MyEconLab Provides the Power of Practice

Optimize your study time with MyEconLab, the online assessment

and tutorial system. When you take a sample test online,
MyEconLab gives you targeted feedback and a personalized
Study Plan to identify the topics you need to review.

STUDY PLAN PROBLEMS AND APPLICATIONS

You can work Problems 1 to 17 in MyEconLab Chapter 3 Study Plan and get instant feedback.

Markets and Prices (Study Plan 3.1) how do you expect the following would change:
1. William Gregg owned a mill in South Carolina. a. The demand for beef? Explain your answer.
In December 1862, he placed a notice in the b. The demand for rice? Explain your answer.
Edgehill Advertiser announcing his willingness 5. In January 2010, the price of gasoline was
Study Plan The Study Plan to exchange cloth for food and other items. $2.70 a gallon. By spring 2010, the price had
Here is an extract: increased to $3.00 a gallon. Assume that there
consists of practice problems were no changes in average income, popula-
1 yard of cloth for 1 pound of bacon
taken directly from the end-of- 2 yards of cloth for 1 pound of butter tion, or any other influence on buying plans.
chapter Study Plan Problems and 4 yards of cloth for 1 pound of wool Explain how the rise in the price of gasoline
8 yards of cloth for 1 bushel of salt would affect
Applications in the textbook.
a. What is the relative price of butter in terms of a. The demand for gasoline.
wool? b. The quantity of gasoline demanded.
b. If the money price of bacon was 20¢ a pound,
Supply (Study Plan 3.3)
what do you predict was the money price of
butter? 6. In 2008, the price of corn increased by 35 per-

Unlimited Practice As you work each

exercise, instant feedback helps you
understand and apply the concepts. Many
Study Plan exercises contain algorithmically
generated values to ensure that you get as
much practice as you need.

Learning Resources Registering for

Study Plan problems link to learning resources If your book came packaged with a MyEconLab
that further reinforce concepts you need to Access code, go to www.myeconlab.com to
master. register and log in. You will need a Course ID
• Step-by-step Guided Solutions help you from your instructor to enroll in their course.
break down a problem much the same way If your book did not come packaged with a
as an instructor would do during office MyEconLab Access code, visit MyEconLab
hours. Guided Solutions are available for to purchase access at any time.
select problems.
• Links to the eText promote reading of the text
when you need to revisit a concept or
explanation.
• Animated graphs, with audio narration,
appeal to a variety of learning styles.
• A graphing tool enables you to build and
manipulate graphs to better understand how
concepts, numbers, and graphs connect.
MICROECONOMICS
TENTH EDITION
This page intentionally left blank
MICROECONOMICS
TENTH EDITION

MICHAEL PARKIN
University of Western Ontario
Editorial Director Sally Yagan
Editor in Chief Donna Battista
Senior Acquisitions Editor Adrienne D’Ambrosio
Development Editor Deepa Chungi
Managing Editor Nancy Fenton
Assistant Editor Jill Kolongowski
Photo Researcher Angel Chavez
Production Coordinator Alison Eusden
Director of Media Susan Schoenberg
Senior Media Producer Melissa Honig
Director of Marketing Patrice Jones
Executive Marketing Manager Lori DeShazo
Rights and Permissions Advisor Jill Dougan
Senior Manufacturing Buyer Carol Melville
Senior Media Buyer Ginny Michaud
Copyeditor Catherine Baum
Art Director and Cover Designer Jonathan Boylan
Technical Illustrator Richard Parkin
Text Design, Project Management
and Page Make-up Integra Software Services, Inc.
Cover Image: Medioimages/PhotoDisc/Getty Images

Photo credits appear on page C-1, which constitutes a continuation of the copyright page.

Copyright © 2012, 2010, 2008, 2005, 2003 Pearson Education, Inc. All rights reserved. No part of this publica-
tion may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed
in the United States of America. For information on obtaining permission for use of material in 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 http://www.pearsoned.com/legal/-
permissions.htm.

Library of Congress Cataloging-in-Publication Data

Parkin, Michael, 1939–
Microeconomics/Michael Parkin. — 10th ed.
p. cm.
Includes index.
ISBN 978-0-13-139425-4 (alk. paper)
1. Microeconomics. I. Title.
HB171.5.P313 2010
330—dc22 2010045760

1 2 3 4 5 6 7 8 10—CRK—14 13 12 11 10

ISBN 10: 0-13-139425-8

ISBN 13: 978-0-13-139425-4
TO ROBIN
This page intentionally left blank
 ABOUT THE AUTHOR

Michael Parkin is Professor Emeritus in the Department of Economics at

the University of Western Ontario, Canada. Professor Parkin has held faculty
appointments at Brown University, the University of Manchester, the University of
Essex, and Bond University. He is a past president of the Canadian Economics
Association and has served on the editorial boards of the American Economic
Review and the Journal of Monetary Economics and as managing editor of the
Canadian Journal of Economics. Professor Parkin’s research on macroeconomics,
monetary economics, and international economics has resulted in over 160
publications in journals and edited volumes, including the American Economic
Review, the Journal of Political Economy, the Review of Economic Studies, the
Journal of Monetary Economics, and the Journal of Money, Credit and Banking.
He became most visible to the public with his work on inflation that discredited the
use of wage and price controls. Michael Parkin also spearheaded the movement
toward European monetary union. Professor Parkin is an experienced and
dedicated teacher of introductory economics.

vii
This page intentionally left blank
 BRIEF CONTENTS

PART ONE PART FIVE

INTRODUCTION 1 MARKET FAILURE AND GOVERNMENT 371
CHAPTER 1 What Is Economics? 1 CHAPTER 16 Public Choices and Public Goods 371
CHAPTER 2 The Economic Problem 29 CHAPTER 17 Economics of the Environment 393

PART TWO PART SIX

HOW MARKETS WORK 55 FACTOR MARKETS, INEQUALITY,
CHAPTER 3 Demand and Supply 55 AND UNCERTAINTY 417
CHAPTER 4 Elasticity 83 CHAPTER 18 Markets for Factors of Production 417
CHAPTER 5 Efficiency and Equity 105 CHAPTER 19 Economic Inequality 441
CHAPTER 6 Government Actions in Markets 127 CHAPTER 20 Uncertainty and Information 465
CHAPTER 7 Global Markets in Action 151

PART THREE
HOUSEHOLDS’ CHOICES 179
CHAPTER 8 Utility and Demand 179
CHAPTER 9 Possibilities, Preferences, and Choices
203

PART FOUR
FIRMS AND MARKETS 227
CHAPTER 10 Organizing Production 227
CHAPTER 11 Output and Costs 251
CHAPTER 12 Perfect Competition 273
CHAPTER 13 Monopoly 299
CHAPTER 14 Monopolistic Competition 323
CHAPTER 15 Oligopoly 341

ix
This page intentionally left blank
 ALTERNATIVE PATHWAYS THROUGH THE CHAPTERS

Micro Flexibility

Chapter 1 Chapter 5 Chapter 6 Chapter 16

What is Economics Efficiency and Equity Government Actions Public Choices

in Markets and Public Goods

Chapter 2 Chapter 19 Chapter 7 Chapter 17

The Economic Problem Economic Inequality Global Markets Economics of the

in Action Environment

Chapter 3 Chapter 4 Chapter 12

Demand and Supply Elasticity Perfect Competition

Chapter 13

Chapter 10 Chapter 11 Monopoly

Organizing Production Output and Costs

Chapter 14
Chapter 8 Chapter 20
Monopolistic
Uncertainty and Competition
Utility and Demand
Information

Chapter 9 Chapter 15

Possibilities, Oligopoly
Preferences, and
Choices

Chapter 18

Markets for Factors

of Production

Start here ... … then jump to … and jump to any of these after
any of these … doing the pre-requisites indicated

xi
This page intentionally left blank
 TABLE OF CONTENTS

PART ONE APPENDIX Graphs in Economics 13

INTRODUCTION 1 Graphing Data 13

Scatter Diagrams 14
CHAPTER 1 ◆ WHAT IS ECONOMICS? 1 Graphs Used in Economic Models 16
Definition of Economics 2 Variables That Move in the Same Direction 16
Variables That Move in Opposite Directions 17
Two Big Economic Questions 3 Variables That Have a Maximum or a
What, How, and For Whom? 3 Minimum 18
Can the Pursuit of Self-Interest Promote the Variables That Are Unrelated 19
Social Interest? 5
The Slope of a Relationship 20
The Economic Way of Thinking 8 The Slope of a Straight Line 20
A Choice Is a Tradeoff 8 The Slope of a Curved Line 21
Making a Rational Choice 8
Benefit: What You Gain 8 Graphing Relationships Among More Than
Cost: What You Must Give Up 8 Two Variables 22
How Much? Choosing at the Margin 9 Ceteris Paribus 22
Choices Respond to Incentives 9 When Other Things Change 23

Economics as Social Science and MATHEMATICAL NOTE

Policy Tool 10 Equations of Straight Lines 24
Economist as Social Scientist 10
Economist as Policy Adviser 10

Summary (Key Points and Key Terms), Study Plan

Problems and Applications, and Additional Problems
and Applications appear at the end of each chapter.

xiii
xiv Contents

CHAPTER 2 ◆ THE ECONOMIC PROBLEM 29 PART TWO

Production Possibilities and Opportunity HOW MARKETS WORK 55
Cost 30
Production Possibilities Frontier 30 CHAPTER 3 ◆ DEMAND AND SUPPLY 55
Production Efficiency 31
Tradeoff Along the PPF 31 Markets and Prices 56
Opportunity Cost 31 Demand 57
Using Resources Efficiently 33 The Law of Demand 57
The PPF and Marginal Cost 33 Demand Curve and Demand Schedule 57
Preferences and Marginal Benefit 34 A Change in Demand 58
Allocative Efficiency 35 A Change in the Quantity Demanded Versus a
Change in Demand 60
Economic Growth 36
The Cost of Economic Growth 36 Supply 62
A Nation’s Economic Growth 37 The Law of Supply 62
Supply Curve and Supply Schedule 62
Gains from Trade 38 A Change in Supply 63
Comparative Advantage and Absolute A Change in the Quantity Supplied Versus a
Advantage 38 Change in Supply 64
Achieving the Gains from Trade 39
Market Equilibrium 66
Economic Coordination 41 Price as a Regulator 66
Firms 41 Price Adjustments 67
Markets 42
Property Rights 42 Predicting Changes in Price and Quantity 68
Money 42 An Increase in Demand 68
Circular Flows Through Markets 42 A Decrease in Demand 68
Coordinating Decisions 42 An Increase in Supply 70
A Decrease in Supply 70
READING BETWEEN THE LINES All the Possible Changes in Demand and
The Rising Opportunity Cost of Food 44 Supply 72
PART ONE WRAP-UP ◆ READING BETWEEN THE LINES
Demand and Supply: The Price of Coffee 74
Understanding the Scope of Economics
Your Economic Revolution 51 MATHEMATICAL NOTE
Demand, Supply, and Equilibrium 76
Talking with
Jagdish Bhagwati 52
 Contents xv

CHAPTER 4 ◆ ELASTICITY 83 CHAPTER 5 ◆ EFFICIENCY AND EQUITY 105

Price Elasticity of Demand 84 Resource Allocation Methods 106
Calculating Price Elasticity of Demand 85 Market Price 106
Inelastic and Elastic Demand 86 Command 106
Elasticity Along a Linear Demand Curve 87 Majority Rule 106
Total Revenue and Elasticity 88 Contest 106
Your Expenditure and Your Elasticity 89 First-Come, First-Served 106
The Factors That Influence the Elasticity of Lottery 107
Demand 89 Personal Characteristics 107
Force 107
More Elasticities of Demand 91
Cross Elasticity of Demand 91 Benefit, Cost, and Surplus 108
Income Elasticity of Demand 92 Demand, Willingness to Pay, and Value 108
Individual Demand and Market Demand 108
Elasticity of Supply 94
Consumer Surplus 109
Calculating the Elasticity of Supply 94
Supply and Marginal Cost 109
The Factors That Influence the Elasticity of
Supply, Cost, and Minimum Supply-Price 110
Supply 95
Individual Supply and Market Supply 110
READING BETWEEN THE LINES Producer Surplus 111
The Elasticities of Demand and Supply for Is the Competitive Market Efficient? 112
Tomatoes 98 Efficiency of Competitive Equilibrium 112
Market Failure 113
Sources of Market Failure 114
Alternatives to the Market 115
Is the Competitive Market Fair? 116
It’s Not Fair If the Result Isn’t Fair 116
It’s Not Fair If the Rules Aren’t Fair 118
Case Study: A Water Shortage in a Natural
Disaster 118
READING BETWEEN THE LINES
Is the Global Market for Roses Efficient? 120
xvi Contents

CHAPTER 6 ◆ GOVERNMENT ACTIONS IN CHAPTER 7 ◆ GLOBAL MARKETS IN ACTION

MARKETS 127 151

A Housing Market With a Rent Ceiling 128 How Global Markets Work 152
A Housing Shortage 128 International Trade Today 152
Increased Search Activity 128 What Drives International Trade? 152
A Black Market 128 Why the United States Imports T-Shirts 153
Inefficiency of a Rent Ceiling 129 Why the United States Exports Airplanes 154
Are Rent Ceilings Fair? 130
Winners, Losers, and the Net Gain from
A Labor Market With a Minimum Wage 131 Trade 155
Minimum Wage Brings Unemployment 131 Gains and Losses from Imports 155
Inefficiency of a Minimum Wage 131 Gains and Losses from Exports 156
Is the Minimum Wage Fair? 132 Gains for All 156
Taxes 133 International Trade Restrictions 157
Tax Incidence 133 Tariffs 157
A Tax on Sellers 133 Import Quotas 160
A Tax on Buyers 134 Other Import Barriers 162
Equivalence of Tax on Buyers and Sellers 134 Export Subsidies 162
Tax Incidence and Elasticity of Demand 135
The Case Against Protection 163
Tax Incidence and Elasticity of Supply 136
The Infant-Industry Argument 163
Taxes and Efficiency 137
The Dumping Argument 163
Taxes and Fairness 138
Saves Jobs 164
Production Quotas and Subsidies 139 Allows Us to Compete with Cheap Foreign
Production Quotas 139 Labor 164
Subsidies 140 Penalizes Lax Environmental Standards 164
Prevents Rich Countries from Exploiting
Markets for Illegal Goods 142
Developing Countries 165
A Free Market for a Drug 142
Offshore Outsourcing 165
A Market for an Illegal Drug 142
Avoiding Trade Wars 166
Legalizing and Taxing Drugs 143
Why Is International Trade Restricted? 166
READING BETWEEN THE LINES Compensating Losers 167
Government Actions in Labor Markets 144
READING BETWEEN THE LINES
A Tarriff on Tires 168

PART TWO WRAP-UP ◆

Understanding How Markets Work
The Amazing Market 175
Talking with
Susan Athey 176
 Contents xvii

PART THREE CHAPTER 9 ◆ POSSIBILITIES, PREFERENCES,

HOUSEHOLDS’ CHOICES 179 AND CHOICES 203
Consumption Possibilities 204
CHAPTER 8 ◆ UTILITY AND DEMAND 179 Budget Equation 205

Consumption Choices 180 Preferences and Indifference Curves 207

Consumption Possibilities 180 Marginal Rate of Substitution 208
Preferences 181 Degree of Substitutability 209

Utility-Maximizing Choice 183 Predicting Consumer Choices 210

A Spreadsheet Solution 183 Best Affordable Choice 210
Choosing at the Margin 184 A Change in Price 211
The Power of Marginal Analysis 186 A Change in Income 213
Revealing Preferences 186 Substitution Effect and Income Effect 214

Predictions of Marginal Utility Theory 187 READING BETWEEN THE LINES

A Fall in the Price of a Movie 187 Paper Books Versus e-Books 216
A Rise in the Price of Soda 189
A Rise in Income 190 PART THREE WRAP-UP ◆
The Paradox of Value 191 Understanding Households’ Choices
Temperature: An Analogy 192 Making the Most of Life 223
New Ways of Explaining Consumer Talking with
Choices 194 Steven D. Levitt 224
Behavioral Economics 194
Neuroeconomics 195
Controversy 195
READING BETWEEN THE LINES
A Paradox of Value: Paramedics and Hockey
Players 196
xviii Contents

PART FOUR CHAPTER 11 ◆ OUTPUT AND COSTS 251

FIRMS AND MARKETS 227 Decision Time Frames 252
The Short Run 252
The Long Run 252
CHAPTER 10 ◆ ORGANIZING
PRODUCTION 227 Short-Run Technology Constraint 253
Product Schedules 253
The Firm and Its Economic Problem 228
Product Curves 253
The Firm’s Goal 228 Total Product Curve 254
Accounting Profit 228 Marginal Product Curve 254
Economic Accounting 228 Average Product Curve 256
A Firm’s Opportunity Cost of Production 228
Economic Accounting: A Summary 229 Short-Run Cost 257
Decisions 229 Total Cost 257
The Firm’s Constraints 230 Marginal Cost 258
Average Cost 258
Technological and Economic Efficiency 231
Marginal Cost and Average Cost 258
Technological Efficiency 231 Why the Average Total Cost Curve Is
Economic Efficiency 231 U-Shaped 258
Information and Organization 233 Cost Curves and Product Curves 260
Command Systems 233 Shifts in the Cost Curves 260
Incentive Systems 233 Long-Run Cost 262
Mixing the Systems 233 The Production Function 262
The Principal-Agent Problem 234 Short-Run Cost and Long-Run Cost 262
Coping with the Principal-Agent Problem 234 The Long-Run Average Cost Curve 264
Types of Business Organization 234 Economies and Diseconomies of Scale 264
Pros and Cons of Different Types of Firms 235
READING BETWEEN THE LINES
Markets and the Competitive Environment 237
Cutting the Cost of Producing Electricity 266
Measures of Concentration 238
Limitations of a Concentration Measure 240
Produce or Outsource? Firms and Markets 242
Firm Coordination 242
Market Coordination 242
Why Firms? 242
READING BETWEEN THE LINES
Battling for Markets in Internet Advertising 244
 Contents xix

CHAPTER 12 ◆ PERFECT COMPETITION 273 CHAPTER 13 ◆ MONOPOLY 299

What Is Perfect Competition? 274 Monopoly and How It Arises 300

How Perfect Competition Arises 274 How Monopoly Arises 300
Price Takers 274 Monopoly Price-Setting Strategies 301
Economic Profit and Revenue 274
A Single-Price Monopoly’s Output and
The Firm’s Decisions 275
Price Decision 302
The Firm’s Output Decision 276 Price and Marginal Revenue 302
Marginal Analysis and the Supply Decision 277 Marginal Revenue and Elasticity 303
Temporary Shutdown Decision 278 Price and Output Decision 304
The Firm’s Supply Curve 279
Single-Price Monopoly and
Output, Price, and Profit in the Short Run 280 Competition Compared 306
Market Supply in the Short Run 280 Comparing Price and Output 306
Short-Run Equilibrium 281 Efficiency Comparison 307
A Change in Demand 281 Redistribution of Surpluses 308
Profits and Losses in the Short Run 281 Rent Seeking 308
Three Possible Short-Run Outcomes 282 Rent-Seeking Equilibrium 308
Output, Price, and Profit in the Long Run 283 Price Discrimination 309
Entry and Exit 283 Capturing Consumer Surplus 309
A Closer Look at Entry 284 Profiting by Price Discriminating 310
A Closer Look at Exit 284 Perfect Price Discrimination 311
Long-Run Equilibrium 285 Efficiency and Rent Seeking with Price
Discrimination 312
Changing Tastes and Advancing
Technology 286 Monopoly Regulation 313
A Permanent Change in Demand 286 Efficient Regulation of a Natural Monopoly 313
External Economies and Diseconomies 287 Second-Best Regulation of a Natural
Technological Change 289 Monopoly 314
Competition and Efficiency 290 READING BETWEEN THE LINES
Efficient Use of Resources 290 Is Google Misusing Monopoly Power? 316
Choices, Equilibrium, and Efficiency 290

READING BETWEEN THE LINES

Perfect Competition in Corn 292
xx Contents

CHAPTER 14 ◆ MONOPOLISTIC CHAPTER 15 ◆ OLIGOPOLY 341

COMPETITION 323 What Is Oligopoly? 342
What Is Monopolistic Competition? 324 Barriers to Entry 342
Large Number of Firms 324 Small Number of Firms 343
Product Differentiation 324 Examples of Oligopoly 343
Competing on Quality, Price, and Marketing Oligopoly Games 344
324
What Is a Game? 344
Entry and Exit 325 The Prisoners’ Dilemma 344
Examples of Monopolistic Competition 325 An Oligopoly Price-Fixing Game 346
Price and Output in Monopolistic Other Oligopoly Games 350
Competition 326 The Disappearing Invisible Hand 351
The Firm’s Short-Run Output and Price A Game of Chicken 352
Decision 326 Repeated Games and Sequential
Profit Maximizing Might Be Loss Games 353
Minimizing 326 A Repeated Duopoly Game 353
Long-Run: Zero Economic Profit 327 A Sequential Entry Game in a Contestable
Monopolistic Competition and Perfect Market 354
Competition 328
Is Monopolistic Competition Efficient? 329 Antitrust Law 356
The Antitrust Laws 356
Product Development and Marketing 330
Price Fixing Always Illegal 357
Innovation and Product Development 330 Three Antitrust Policy Debates 357
Advertising 330 Mergers and Acquisitions 359
Using Advertising to Signal Quality 332
Brand Names 333 READING BETWEEN THE LINES
Efficiency of Advertising and Brand Names 333 Gillete and Schick in a Duopoly Game 360
READING BETWEEN THE LINES PART FOUR WRAP-UP ◆
Product Differentiation and Entry in the Market
for Smart Phones 334 Understanding Firms and Markets
Managing Change and Limiting Market
Power 367
Talking with
Thomas Hubbard 368
 Contents xxi

PART FIVE CHAPTER 17 ◆ ECONOMICS OF THE

MARKET FAILURE AND ENVIRONMENT 393
GOVERNMENT 371 Negative Externalities: Pollution 394
Sources of Pollution 394
CHAPTER 16 ◆ PUBLIC CHOICES AND Effects of Pollution 394
Private Cost and Social Cost of Pollution 395
PUBLIC GOODS 371
Production and Pollution: How Much? 396
Public Choices 372 Property Rights 396
Why Governments Exist 372 The Coase Theorem 397
Public Choice and the Political Marketplace 372 Government Actions in a Market with External
Political Equilibrium 373 Costs 398
What is a Public Good? 374 The Tragedy of the Commons 400
A Fourfold Classification 374
Sustainable Use of a Renewable Resource 400
Mixed Goods and Externalities 374
The Overuse of a Common Resource 402
Inefficiencies that Require Public Choices 376
Achieving an Efficient Outcome 403
Providing Public Goods 377
READING BETWEEN THE LINES
The Free-Rider Problem 377
Tax Versus Cap-and-Trade 406
Marginal Social Benefit from a Public
Good 377 PART FIVE WRAP-UP ◆
Marginal Social Cost of a Public Good 378
Efficient Quantity of a Public Good 378 Understanding Market Failure and
Inefficient Private Provision 378 Government
Efficient Public Provision 378 We, the People, … 413
Inefficient Public Overprovision 380
Talking with
Providing Mixed Goods with External Caroline M. Hoxby 414
Benefits 381
Private Benefits and Social Benefits 381
Government Actions in the Market for a Mixed
Good with External Benefits 382
Bureaucratic Inefficiency and Government
Failure 383
Health-Care Services 384
READING BETWEEN THE LINES
Reforming Health Care 386
xxii Contents

CHAPTER 19 ◆ ECONOMIC INEQUALITY 441

PART SIX
FACTOR MARKETS, INEQUALITY, Economic Inequality in the United States 442
AND UNCERTAINTY 417 The Distribution of Income 442
The Income Lorenz Curve 443
The Distribution of Wealth 444
CHAPTER 18 ◆ MARKETS FOR FACTORS OF Wealth or Income? 444
PRODUCTION 417 Annual or Lifetime Income and Wealth? 445
The Anatomy of Factor Markets 418 Trends in Inequality 445
Markets for Labor Services 418 Poverty 446
Markets for Capital Services 418 Inequality in the World Economy 448
Markets for Land Services and Natural Income Distributions in Selected Countries 448
Resources 418 Global Inequality and Its Trends 449
Entrepreneurship 418
The Sources of Economic Inequality 450
The Demand for a Factor of Production 419 Human Capital 450
Value of Marginal Product 419 Discrimination 452
A Firm’s Demand for Labor 419 Contests Among Superstars 453
A Firm’s Demand for Labor Curve 420 Unequal Wealth 454
Changes in a Firm’s Demand for Labor 421
Income Redistribution 455
Labor Markets 422 Income Taxes 455
A Competitive Labor Market 422 Income Maintenance Programs 455
A Labor Market with a Union 424 Subsidized Services 455
Scale of the Union–Nonunion Wage The Big Tradeoff 456
Gap 426
Trends and Differences in Wage Rates 427 READING BETWEEN THE LINES
Trends in Incomes of the Super Rich 458
Capital and Natural Resource Markets 428
Capital Rental Markets 428
Land Rental Markets 428
Nonrenewable Natural Resource Markets 429
READING BETWEEN THE LINES
The Labor Market in Action 432

MATHEMATICAL NOTE
Present Value and Discounting 434
 Contents xxiii

CHAPTER 20 ◆ UNCERTAINTY AND Uncertainty, Information, and the Invisible

INFORMATION 465 Hand 477
Information as a Good 477
Decisions in the Face of Uncertainty 466
Monopoly in Markets that Cope with
Expected Wealth 466 Uncertainty 477
Risk Aversion 466
Utility of Wealth 466 READING BETWEEN THE LINES
Expected Utility 467 Grades as Signals 478
Making a Choice with Uncertainty 468
PART SIX WRAP-UP ◆
Buying and Selling Risk 469
Insurance Markets 469 Understanding Factor Markets,
A Graphical Analysis of Insurance 470 Inequality, and Uncertainty
Risk That Can’t Be Insured 471 For Whom? 485
Private Information 472 Talking with
Asymmetric Information: Examples and David Card 486
Problems 472
The Market for Used Cars 472
The Market for Loans 475 Glossary G-1
The Market for Insurance 476 Index I-1
Credits C-1
This page intentionally left blank