Instructor’s Manual
Duncan M. Holthausen
North Carolina State University
Microeconomics
7th edition
Robert S. Pindyck
Daniel L. Rubinfeld
www.elsolucionario.net
, CONTENTS
P A R T 1: Introduction: Markets and Prices
Chapter 1 Preliminaries 1
Chapter 2 The Basics of Supply and Demand 6
P A R T 2: Producers, Consumers, and Competitive Markets
Chapter 3 Consumer Behavior 26
Chapter 4 Individual and Market Demand 49
Chapter 4 Appendix 69
Chapter 5 Uncertainty and Consumer Behavior 76
Chapter 6 Production 88
Chapter 7 The Cost of Production 99
Chapter 7 Appendix 115
Chapter 8 Profit Maximization and Competitive Supply 119
Chapter 9 The Analysis of Competitive Markets 137
P A R T 3: Market Structure and Competitive Strategy
Chapter 10 Market Power: Monopoly and Monopsony 158
Chapter 11 Pricing with Market Power 182
Chapter 11 Appendix 209
Chapter 12 Monopolistic Competition and Oligopoly 216
Chapter 13 Game Theory and Competitive Strategy 245
Chapter 14 Markets for Factor Inputs 262
Chapter 15 Investment, Time, and Capital Markets 274
P A R T 4: Information, Market Failure, and the Role of Government
Chapter 16 General Equilibrium and Economic Efficiency 289
Chapter 17 Markets with Asymmetric Information 303
Chapter 18 Externalities and Public Goods 315
www.elsolucionario.net
, Chapter 1: Preliminaries
PART I
INTRODUCTION:
MARKETS AND PRICES
CHAPTER 1
PRELIMINARIES
TEACHING NOTES
Chapter 1 covers basic concepts students first saw in their introductory course but could bear
some repeating. Since most students will not have read this chapter before the first class, it is a good
time to get them talking about some of the concepts presented. You might start by asking for a
definition of economics. Make sure to emphasize scarcity and trade-offs. Remind students that the
objective of economics is to explain observed phenomena and predict behavior of consumers and firms
as economic conditions change. Ask about the differences (and similarities) between microeconomics
and macroeconomics and the difference between positive and normative analysis. Review the concept of
a market and the role prices play in allocating resources. Discussions of economic theories and models
may be a bit abstract at this point in the course, but you can lay the groundwork for a deeper
discussion that might take place when you cover consumer behavior in Chapter 3.
Section 1.3 considers real and nominal prices. Given the reliance on dollar prices in the
economy, students must understand the difference between real and nominal prices and how to
compute real prices. Most students know about the Consumer Price Index, so you might also mention
other price indexes such as the Producer Price Index and the Personal Consumption Expenditures
(PCE) Price Index, which is the Fed’s preferred inflation measure. 1 It is very useful to go over some
numerical examples using goods that are in the news and/or that students often purchase such as
gasoline, food, textbooks, and a college education.2
In general, the first class is a good time to pique student interest in the course. It is also a good
time to tell students that they need to work hard to learn how to do economic analysis, and that
memorization alone will not get them through the course. Students must learn to think like
economists, so encourage them to work lots of problems. Also encourage them to draw graphs neatly
and large enough to make them easy to interpret. It always amazes me to see the tiny, poorly drawn
graphs some students produce. It is no wonder their answers are often incorrect. You might even
suggest they bring a small ruler and colored pencils to class so they can draw good diagrams.
QUESTIONS FOR REVIEW
1. It is often said that a good theory is one that can be refuted by an empirical, data-
oriented study. Explain why a theory that cannot be evaluated empirically is not a good
theory.
A theory is useful only if it succeeds in explaining and predicting the phenomena it was
intended to explain. If a theory cannot be evaluated or tested by comparing its
predictions to known facts and data, then we have no idea whether the theory is valid.
If we cannot validate the theory, we cannot have any confidence in its predictions, and
it is of little use.
1
The CPI and PPI are reported by the Bureau of Labor Statistics (www.bls.gov). The PCE Price Index is compiled
by the Bureau of Economic Analysis in the Commerce Department (www.bea.gov).
2
The College Board collects data on college tuition (www.collegeboard.com).
1
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
www.elsolucionario.net
, Chapter 1: Preliminaries
2. Which of the following two statements involves positive economic analysis and which
normative? How do the two kinds of analysis differ?
a. Gasoline rationing (allocating to each individual a maximum amount of gasoline
that can be purchased each year) is a poor social policy because it interferes with
the workings of the competitive market system.
Positive economic analysis is concerned with explaining what is and predicting what
will be. Normative economic analysis describes what ought to be. Statement (a) is
primarily normative because it makes the normative assertion (i.e., a value judgment)
that gasoline rationing is “poor social policy.” There is also a positive element to
statement (a), because it claims that gasoline rationing “interferes with the workings of
the competitive market system.” This is a prediction that a constraint placed on
demand will change the market equilibrium.
b. Gasoline rationing is a policy under which more people are made worse off than are
made better off.
Statement (b) is positive because it predicts how gasoline rationing effects people
without making a value judgment about the desirability of the rationing policy.
3. Suppose the price of regular-octane gasoline were 20 cents per gallon higher in New
Jersey than in Oklahoma. Do you think there would be an opportunity for arbitrage (i.e.,
that firms could buy gas in Oklahoma and then sell it at a profit in New Jersey)? Why or
why not?
Oklahoma and New Jersey represent separate geographic markets for gasoline because
of high transportation costs. There would be an opportunity for arbitrage if
transportation costs were less than 20 cents per gallon. Then arbitrageurs could make
a profit by purchasing gasoline in Oklahoma, paying to transport it to New Jersey and
then selling it in New Jersey. If the transportation costs were 20 cents or higher,
however, no arbitrage would take place.
4. In Example 1.3, what economic forces explain why the real price of eggs has fallen while
the real price of a college education has increased? How have these changes affected
consumer choices?
The price and quantity of goods (e.g., eggs) and services (e.g., a college education) are
determined by the interaction of supply and demand. The real price of eggs fell from
1970 to 2007 because of either a reduction in demand (e.g., consumers switched to
lower-cholesterol food), a reduction in production costs (e.g., improvements in egg
production technology), or both. In response, the price of eggs relative to other foods
decreased. The real price of a college education rose because of either an increase in
demand (e.g., the perceived value of a college education increased, population
increased, etc.), an increase in the cost of education (e.g., increase in faculty and staff
salaries), or both.
5. Suppose that the Japanese yen rises against the U.S. dollar – that is, it will take more
dollars to buy any given amount of Japanese yen. Explain why this increase
simultaneously increases the real price of Japanese cars for U.S. consumers and lowers the
real price of U.S. automobiles for Japanese consumers.
As the value of the yen grows relative to the dollar, it takes more dollars to purchase a
yen, and it takes fewer yen to purchase a dollar. Assume that the costs of production
for both Japanese and U.S. automobiles remain unchanged. Then using the new
exchange rate, the purchase of a Japanese automobile priced in yen requires more
dollars, so the real price of Japanese cars in dollars increases. Similarly, the purchase
of a U.S. automobile priced in dollars requires fewer yen, and thus the real price of a
U.S automobile in yen decreases.
2
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
www.elsolucionario.net
Duncan M. Holthausen
North Carolina State University
Microeconomics
7th edition
Robert S. Pindyck
Daniel L. Rubinfeld
www.elsolucionario.net
, CONTENTS
P A R T 1: Introduction: Markets and Prices
Chapter 1 Preliminaries 1
Chapter 2 The Basics of Supply and Demand 6
P A R T 2: Producers, Consumers, and Competitive Markets
Chapter 3 Consumer Behavior 26
Chapter 4 Individual and Market Demand 49
Chapter 4 Appendix 69
Chapter 5 Uncertainty and Consumer Behavior 76
Chapter 6 Production 88
Chapter 7 The Cost of Production 99
Chapter 7 Appendix 115
Chapter 8 Profit Maximization and Competitive Supply 119
Chapter 9 The Analysis of Competitive Markets 137
P A R T 3: Market Structure and Competitive Strategy
Chapter 10 Market Power: Monopoly and Monopsony 158
Chapter 11 Pricing with Market Power 182
Chapter 11 Appendix 209
Chapter 12 Monopolistic Competition and Oligopoly 216
Chapter 13 Game Theory and Competitive Strategy 245
Chapter 14 Markets for Factor Inputs 262
Chapter 15 Investment, Time, and Capital Markets 274
P A R T 4: Information, Market Failure, and the Role of Government
Chapter 16 General Equilibrium and Economic Efficiency 289
Chapter 17 Markets with Asymmetric Information 303
Chapter 18 Externalities and Public Goods 315
www.elsolucionario.net
, Chapter 1: Preliminaries
PART I
INTRODUCTION:
MARKETS AND PRICES
CHAPTER 1
PRELIMINARIES
TEACHING NOTES
Chapter 1 covers basic concepts students first saw in their introductory course but could bear
some repeating. Since most students will not have read this chapter before the first class, it is a good
time to get them talking about some of the concepts presented. You might start by asking for a
definition of economics. Make sure to emphasize scarcity and trade-offs. Remind students that the
objective of economics is to explain observed phenomena and predict behavior of consumers and firms
as economic conditions change. Ask about the differences (and similarities) between microeconomics
and macroeconomics and the difference between positive and normative analysis. Review the concept of
a market and the role prices play in allocating resources. Discussions of economic theories and models
may be a bit abstract at this point in the course, but you can lay the groundwork for a deeper
discussion that might take place when you cover consumer behavior in Chapter 3.
Section 1.3 considers real and nominal prices. Given the reliance on dollar prices in the
economy, students must understand the difference between real and nominal prices and how to
compute real prices. Most students know about the Consumer Price Index, so you might also mention
other price indexes such as the Producer Price Index and the Personal Consumption Expenditures
(PCE) Price Index, which is the Fed’s preferred inflation measure. 1 It is very useful to go over some
numerical examples using goods that are in the news and/or that students often purchase such as
gasoline, food, textbooks, and a college education.2
In general, the first class is a good time to pique student interest in the course. It is also a good
time to tell students that they need to work hard to learn how to do economic analysis, and that
memorization alone will not get them through the course. Students must learn to think like
economists, so encourage them to work lots of problems. Also encourage them to draw graphs neatly
and large enough to make them easy to interpret. It always amazes me to see the tiny, poorly drawn
graphs some students produce. It is no wonder their answers are often incorrect. You might even
suggest they bring a small ruler and colored pencils to class so they can draw good diagrams.
QUESTIONS FOR REVIEW
1. It is often said that a good theory is one that can be refuted by an empirical, data-
oriented study. Explain why a theory that cannot be evaluated empirically is not a good
theory.
A theory is useful only if it succeeds in explaining and predicting the phenomena it was
intended to explain. If a theory cannot be evaluated or tested by comparing its
predictions to known facts and data, then we have no idea whether the theory is valid.
If we cannot validate the theory, we cannot have any confidence in its predictions, and
it is of little use.
1
The CPI and PPI are reported by the Bureau of Labor Statistics (www.bls.gov). The PCE Price Index is compiled
by the Bureau of Economic Analysis in the Commerce Department (www.bea.gov).
2
The College Board collects data on college tuition (www.collegeboard.com).
1
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
www.elsolucionario.net
, Chapter 1: Preliminaries
2. Which of the following two statements involves positive economic analysis and which
normative? How do the two kinds of analysis differ?
a. Gasoline rationing (allocating to each individual a maximum amount of gasoline
that can be purchased each year) is a poor social policy because it interferes with
the workings of the competitive market system.
Positive economic analysis is concerned with explaining what is and predicting what
will be. Normative economic analysis describes what ought to be. Statement (a) is
primarily normative because it makes the normative assertion (i.e., a value judgment)
that gasoline rationing is “poor social policy.” There is also a positive element to
statement (a), because it claims that gasoline rationing “interferes with the workings of
the competitive market system.” This is a prediction that a constraint placed on
demand will change the market equilibrium.
b. Gasoline rationing is a policy under which more people are made worse off than are
made better off.
Statement (b) is positive because it predicts how gasoline rationing effects people
without making a value judgment about the desirability of the rationing policy.
3. Suppose the price of regular-octane gasoline were 20 cents per gallon higher in New
Jersey than in Oklahoma. Do you think there would be an opportunity for arbitrage (i.e.,
that firms could buy gas in Oklahoma and then sell it at a profit in New Jersey)? Why or
why not?
Oklahoma and New Jersey represent separate geographic markets for gasoline because
of high transportation costs. There would be an opportunity for arbitrage if
transportation costs were less than 20 cents per gallon. Then arbitrageurs could make
a profit by purchasing gasoline in Oklahoma, paying to transport it to New Jersey and
then selling it in New Jersey. If the transportation costs were 20 cents or higher,
however, no arbitrage would take place.
4. In Example 1.3, what economic forces explain why the real price of eggs has fallen while
the real price of a college education has increased? How have these changes affected
consumer choices?
The price and quantity of goods (e.g., eggs) and services (e.g., a college education) are
determined by the interaction of supply and demand. The real price of eggs fell from
1970 to 2007 because of either a reduction in demand (e.g., consumers switched to
lower-cholesterol food), a reduction in production costs (e.g., improvements in egg
production technology), or both. In response, the price of eggs relative to other foods
decreased. The real price of a college education rose because of either an increase in
demand (e.g., the perceived value of a college education increased, population
increased, etc.), an increase in the cost of education (e.g., increase in faculty and staff
salaries), or both.
5. Suppose that the Japanese yen rises against the U.S. dollar – that is, it will take more
dollars to buy any given amount of Japanese yen. Explain why this increase
simultaneously increases the real price of Japanese cars for U.S. consumers and lowers the
real price of U.S. automobiles for Japanese consumers.
As the value of the yen grows relative to the dollar, it takes more dollars to purchase a
yen, and it takes fewer yen to purchase a dollar. Assume that the costs of production
for both Japanese and U.S. automobiles remain unchanged. Then using the new
exchange rate, the purchase of a Japanese automobile priced in yen requires more
dollars, so the real price of Japanese cars in dollars increases. Similarly, the purchase
of a U.S. automobile priced in dollars requires fewer yen, and thus the real price of a
U.S automobile in yen decreases.
2
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
www.elsolucionario.net
