Microeconomics

Abstract

This book presents microeconomics as an evolving science, interacting with mathematics, psychology, and other disciplines and offering solutions to a growing range of practical problems. It gives extensive and innovative coverage of recent research in cognitive psychology and behavioral economics. This research not only documents behavior inconsistent with some elements of traditional theory, but also advances positive theories with superior predictive power. The research covered includes studies of loss aversion, reference-dependent preferences, the context and framing of choice, hyperbolic discounting and inconsistent intertemporal choice, predictable errors in updating probabilities, nonlinear weighting of probabilities, and prospect theory. Covering results from behavioral and experimental economics along with traditional microeconomic doctrine involves re-balancing three key components of economics: issues, theory, and data. In comparison to traditional texts, this book places more emphasis on experimental data, both when they support received theory and when they reveal anomalies. Thus the book covers both feed-lot experiments that generate conventionally shaped isoquants and choice experiments that cast doubt on the predictive value of expected utility theory. This text offers many opportunities to apply high-school algebra in an economic context and to develop basic skills in linear programming and risk modeling. Through footnotes and parenthetical remarks, it also encourages readers to make good use of any calculus they know. Exercises appear where appropriate in the text; solutions and supplemental problems are collected at the ends of chapters.