behaviour 71
A Revealed preference 71
B The consumer as a labour supplier 77
C Consumption and the allocation of time 82
D Households 86
5 Production 92
A Introduction 92
B The production function 96
C Variations in scale 101
D Variations in input proportions 105
E The multi-product case 107
6 Cost 111
A Introduction 111
B Long-run cost minimization 114
C Short-run cost minimization 126
D Cost minimization with several plants 135
E Multi-product cost functions 138
vi CONTENTS
7 Supply and firm objectives 143
A Long-run profit maximization 144
B Short-run profit maximization 148
C The multi-product firm 151
D The profit function and comparative statics 154
E The entrepreneurial firm 159
F Labour-managed firms 164
8 The theory of a competitive market 170
A Short-run equilibrium 170
B Stability of equilibrium 175
C Long-run equilibrium 184
D Conclusions 189
9 Monopoly 190
A Introduction 190
B Price and output determination under monopoly 191
C Price discrimination 194
D Monopoly welfare loss 205
10 Input markets 210
A Demand for inputs 210
B Monopsony 216
C Unions as monopoly input suppliers 220
D Bilateral monopoly 223
11 Capital markets 227
A Introduction 227
B Optimal consumption over time 227
C The optimal investment decision 231
D Capital market equilibrium under certainty 240
E Extension to many periods 245
12 General equilibrium 250
A Introduction 250
B Walrasian equilibrium of a competitive economy 251
C Existence of Walrasian equilibrium 254
D Stability of Walrasian equilibrium 260
E Edgeworth exchange theory 266
F Exchange, equilibrium and the core 269
13 Welfare economics 279
A Introduction 279
B Pareto efficient resource allocation 279
C Welfare functions and the Pareto criterion 289
CONTENTS vii
D Pareto efficiency and competitive markets 293
E Distribution and markets 299
F Arrow’s impossibility theorem 305
14 Market failure and government failure 314
A The causes of market failure 314
B Instances of market failure 318
C The theory of the second best 335
D Government action and government failure 340
15 Game theory 346
A Introduction 346
B Game representation and solutions 348
C Games of imperfect and incomplete information 362
D Mixed strategies 375
E Cooperative bargaining games 377
F Bargaining as a non-cooperative game 385
G Delay and disagreement in bargaining 392
16 Oligopoly 400
A Introduction 400
B One-shot games 401
C Oligopoly as a repeated game 417
D Entry 433
E Conclusions 444
17 Choice under uncertainty 446
A Introduction 446
B A formalization of ‘uncertainty’ 447
C Choice under uncertainty 449
D Properties of the utility function 456
E Risk aversion and indifference curves 466
F Measures of risk 473
G Comparative statics under uncertainty 483
18 Production under uncertainty 491
A Introduction 491
B Competitive firm under uncertainty 491
C Production with futures markets 503
19 Insurance, risk spreading and pooling 507
A Introduction 507
B The insurance decision 507
viii CONTENTS
C Incomplete insurance markets 514
D Risk spreading: the Arrow-Lind Theorem 520
E Risk pooling and diversification 525
F Asymmetric information in insurance markets: adverse selection 530
G Asymmetric information in insurance markets: moral hazard 540
H Signalling
20 Agency, contract theory and the firm 553
A Critique of the classical theory of the firm 553
B Agency theory and the separation of ownership 555
C The moral hazard principal–agent model 568
D The adverse selection principal–agent model 579
21 General equilibrium under uncertainty and incomplete markets 602
A Introduction 602
B Complete markets in state contingent claims 604
C State-contingent commodities 614
D Efficiency with production 627
E The stock market 637
F Incomplete stock markets 648
Mathematical Appendices
A The structure of an optimization problem 657
B Solutions to optimization problems 660
C Existence of solutions 670
D Local and global optima 672
E Uniqueness of solutions 675
F Interior and boundary optima 677
G Location of the optimum: the method of Lagrange 679
H Concave programming and the Kuhn-Tucker conditions 686
I Second-order conditions and comparative statics 696
J The envelope theorem 708
K Fixed point theorems 710
L Bayes’s rule 712
References and further reading 713
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