Contents,8 Short Run Costs and Output,Decisions 167 9 Long Run Costs and Output. Decisions 189, Costs in the Short Run 168 Short Run Conditions and Long Run. Fixed Costs 168 Directions 190,Variable Costs 169 Maximizing Profits 190. Total Costs 175 Minimizing Losses 192, Short Run Costs A Review 177 The Short Run Industry Supply Curve 194. ECONOMICS IN PRACTICE Average and Marginal Long Run Directions A Review 194. Costs at a College 178 Long Run Costs Economies and Diseconomies of. Output Decisions Revenues Costs and Profit Scale 195. Maximization 179 Increasing Returns to Scale 196, Perfect Competition 179 ECONOMICS IN PRACTICE Economies of Scale in. Total Revenue and Marginal Revenue 180 the World Marketplace 197. Comparing Costs and Revenues to Maximize ECONOMICS IN PRACTICE Economies of Scale in. Profit 180 Solar 198, ECONOMICS IN PRACTICE Case Study in Marginal Constant Returns to Scale 199. Analysis An Ice Cream Parlor 182 Decreasing Returns to Scale 200. The Short Run Supply Curve 184 U Shaped Long Run Average Costs 200. Looking Ahead 185 Long Run Adjustments to Short Run. Summary 185 Review Terms and Concepts 186 Problems 186 Conditions 200. ECONOMICS IN PRACTICE The Long Run Average,Cost Curve Flat or U Shaped 201. Short Run Profits Moves In and Out of,Equilibrium 201. ECONOMICS IN PRACTICE The Fortunes of the,Auto Industry 204. The Long Run Adjustment Mechanism Investment,Flows Toward Profit Opportunities 204. ECONOMICS IN PRACTICE Why Are Hot Dogs So,Expensive in Central Park 205. Output Markets A Final Word 206, Summary 206 Review Terms and Concepts 207 Problems 207. Appendix External Economies and Diseconomies and the Long Run. Industry Supply Curve 210,88851 00 FM pi xxxii 12 3 10 5 02 PM Page xi. Contents xi,10 Input Demand The Labor and,Land Markets 215 11 Input Demand The Capital. Market and the Investment,Decision 233,Input Markets Basic Concepts 215. Demand for Inputs A Derived Demand 215 Capital Investment and Depreciation 233. Inputs Complementary and Substitutable 216 Capital 233. Diminishing Returns 216 ECONOMICS IN PRACTICE Investment Banking. ECONOMICS IN PRACTICE Sometimes Workers Play IPOs and Electric Cars 235. Hooky 217 Investment and Depreciation 235, Marginal Revenue Product 217 The Capital Market 236. Labor Markets 219 Capital Income Interest and Profits 237. A Firm Using Only One Variable Factor of Financial Markets in Action 239. Production Labor 219 Mortgages and the Mortgage Market 240. A Firm Employing Two Variable Factors of ECONOMICS IN PRACTICE Who Owns Stocks in the. Production in the Short and Long Run 222 United States 241. ECONOMICS IN PRACTICE What is Denzel Capital Accumulation and Allocation 241. Washington s Marginal Revenue Product in Broadway s The Demand for New Capital and the Investment. Fences 223 Decision 241,Many Labor Markets 224 Forming Expectations 242. Land Markets 224,ECONOMICS IN PRACTICE Chinese Wind. Rent and the Value of Output Produced on Power 243. Land 225 Comparing Costs and Expected Return 243, ECONOMICS IN PRACTICE Time Is Money A Final Word on Capital 245. European High Speed Trains 226, Summary 246 Review Terms and Concepts 246 Problems 247. The Firm s Profit Maximizing Condition in Input,Appendix Calculating Present Value 248. Markets 226,Input Demand Curves 227,Shifts in Factor Demand Curves 227. Looking Ahead 228, Summary 229 Review Terms and Concepts 230 Problems 230. 88851 00 FM pi xxxii 12 3 10 5 02 PM Page xii,xii Contents. PART III Market Imperfections and the Role,12 General Equilibrium and the. Efficiency of Perfect,Competition 253,of Government 269. Market Adjustment to Changes in Demand 254,Allocative Efficiency and Competitive. 13 Monopoly and Antitrust,Policy 269, Equilibrium 256 Imperfect Competition and Market Power Core. Pareto Efficiency 256 Concepts 269,Forms of Imperfect Competition and Market. ECONOMICS IN PRACTICE Ethanol and Land,Prices 257 Boundaries 270. Revisiting Consumer and Producer Surplus 258 Price and Output Decisions in Pure Monopoly. Markets 271,The Efficiency of Perfect Competition 259. Demand in Monopoly Markets 271,Perfect Competition versus Real Markets 262. Perfect Competition and Monopoly,The Sources of Market Failure 262. Compared 276,Imperfect Markets 262,Monopoly in the Long Run Barriers to Entry 277. Public Goods 263,ECONOMICS IN PRACTICE Managing the Cable. Externalities 263,Monopoly 280,Imperfect Information 264. The Social Costs of Monopoly 281,Evaluating the Market Mechanism 264. Inefficiency and Consumer Loss 281, Summary 264 Review Terms and Concepts 265 Problems 265. Rent Seeking Behavior 282,Price Discrimination 283. Examples of Price Discrimination 285,Remedies for Monopoly Antitrust Policy 285. Major Antitrust Legislation 285,ECONOMICS IN PRACTICE Antitrust Rules Cover. the NFL 287,Imperfect Markets A Review and a Look, Summary 288 Review Terms and Concepts 289 Problems 289. 88851 00 FM pi xxxii 12 3 10 5 02 PM Page xiii,Contents xiii. 14 Oligopoly 293,15 Monopolistic Competition 313, Market Structure in an Oligopoly 294 Industry Characteristics 314. ECONOMICS IN PRACTICE Why Are Record Labels Product Differentiation and Advertising 315. Losing Key Stars Like Madonna 296 How Many Varieties 315. Oligopoly Models 297 How Do Firms Differentiate Products 316. The Collusion Model 297 ECONOMICS IN PRACTICE An Economist Makes. The Price Leadership Model 298 Tea 318,The Cournot Model 299 Advertising 318. Game Theory 300 ECONOMICS IN PRACTICE Can Information Reduce. Repeated Games 303 Obesity 321, A Game with Many Players Collective Action Can Price and Output Determination in Monopolistic. Be Blocked by a Prisoner s Dilemma 304 Competition 322. ECONOMICS IN PRACTICE Price Fixing in Digital Product Differentiation and Demand Elasticity 323. Music 306 Price Output Determination in the Short Run 323. Oligopoly and Economic Performance 306 Price Output Determination in the Long Run 324. Industrial Concentration and Technological Economic Efficiency and Resource Allocation 326. Change 307 Summary 326 Review Terms and Concepts 327 Problems 327. The Role of Government 307,Regulation of Mergers 308. A Proper Role 310, Summary 310 Review Terms and Concepts 311 Problems 311. 88851 00 FM pi xxxii 12 3 10 5 02 PM Page xiv,xiv Contents. 16 Externalities Public Goods and,Social Choice 329 17 Uncertainty and Asymmetric. Information 353, Externalities and Environmental Economics 329 Decision Making Under Uncertainty The. Marginal Social Cost and Marginal Cost Tools 353,Pricing 330 Expected Value 354. ECONOMICS IN PRACTICE Ban on Oil Drillers 332 Expected Utility 354. Private Choices and External Effects 333 Attitudes Toward Risk 356. Internalizing Externalities 334 Asymmetric Information 357. ECONOMICS IN PRACTICE Externalities Are All Adverse Selection 358. Around Us 338 ECONOMICS IN PRACTICE Adverse Selection in the. ECONOMICS IN PRACTICE Climate Change 341 Health Care Market 360. Public Social Goods 341 Market Signaling 360, The Characteristics of Public Goods 341 ECONOMICS IN PRACTICE How to Read. Public Provision of Public Goods 342 Advertisements 361. Optimal Provision of Public Goods 343 Moral Hazard 362. Local Provision of Public Goods Tiebout Incentives 363. Hypothesis 345 Labor Market Incentives 363, Social Choice 346 Summary 364 Review Terms and Concepts 365 Problems 365. The Voting Paradox 346,Government Inefficiency Theory of Public. Choice 348,Rent Seeking Revisited 348,Government and the Market 349. Summary 349 Review Terms and Concepts 350 Problems 350. 88851 00 FM pi xxxii 12 3 10 5 02 PM Page xv,Contents xv. 18 Income Distribution and,Poverty 367 19 Public Finance The Economics. of Taxation 389, The Sources of Household Income 367 The Economics of Taxation 389. Wages and Salaries 367 Taxes Basic Concepts 389, Income from Property 369 ECONOMICS IN PRACTICE Calculating Taxes 392. Income from the Government Transfer Tax Equity 392. Payments 370 What Is the Best Tax Base 393, The Distribution of Income 370 ECONOMICS IN PRACTICE The Yankees and the. Income Inequality in the United States 370 Estate Tax 396. The World Distribution of Income 372 The Gift and Estate Tax 396. ECONOMICS IN PRACTICE The New Rich Tax Incidence Who Pays 396. Work 373 The Incidence of Payroll Taxes 397, Causes of Increased Inequality 373 The Incidence of Corporate Profits Taxes 400. Poverty 375 The Overall Incidence of Taxes in the United States. The Distribution of Wealth 376 Empirical Evidence 402. The Utility Possibilities Frontier 376 Excess Burdens and the Principle of. The Redistribution Debate 377 Neutrality 402, Arguments Against Redistribution 378 How Do Excess Burdens Arise 402. Arguments in Favor of Redistribution 378 Measuring Excess Burdens 403. Redistribution Programs and Policies 380 Excess Burdens and the Degree of Distortion 404. Financing Redistribution Programs Taxes 380 The Principle of Second Best 405. Expenditure Programs 381 Optimal Taxation 406, ECONOMICS IN PRACTICE Does Price Matter in Summary 406 Review Terms and Concepts 407 Problems 407. Charitable Giving 384,Government or the Market A Review 385. Summary 385 Review Terms and Concepts 386 Problems 386.