# Chicago Price Theory

248# Chicago Price Theory

248## eBook

## Overview

**An authoritative textbook based on the legendary economics course taught at the University of Chicago**

Price theory is a powerful analytical toolkit for measuring, explaining, and predicting human behavior in the marketplace. This incisive textbook provides an essential introduction to the subject, offering a diverse array of practical methods that empower students to learn by doing. Based on Economics 301, the legendary PhD course taught at the University of Chicago, the book emphasizes the importance of applying price theory in order to master its concepts.*Chicago Price Theory* features immersive chapter-length examples such as addictive goods, urban-property pricing, the consequences of prohibition, the value of a statistical life, and occupational choice. It looks at human behavior in the aggregate of an industry, region, or demographic group, but also provides models of individuals when they offer insights about the aggregate. The book explains the surprising answers that price theory can provide to practical questions about taxation, education, the housing market, government subsidies, and much more.

- Emphasizes the application of price theory, enabling students to learn by doing
- Features chapter-length examples such as addictive goods, urban-property pricing, the consequences of prohibition, and the value of a statistical life
- Supported by video lectures taught by Kevin M. Murphy and Gary Becker
- The video course enables students to learn the theory at home and practice the applications in the classroom

## Related collections and offers

## Product Details

ISBN-13: | 9780691198811 |
---|---|

Publisher: | Princeton University Press |

Publication date: | 09/10/2019 |

Sold by: | Barnes & Noble |

Format: | eBook |

Pages: | 248 |

File size: | 5 MB |

## About the Author

**Sonia Jaffe**is a research economist at Microsoft.

**Robert Minton**is a PhD student in business economics at Harvard Business School.

**Casey B. Mulligan**is professor of economics at the University of Chicago.

**Kevin M. Murphy**is the George J. Stigler Distinguished Service Professor of Economics at the University of Chicago's Booth School of Business.

## Table of Contents

Acknowledgments xiii

Chicago Price Theory: An Introduction 1

The Chicago Economics Tradition 1

Price Theory Differs from Microeconomics 2

Using Chicago Price Theory to Learn Economics 4

Example: Ethanol Fuel Subsidies 6

Example: Acquired Comparative Advantage 12

Outline of the Course 16

Part I Prices and Substitution Effects

Chapter 1 Utility Maximization and Demand 21

Utility Maximization 21

The Theory of Demand 25

Chapter 2 Cost Minimization and Demand 30

The Cost Function 30

Hicks' Generalized Law of Demand 34

Relationships between Indifference Curves and the Demand System 35

Properties of Hicksian Demand Functions 36

Chapter 3 Relating the Marshallian and Hicksian Systems 38

The Slutsky Equation 38

Adding Up and Symmetry for the Marshallian System 41

Demand System Degrees of Freedom 43

The Income Effect of a Price Change 44

Chapter 4 Price Indices: Consumer Theory Guides Measurement 48

Laspeyres and Paasche Decompositions of Expenditure Growth 48

Chained Price Indices 51

Using the Cost Function to Value Quality Change 55

Chapter 5 Nudges in Consumer Theory 59

Indifference Curves for Buyers 59

Consumer Misinformation and "Nudgeability" Is a Prediction of Consumer Theory 60

Chapter 6 Short- and Long-Run Demand, with an Application to Addiction 62

An Example: The Demand for Cars and Gasoline 62

Relating the Short-Run Demand Curve to the Overall Demand System 64

Using Consumption Stocks to Understand Addiction 66

Short- and Long-Run Price Effects on Addictive Behaviors 69

Homework Problems for Part I: Prices and Substitution Effects 73

Part II Market Equilibrium

Chapter 7 Discrete Choice and Product Quality 79

Market Demand Is a Distribution Function 79

Equilibrium Product Quality 81

Heterogeneous Firms 87

Heterogeneous Firms and Consumers 91

Chapter 8 Location Choice: An Introduction to Equilibrium Compensating Differences 94

Properties of the Rent Gradient Model 96

Chapter 9 Learning by Doing and On-the-job Investment 101

Human Capital Acquired from Training Programs Administered by the Employer 101

Learning by Doing 102

Types of Human Capital 104

Chapter 10 Production, Profits, and Factor Demand 106

Comparative Advantage and the Production-Possibility Frontier 106

The Production Function 109

Profit Maximization 110

Cost Minimization 112

The Firm's Slutsky Equation 114

Two-Input Production 116

Substitution and Scale Effects on Factor Demand 120

Acquired Comparative Advantage 121

Chapter 11 The Industry Model 126

Properties of the Industry Model 126

The Supply-Demand Perspective on Industry Behavior 128

Four Ingredients of the Industry Model 131

Industry Elasticity of Labor Demand 132

Are Labor and Capital Complements or Substitutes? 133

Chapter 12 The Consequences of Prohibition 135

The Revenue from Drug Sales 135

The Legalization Multiplier 136

Half-Hearted Prohibitions Are the Most Costly 137

Chapter 13 A Price-Theoretic Perspective on the Core 140

Looking for Gains from Trade: Indifference Curves for Buyers and Sellers 140

Exclusive Dealing, Quantity Discounts, and Other Market Outcomes That Are off the Marshallian Demand Curve 142

Chapter 14 Multiple-Factor Industry Model 145

Review of the Industry Model 145

Properties of the Multiple-Factor Industry Model 146

Analyzing Production 148

Endogenous Factor Prices 149

Homework Problems for Part II: Market Equilibrium 150

Part III Technological Progress and Markets for Durable Goods

Chapter 15 Durable Production Factors 155

Stocks and Flows for Factor Prices and Quantities 155

The Use and Investment Markets for Capital Goods 157

Four Equilibrium Conditions 157

Steady State 159

Perturbing the Steady State 159

Chapter 16 Capital Accumulation in Continuous Time 166

Perturbing the Steady State (Continued) 166

Continuous-Time Versions of the Four Equilibrium Conditions 168

Chapter 17 Investment from a Planning Perspective 172

Adjustment Costs Applied to Net Investment 174

Endogenous Interest Rates: The Neoclassical Growth Model 176

Chapter 18 Applied Factor Supply and Demand 1: Technological Progress and Capital-Income Tax Incidence 180

Definitions of Labor Productivity 180

Explaining Economic Growth in the Presence of Complementarity 180

The Consequences of Unbiased Technological Change 182

The Incidence of a Capital-Income Tax 184

Why Capital is Elastically Supplied in the Long Run 186

The Incidence of a Corporate-Income Tax 186

Chapter 19 Applied Factor Supply and Demand 2: Factor-Biased Technological Progress, Factor Shares, and the Malthusian Economy 189

The Definition of Technological Bias 189

Relating Labor's Share to Economic Growth 191

The Malthusian Special Case 195

Capital-Biased Technical Change Also Benefits Labor 195

Adding Human Capital 197

Chapter 20 Investments in Health and the Value of a Statistical Life 199

Investments in Self-Protection 200

The Value of a Statistical Life 204

Homework Problems for Part III: Technological Progress and Markets for Durable Goods 207

Notes 211

Bibliography 217

Index 221

## What People are Saying About This

**From the Publisher**

"A tremendous resource. This comprehensive and innovative book brings together in one great package the Chicago way of thinking about price theory."**—Douglas A. Irwin, author of Free Trade under Fire **

"This excellent book captures the essence of the University of Chicago's unique approach to economics education. It uses many modern examples to demonstrate that price theory is a powerful tool for understanding human behavior."

**—Matthew E. Kahn, Johns Hopkins University**