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Intermediate Microeconomics
A Modern Approach
Ninth Edition
Intermediate
Microeconomics
A Modern Approach
Ninth Edition
Hal R. Varian
University of California at Berkeley
W. W. Norton & Company • New York • London
W. W. Norton & Company has been independent since its founding in 1923,
when William Warder Norton and Mary D. Herter Norton first published lectures delivered at the People’s Institute, the adult education division of New
York City’s Cooper Union. The firm soon expanded its program beyond the Institute, publishing books by celebrated academics from America and abroad. By
mid-century, the two major pillars of Norton’s publishing program—trade books
and college texts—were firmly established. In the 1950s, the Norton family transferred control of the company to its employees, and today—with a staff of four
hundred and a comparable number of trade, college, and professional titles published each year—W. W. Norton & Company stands as the largest and oldest
publishing house owned wholly by its employees.
c 2014, 2010, 2006, 2003, 1999, 1996, 1993, 1990, 1987 by Hal R.
Copyright
Varian
All rights reserved
Printed in the United States of America
NINTH EDITION
Editor: Jack Repcheck
Senior project editor: Thom Foley
Production manager: Andy Ensor
Editorial assistant: Theresia Kowara
TEXnician: Hal Varian
ISBN 978-0-393-12 3 96 – 8
W. W. Norton & Company, Inc., 500 Fifth Avenue, New York, N.Y. 10110
W. W. Norton & Company, Ltd., Castle House, 75/76 Wells Street, London W1T 3QT
www.wwnorton.com
1234567890
To Carol
CONTENTS
Preface
xix
1 The Market
Constructing a Model 1 Optimization and Equilibrium 3 The Demand Curve 3 The Supply Curve 5 Market Equilibrium 7 Comparative Statics 9 Other Ways to Allocate Apartments 11
The Discriminating Monopolist • The Ordinary Monopolist • Rent Control •
Which Way Is Best? 14 Pareto Efficiency 15 Comparing Ways to Allocate Apartments 16 Equilibrium in the Long Run 17 Summary 18
Review Questions 19
2 Budget Constraint
The Budget Constraint 20 Two Goods Are Often Enough 21 Properties of the Budget Set 22 How the Budget Line Changes 24 The
Numeraire 26 Taxes, Subsidies, and Rationing 26
Example: The
Food Stamp Program Budget Line Changes 31 Summary 31 Review
Questions 32
VIII CONTENTS
3 Preferences
Consumer Preferences 34 Assumptions about Preferences 35 Indifference Curves 36 Examples of Preferences 37
Perfect Substitutes
• Perfect Complements • Bads • Neutrals • Satiation • Discrete
Goods • Well-Behaved Preferences 44 The Marginal Rate of Substitution 48 Other Interpretations of the MRS 50 Behavior of the MRS
51 Summary 52 Review Questions 52
4 Utility
Cardinal Utility 57 Constructing a Utility Function 58 Some Examples of Utility Functions 59
Example: Indifference Curves from Utility
Perfect Substitutes • Perfect Complements • Quasilinear Preferences
• Cobb-Douglas Preferences • Marginal Utility 65 Marginal Utility
and MRS 66 Utility for Commuting 67 Summary 69 Review
Questions 70 Appendix 70
Example: Cobb-Douglas Preferences
5 Choice
Optimal Choice 73
Consumer Demand 78
Some Examples 78
Perfect Substitutes • Perfect Complements • Neutrals and Bads •
Discrete Goods • Concave Preferences • Cobb-Douglas Preferences •
Estimating Utility Functions 83 Implications of the MRS Condition 85
Choosing Taxes 87 Summary 89 Review Questions 89 Appendix 90
Example: Cobb-Douglas Demand Functions
6 Demand
Normal and Inferior Goods 96 Income Offer Curves and Engel Curves
97 Some Examples 99
Perfect Substitutes • Perfect Complements
• Cobb-Douglas Preferences • Homothetic Preferences • Quasilinear
Preferences • Ordinary Goods and Giffen Goods 104 The Price Offer
Curve and the Demand Curve 106 Some Examples 107
Perfect
Substitutes • Perfect Complements • A Discrete Good • Substitutes
and Complements 111 The Inverse Demand Function 112 Summary
114 Review Questions 115 Appendix 115
CONTENTS
IX
7 Revealed Preference
The Idea of Revealed Preference 119 From Revealed Preference to Preference 120 Recovering Preferences 122 The Weak Axiom of Revealed Preference 124 Checking WARP 125 The Strong Axiom of
Revealed Preference 128 How to Check SARP 129 Index Numbers
130 Price Indices 132
Example: Indexing Social Security Payments
Summary 135 Review Questions 135
8 Slutsky Equation
The Substitution Effect 137
Example: Calculating the Substitution Effect The Income Effect 141
Example: Calculating the Income Effect
Sign of the Substitution Effect 142 The Total Change in Demand 143
Rates of Change 144 The Law of Demand 147 Examples of Income
and Substitution Effects 147
Example: Rebating a Tax Example:
Voluntary Real Time Pricing Another Substitution Effect 153 Compensated Demand Curves 155 Summary 156 Review Questions 157
Appendix 157
Example: Rebating a Small Tax
9 Buying and Selling
Net and Gross Demands 160 The Budget Constraint 161 Changing
the Endowment 163 Price Changes 164 Offer Curves and Demand
Curves 167 The Slutsky Equation Revisited 168 Use of the Slutsky Equation 172
Example: Calculating the Endowment Income Effect
Labor Supply 173
The Budget Constraint • Comparative Statics of
Labor Supply 174
Example: Overtime and the Supply of Labor Summary 178 Review Questions 179 Appendix 179
X
CONTENTS
10 Intertemporal Choice
The Budget Constraint 182 Preferences for Consumption 185 Comparative Statics 186 The Slutsky Equation and Intertemporal Choice
187 Inflation 189 Present Value: A Closer Look 191 Analyzing Present Value for Several Periods 193 Use of Present Value 194
Example: Valuing a Stream of Payments Example: The True Cost of
a Credit Card Example: Extending Copyright Bonds 198
Example: Installment Loans Taxes 200
Example: Scholarships and Savings Choice of the Interest Rate 201 Summary 202 Review Questions 202
11 Asset Markets
Rates of Return 203 Arbitrage and Present Value 205 Adjustments
for Differences among Assets 205 Assets with Consumption Returns
206 Taxation of Asset Returns 207 Market Bubbles 208 Applications 209
Depletable Resources • When to Cut a Forest • Example:
Gasoline Prices during the Gulf War Financial Institutions 213 Summary 214 Review Questions 215 Appendix 215
12 Uncertainty
Contingent Consumption 217
Example: Catastrophe Bonds Utility
Functions and Probabilities 222
Example: Some Examples of Utility
Functions Expected Utility 223 Why Expected Utility Is Reasonable
224 Risk Aversion 226
Example: The Demand for Insurance Diversification 230 Risk Spreading 230 Role of the Stock Market 231
Summary 232 Review Questions 232 Appendix 233
Example:
The Effect of Taxation on Investment in Risky Assets
13 Risky Assets
Mean-Variance Utility 236 Measuring Risk 241 Counterparty Risk
243 Equilibrium in a Market for Risky Assets 243 How Returns
Adjust 245
Example: Value at Risk Example: Ranking Mutual Funds
Summary 249 Review Questions 250
CONTENTS
XI
14 Consumer’s Surplus
Demand for a Discrete Good 252 Constructing Utility from Demand
253 Other Interpretations of Consumer’s Surplus 254 From Consumer’s Surplus to Consumers’ Surplus 255 Approximating a Continuous Demand 255 Quasilinear Utility 255 Interpreting the Change in
Consumer’s Surplus 256
Example: The Change in Consumer’s Surplus
Compensating and Equivalent Variation 258
Example: Compensating
and Equivalent Variations Example: Compensating and Equivalent Variation for Quasilinear Preferences Producer’s Surplus 262 Benefit-Cost
Analysis 264
Rationing • Calculating Gains and Losses 266 Summary 267 Review Questions 267 Appendix 268
Example: A
Few Demand Functions Example: CV, EV, and Consumer’s Surplus
15 Market Demand
From Individual to Market Demand 270 The Inverse Demand Function
272
Example: Adding Up “Linear” Demand Curves Discrete Goods
273 The Extensive and the Intensive Margin 273 Elasticity 274
Example: The Elasticity of a Linear Demand Curve Elasticity and Demand 276 Elasticity and Revenue 277
Example: Strikes and Profits
Constant Elasticity Demands 280 Elasticity and Marginal Revenue 281
Example: Setting a Price Marginal Revenue Curves 283 Income Elasticity 284 Summary 285 Review Questions 286 Appendix 287
Example: The Laffer Curve Example: Another Expression for Elasticity
16 Equilibrium
Supply 293 Market Equilibrium 293 Two Special Cases 294 Inverse Demand and Supply Curves 295
Example: Equilibrium with Linear Curves Comparative Statics 297
Example: Shifting Both Curves
Taxes 298
Example: Taxation with Linear Demand and Supply Passing Along a Tax 302 The Deadweight Loss of a Tax 304
Example:
The Market for Loans Example: Food Subsidies Example: Subsidies in
Iraq Pareto Efficiency 310
Example: Waiting in Line Summary 313
Review Questions 313
XII CONTENTS
17 Measurement
Summarize data 316
Example: Simpson’s paradox Test 320 Estimating demand using experimental data 320 Effect of treatment 321
Estimating demand using observational data 322
Functional form •
Statistical model • Estimation • Identification 324 What can go
wrong? 326 Policy evaluation 327
Example: Crime and police
Summary 328 Review Questions 329
18 Auctions
Classification of Auctions 331
Bidding Rules • Auction Design 332
Example: Goethe’s auction Other Auction Forms 336
Example: Late
Bidding on eBay Position Auctions 338
Two Bidders • More Than
Two Bidders • Quality Scores • Should you advertise on your brand?
341 Auction revenue and number of bidders 342 Problems with Auctions 343
Example: Taking Bids Off the Wall The Winner’s Curse
344 Stable Marriage Problem 345 Mechanism Design 346 Summary 348 Review Questions 349
19 Technology
Inputs and Outputs 350 Describing Technological Constraints 351
Examples of Technology 352
Fixed Proportions • Perfect Substitutes • Cobb-Douglas • Properties of Technology 354 The Marginal
Product 356 The Technical Rate of Substitution 356 Diminishing
Marginal Product 357 Diminishing Technical Rate of Substitution 357
The Long Run and the Short Run 358 Returns to Scale 358
Example: Datacenters Example: Copy Exactly! Summary 361 Review
Questions 362
CONTENTS XIII
20 Profit Maximization
Profits 363 The Organization of Firms 365 Profits and Stock Market
Value 365 The Boundaries of the Firm 367 Fixed and Variable Factors 368 Short-Run Profit Maximization 368 Comparative Statics
370 Profit Maximization in the Long Run 371 Inverse Factor Demand
Curves 372 Profit Maximization and Returns to Scale 373 Revealed
Profitability 374
Example: How Do Farmers React to Price Supports?
Cost Minimization 378 Summary 378 Review Questions 379 Appendix 380
21 Cost Minimization
Cost Minimization 382
Example: Minimizing Costs for Specific Technologies Revealed Cost Minimization 386 Returns to Scale and the
Cost Function 387 Long-Run and Short-Run Costs 389 Fixed and
Quasi-Fixed Costs 391 Sunk Costs 391 Summary 392 Review
Questions 392 Appendix 393
22 Cost Curves
Average Costs 396 Marginal Costs 398 Marginal Costs and Variable
Costs 400
Example: Specific Cost Curves Example: Marginal Cost
Curves for Two Plants Cost Curves for Online Auctions 404 Long-Run
Costs 405 Discrete Levels of Plant Size 407 Long-Run Marginal Costs
408 Summary 409 Review Questions 410 Appendix 411
23 Firm Supply
Market Environments 413 Pure Competition 414 The Supply Decision of a Competitive Firm 416 An Exception 418 Another Exception
419
Example: Pricing Operating Systems The Inverse Supply Function 421 Profits and Producer’s Surplus 421
Example: The Supply
Curve for a Specific Cost Function The Long-Run Supply Curve of a Firm
425 Long-Run Constant Average Costs 427 Summary 428 Review
Questions 429 Appendix 429
XIV CONTENTS
24 Industry Supply
Short-Run Industry Supply 431 Industry Equilibrium in the Short Run
432 Industry Equilibrium in the Long Run 433 The Long-Run Supply
Curve 435
Example: Taxation in the Long Run and in the Short Run
The Meaning of Zero Profits 439 Fixed Factors and Economic Rent
440
Example: Taxi Licenses in New York City Economic Rent 442
Rental Rates and Prices 444
Example: Liquor Licenses The Politics
of Rent 445
Example: Farming the Government Energy Policy 447
Two-Tiered Oil Pricing • Price Controls • The Entitlement Program
• Carbon Tax Versus Cap and Trade 451
Optimal Production of Emissions • A Carbon Tax • Cap and Trade • Summary 455 Review
Questions 455
25 Monopoly
Maximizing Profits 458 Linear Demand Curve and Monopoly 459
Markup Pricing 461
Example: The Impact of Taxes on a Monopolist Inefficiency of Monopoly 463 Deadweight Loss of Monopoly 465
Example: The Optimal Life of a Patent Example: Patent Thickets Example: Managing the Supply of Potatoes Natural Monopoly 469 What
Causes Monopolies? 472
Example: Diamonds Are Forever Example:
Pooling in Auction Markets Example: Price Fixing in Computer Memory
Markets Summary 476 Review Questions 476 Appendix 477
26 Monopoly Behavior
Price Discrimination 480 First-Degree Price Discrimination 480
Example: First-degree Price Discrimination in Practice Second-Degree Price
Discrimination 483
Example: Price Discrimination in Airfares Example: Prescription Drug Prices Third-Degree Price Discrimination 487
Example: Linear Demand Curves Example: Calculating Optimal Price
Discrimination Example: Price Discrimination in Academic Journals
Bundling 492
Example: Software Suites Two-Part Tariffs 493 Monopolistic Competition 494 A Location Model of Product Differentiation
498 Product Differentiation 500 More Vendors 501 Summary 502
Review Questions 502
CONTENTS XV
27 Factor Markets
Monopoly in the Output Market 503 Monopsony 506
Example: The
Minimum Wage Upstream and Downstream Monopolies 510 Summary
512 Review Questions 513 Appendix 513
28 Oligopoly
Choosing a Strategy 516
Example: Pricing Matching Quantity Leadership 517
The Follower’s Problem • The Leader’s Problem • Price
Leadership 522 Comparing Price Leadership and Quantity Leadership
525
Simultaneous Quantity Setting 525
An Example of Cournot
Equilibrium 527 Adjustment to Equilibrium 528 Many Firms in
Cournot Equilibrium 529 Simultaneous Price Setting 530 Collusion 531 Punishment Strategies 533
Example: Price Matching and
Competition Example: Voluntary Export Restraints Comparison of the
Solutions 537 Summary 537 Review Questions 538
29 Game Theory
The Payoff Matrix of a Game 540 Nash Equilibrium 542 Mixed
Strategies 543
Example: Rock Paper Scissors The Prisoner’s Dilemma
545 Repeated Games 547 Enforcing a Cartel 548
Example: Tit
for Tat in Airline Pricing Sequential Games 550 A Game of Entry
Deterrence 552 Summary 554 Review Questions 555
30 Game Applications
Best Response Curves 556 Mixed Strategies 558 Games of Coordination 560
Battle of the Sexes • Prisoner’s Dilemma • Assurance
Games • Chicken • How to Coordinate • Games of Competition 564
Games of Coexistence 569 Games of Commitment 571
The Frog
and the Scorpion • The Kindly Kidnapper • When Strength Is Weakness • Savings and Social Security • Example: Dynamic inefficiency
of price discrimination Hold Up • Bargaining 580
The Ultimatum
Game • Summary 583 Review Questions 583
XVI CONTENTS
31 Behavioral Economics
Framing Effects in Consumer Choice 586
The Disease Dilemma •
Anchoring Effects • Bracketing • Too Much Choice • Constructed
Preferences • Uncertainty 590
Law of Small Numbers • Asset Integration and Loss Aversion • Time 593
Discounting • Self-control
• Example: Overconfidence Strategic Interaction and Social Norms 595
Ultimatum Game • Fairness • Assessment of Behavioral Economics
597 Summary 599 Review Questions 599
32 Exchange
The Edgeworth Box 602 Trade 604 Pareto Efficient Allocations
605 Market Trade 607 The Algebra of Equilibrium 609 Walras’
Law 611 Relative Prices 612
Example: An Algebraic Example of
Equilibrium The Existence of Equilibrium 614 Equilibrium and Efficiency 615 The Algebra of Efficiency 616
Example: Monopoly in
the Edgeworth Box Efficiency and Equilibrium 619 Implications of the
First Welfare Theorem 621 Implications of the Second Welfare Theorem
623 Summary 625 Review Questions 626 Appendix 626
33 Production
The Robinson Crusoe Economy 628 Crusoe, Inc. 630 The Firm 631
Robinson’s Problem 632 Putting Them Together 632 Different Technologies 634 Production and the First Welfare Theorem 636 Production and the Second Welfare Theorem 637 Production Possibilities 637
Comparative Advantage 639 Pareto Efficiency 641 Castaways, Inc.
643 Robinson and Friday as Consumers 645 Decentralized Resource
Allocation 646 Summary 647 Review Questions 647 Appendix 648
CONTENTS XVII
34 Welfare
Aggregation of Preferences 651 Social Welfare Functions 653 Welfare
Maximization 655 Individualistic Social Welfare Functions 657 Fair
Allocations 658 Envy and Equity 659 Summary 661 Review
Questions 661 Appendix 662
35 Externalities
Smokers and Nonsmokers 664 Quasilinear Preferences and the Coase
Theorem 667 Production Externalities 669
Example: Pollution
Vouchers Interpretation of the Conditions 674 Market Signals 677
Example: Bees and Almonds The Tragedy of the Commons 678
Example: Overfishing Example: New England Lobsters Automobile Pollution 682 Summary 684 Review Questions 684
36 Information Technology
Systems Competition 687 The Problem of Complements 687
Relationships among Complementors • Example: Apple’s iPod and iTunes
Example: Who Makes an iPod? Example: AdWords and AdSense LockIn 693
A Model of Competition with Switching Costs • Example:
Online Bill Payment Example: Number Portability on Cell Phones Network Externalities 697 Markets with Network Externalities 697 Market Dynamics 699
Example: Network Externalities in Computer Software Implications of Network Externalities 703
Example: The Yellow
Pages Example: Radio Ads Two-sided Markets 705
A Model of
Two-sided Markets • Rights Management 706
Example: Video Rental
Sharing Intellectual Property 708
Example: Online Two-sided Markets
Summary 711 Review Questions 712
XVIII CONTENTS
37 Public Goods
When to Provide a Public Good? 714 Private Provision of the Public
Good 718 Free Riding 718 Different Levels of the Public Good 720
Quasilinear Preferences and Public Goods 722
Example: Pollution
Revisited The Free Rider Problem 724 Comparison to Private Goods
726
Voting 727
Example: Agenda Manipulation The VickreyClarke-Groves Mechanism 730
Groves Mechanism • The VCG Mechanism • Examples of VCG 732
Vickrey Auction • Clarke-Groves
Mechanism • Problems with the VCG 733 Summary 734 Review
Questions 735 Appendix 735
38 Asymmetric Information
The Market for Lemons 738 Quality Choice 739
Choosing the Quality • Adverse Selection 741 Moral Hazard 743 Moral Hazard and
Adverse Selection 744 Signaling 745
Example: The Sheepskin Effect
Incentives 749
Example: Voting Rights in the Corporation Example:
Chinese Economic Reforms Asymmetric Information 754
Example:
Monitoring Costs Example: The Grameen Bank Summary 757 Review Questions 758
Mathematical Appendix
Functions A1 Graphs A2 Properties of Functions A2 Inverse
Functions A3 Equations and Identities A3 Linear Functions A4
Changes and Rates of Change A4 Slopes and Intercepts A5 Absolute
Values and Logarithms A6 Derivatives A6 Second Derivatives A7
The Product Rule and the Chain Rule A8 Partial Derivatives A8
Optimization A9 Constrained Optimization A10
Answers
A11
Index
A31
PREFACE
The success of the first eight editions of Intermediate Microeconomics has
pleased me very much. It has confirmed my belief that the market would
welcome an analytic approach to microeconomics at the undergraduate
level.
My aim in writing the original text was to present a treatment of the
methods of microeconomics that would allow students to apply these tools
on their own and not just passively absorb the predigested cases described
in the text. I have found that the best way to do this is to emphasize
the fundamental conceptual foundations of microeconomics and to provide
concrete examples of their application rather than to attempt to provide
an encyclopedia of terminology and anecdote.
A challenge in pursuing this approach arises from the lack of mathematical prerequisites for economics courses at many colleges and universities.
The lack of calculus and problem-solving experience in general makes it
difficult to present some of the analytical methods of economics. However,
it is not impossible. One can go a long way with a few simple facts about
linear demand and supply functions, and some elementary algebra. It is
perfectly possible to be analytical without being excessively mathematical.
The distinction is worth emphasizing. An analytical approach to economics is one that uses rigorous, logical reasoning. This does not necessarily require the use of advanced mathematical methods. The language
of mathematics certainly helps to ensure a rigorous analysis and using it
is undoubtedly the best way to proceed when possible, but it may not be
appropriate for all students.
XX
PREFACE
Many undergraduate majors in economics are students who should know
calculus, but don’t—at least, not very well. For this reason I have kept calculus out of the main body of the text. However, I have provided complete
calculus appendices to many of the chapters. This means that the calculus
methods are there for the students who can handle them, but they do not
pose a barrier to understanding for the others.
I think that this approach manages to convey the idea that calculus is
not just a footnote to the argument of the text, but is instead a deeper
way to examine the same issues that one can also explore verbally and
graphically. Many arguments are much simpler with a little mathematics,
and all economics students should learn that. In many cases I’ve found
that with a little motivation, and a few nice economic examples, students
become quite enthusiastic about looking at things from an analytic perspective.
For students who are comfortable with calculus, I also offer a version of
the text that incorporates the material in the chapter appendices into the
body of chapters.
There are several other innovations in this text. First, the chapters are
generally very short. I’ve tried to make most of them roughly “lecture
size,” so that they can be read in one sitting. I have followed the standard
order of discussing first consumer theory and then producer theory, but
I’ve spent a bit more time on consumer theory than is normally the case.
This is not because I think that consumer theory is necessarily the most
important part of microeconomics; rather, I have found that this is the
material that students find the most mysterious, so I wanted to provide a
more detailed treatment of it.
Second, I’ve tried to put in a lot of examples of how to use the theories
described here. In most books, students look at a lot of diagrams of shifting
curves, but they don’t see much algebra, or much calculation of any sort for
that matter. But it is the algebra that is used to solve problems in practice.
Graphs can provide insight, but the real power of economic analysis comes
in calculating quantitative answers to economic problems. Every economics
student should be able to translate an economic story into an equation or
a numerical example, but all too often the development of this skill is
neglected. For this reason I have also provided a workbook that I feel is
an integral accompaniment to this book. The workbook was written with
my colleague Theodore Bergstrom, and we have put a lot of effort into
generating interesting and instructive problems. We think that it provides
an important aid to the student of microeconomics.
Third, I believe that the treatment of the topics in this book is more
accurate than is usually the case in intermediate micro texts. It is true
that I’ve sometimes chosen special cases to analyze when the general case
is too difficult, but I’ve tried to be honest about that when I did it. In
general, I’ve tried to spell out every step of each argument in detail. I
believe that the discussion I’ve provided is not only more complete and more
PREFACE XXI
accurate than usual, but this attention to detail also makes the arguments
easier to understand than the loose discussion presented in many other
books.
There Are Many Paths to Economic Enlightenment
There is more material in this book than can comfortably be taught in one
semester, so it is worthwhile picking and choosing carefully the material
that you want to study. If you start on page 1 and proceed through the
chapters in order, you will run out of time long before you reach the end
of the book. The modular structure of the book allows the instructor a
great deal of freedom in choosing how to present the material, and I hope
that more people will take advantage of this freedom. The following chart
illustrates the chapter dependencies.
The Market
Budget
Preferences
Utility
Choice
Uncertainty
Demand
Intertemporal Choice
Asset Markets
Consumer’s Surplus
Market Demand
Risky Assets
Slutsky Equation
Buying and Selling
Equilibrium
Auctions
Profit Maximization
Revealed Preference
Exchange
Information
Technology
Technology
Production
Welfare
Cost Minimization
Cost Curves
Firm Supply
Industry Supply
Monopoly Behavior
Monopoly
Oligopoly
Factor Markets
Externalities
Game Theory
Public Goods
Game Applications
Asymmetric Information
The darker colored chapters are “core” chapters—they should probably be
covered in every intermediate microeconomics course. The lighter-colored
chapters are “optional” chapters: I cover some but not all of these every
semester. The gray chapters are chapters I usually don’t cover in my course,
but they could easily be covered in other courses. A solid line going from
Chapter A to Chapter B means that Chapter A should be read before
XXII
PREFACE
chapter B. A broken line means that Chapter B requires knowing some
material in Chapter A, but doesn’t depend on it in a significant way.
I generally cover consumer theory and markets and then proceed directly
to producer theory. Another popular path is to do exchange right after
consumer theory; many instructors prefer this route and I have gone to
some trouble to make sure that this path is possible.
Some people like to do producer theory before consumer theory. This is
possible with this text, but if you choose this path, you will need to supplement the textbook treatment. The material on isoquants, for example,
assumes that the students have already seen indifference curves.
Much of the material on public goods, externalities, law, and information
can be introduced earlier in the course. I’ve arranged the material so that
it is quite easy to put it pretty much wherever you desire.
Similarly, the material on public goods can be introduced as an illustration of Edgeworth box analysis. Externalities can be introduced right
after the discussion of cost curves, and topics from the information chapter
can be introduced almost anywhere after students are familiar with the
approach of economic analysis.
Changes for the Ninth Edition
I have added a new chapter on measurement which describes some of the
issues involved in estimating economic relationships. The idea is to introduce the student to some basic concepts from econometrics and try to
bridge the theoretical treatment in the book with the practical problems
encountered in practice.
I have offered some new examples drawn from Silicon Valley firms such
as Apple, eBay, Google, Yahoo, and others. I discuss topics such as the
complementarity between the iPod and iTunes, the positive feedback associated with companies such as Facebook, and the ad auction models used
by Google, Microsoft, and Yahoo. I believe that these are fresh and interesting examples of economics in action.
I’ve also added an extended discussion of mechanism design issues, including two-sided matching markets and the Vickrey-Clarke-Groves mechanisms. This field, which was once primarily theoretical in nature, has now
taken on considerable practical importance.
The Test Bank and Workbook
The workbook, Workouts in Intermediate Microeconomics, is an integral
part of the course. It contains hundreds of fill-in-the-blank exercises that
lead the students through the steps of actually applying the tools they have
learned in the textbook. In addition to the exercises, Workouts contains a
collection of short multiple-choice quizzes based on the workbook problems
in each chapter. Answers to the quizzes are also included in Workouts.
PREFACE
XXIII
These quizzes give a quick way for the student to review the material he
or she has learned by working the problems in the workbook.
But there is more . . . instructors who have adopted Workouts for their
course can make use of the Test Bank offered with the textbook. The Test
Bank contains several alternative versions of each Workouts quiz. The
questions in these quizzes use different numerical values but the same internal logic. They can be used to provide additional problems for students
to work on, or to give quizzes to be taken in class. Grading is quick and
reliable because the quizzes are multiple choice and can be graded electronically.
In our course, we tell the students to work through all the quiz questions
for each chapter, either by themselves or with a study group. Then during
the term we have a short in-class quiz every other week or so, using the
alternative versions from the Test Bank. These are essentially the Workouts quizzes with different numbers. Hence, students who have done their
homework find it easy to do well on the quizzes.
We firmly believe that you can’t learn economics without working some
problems. The quizzes provided in Workouts and in the Test Bank make
the learning process much easier for both the student and the teacher.
A hard copy of the Test Bank is available from the publisher, as is the
textbook’s Instructor’s Manual, which includes my teaching suggestions
and lecture notes for each chapter of the textbook, and solutions to the
exercises in Workouts.
A number of other useful ancillaries are also available with this textbook. These include a comprehensive set of PowerPoint slides, as well
as the Norton Economic News Service, which alerts students to economic
news related to specific material in the textbook. For information on
these and other ancillaries, please visit the homepage for the book at
http://www.wwnorton.com/varian.
The Production of the Book
The entire book was typeset by the author using TEX, the wonderful typesetting system designed by Donald Knuth. I worked on a Linux system
and using GNU emacs for editing, rcs for version control and the TEX
Live system for processing. I used makeindex for the index, and Trevor
Darrell’s psfig software for inserting the diagrams.
The book design was by Nancy Dale Muldoon, with some modifications
by Roy Tedoff and the author. Jack Repchek coordinated the whole effort
in his capacity as editor.
Acknowledgments
Several people contributed to this project. First, I must thank my editorial
assistants for the first edition, John Miller and Debra Holt. John provided
XXIV PREFACE
many comments, suggestions, and exercises based on early drafts of this
text and made a significant contribution to the coherence of the final product. Debra did a careful proofreading and consistency check during the
final stages and helped in preparing the index.
The following individuals provided me with many useful suggestions and
comments during the preparation of the first edition: Ken Binmore (University of Michigan), Mark Bagnoli (Indiana University), Larry Chenault (Miami University), Jonathan Hoag (Bowling Green State University), Allen
Jacobs (M.I.T.), John McMillan (University of California at San Diego),
Hal White (University of California at San Diego), and Gary Yohe (Wesleyan University). In particular, I would like to thank Dr. Reiner Buchegger, who prepared the German translation, for his close reading of the first
edition and for providing me with a detailed list of corrections. Other individuals to whom I owe thanks for suggestions prior to the first edition
are Theodore Bergstrom, Jan Gerson, Oliver Landmann, Alasdair Smith,
Barry Smith, and David Winch.
My editorial assistants for the second edition were Sharon Parrott and
Angela Bills. They provided much useful assistance with the writing and
editing. Robert M. Costrell (University of Massachusetts at Amherst), Ashley Lyman (University of Idaho), Daniel Schwallie (Case-Western Reserve),
A. D. Slivinskie (Western Ontario), and Charles Plourde (York University)
provided me with detailed comments and suggestions about how to improve
the second edition.
In preparing the third edition I received useful comments from the following individuals: Doris Cheng (San Jose), Imre Csekó (Budapest), Gregory
Hildebrandt (UCLA), Jamie Brown Kruse (Colorado), Richard Manning
(Brigham Young), Janet Mitchell (Cornell), Charles Plourde (York University), Yeung-Nan Shieh (San Jose), and John Winder (Toronto). I especially want to thank Roger F. Miller (University of Wisconsin), and David
Wildasin (Indiana) for their detailed comments, suggestions, and corrections.
The fifth edition benefited from th
