MICROECONOMICS

Preface xvii
part1 What Is Economics?
introductionThe Ordinary Business of Life	1
ANY GIVEN SUNDAY 1
The Invisible Hand 2
My Benefit, Your Cost 3
Good Times, Bad Times 3
Onward and Upward 4
An Engine for Discovery 4
chapter1First Principles	5
COMMON GROUND 5
Principles That Underlie Individual Choice: The Core of Economics 6
Principle #1: Choices Are Necessary Because Resources Are Scarce 6
Principle #2: The True Cost of Something Is Its Opportunity Cost 7
Principle #3: “How Much” Is a Decision at the Margin 8
Principle #4: People Usually Respond to Incentives, Exploiting Opportunities to Make Themselves Better Off 9
FOR INQUIRING MINDS: Cashing in at School 10
ECONOMICS IN ACTION Boy or Girl? It Depends on the Cost 10
Interaction: How Economies Work 12
Principle #5: There Are Gains from Trade 12
Principle #6: Markets Move Toward Equilibrium 13
FOR INQUIRING MINDS: Choosing Sides 14
Principle #7: Resources Should Be Used Efficiently to Achieve Society’s Goals 15
Principle #8: Markets Usually Lead to Efficiency 16
Principle #9: When Markets Don’t Achieve Efficiency, Government Intervention Can Improve 16
Society’s Welfare 16
ECONOMICS IN ACTION Restoring Equilibrium on the Freeways 17
Economy-Wide Interactions 18
Principle #10: One Person’s Spending Is Another Person’s Income 18
Principle #11: Overall Spending Sometimes Gets Out of Line with the Economy’s Productive Capacity 19
Principle #12: Government Policies Can Change Spending 19
ECONOMICS IN ACTION Adventures in Babysitting 20
BUSINESS CASE: How Priceline.com Revolutionized the Travel Industry 21
chapter2Economics Models: Trade-offs and Trade	25
from kitty hawk to dreamliner 25
Models in Economics: Some Important Examples 26
FOR INQUIRING MINDS: The Model That Ate the Economy 26
Trade-offs: The Production Possibility Frontier 27
Comparative Advantage and Gains from Trade 33
Comparative Advantage and International Trade, in Reality 36
GLOBAL COMPARISON: Pajama Republics 37
Transactions: The Circular-Flow Diagram 37
ECONOMICS IN ACTION Rich Nation, Poor Nation
Using Models 40
Positive versus Normative Economics 40
When and Why Economists Disagree 41
FOR INQUIRING MINDS: When Economists Agree 42
ECONOMICS IN ACTION Economists, Beyond the Ivory Tower 43
BUSINESS CASE: Efficiency, Opportunity Cost, and the Logic of Lean Production 45
chapter 2 appendix Graphs in Economics	51
Getting the Picture 51
Graphs, Variables, and Economic Models 51
How Graphs Work 51
Two-Variable Graphs 51
Curves on a Graph 53
A Key Concept: The Slope of a Curve 54
The Slope of a Linear Curve 54
Horizontal and Vertical Curves and Their Slopes 55
The Slope of a Nonlinear Curve 56
Calculating the Slope Along a Nonlinear Curve 56
Maximum and Minimum Points 58

Calculating the Area Below or Above a Curve 59
Graphs That Depict Numerical Information 60
Types of Numerical Graphs 60
Problems in Interpreting Numerical Graphs 62
part2 Supply and Demand
chapter3Supply and Demand	67
a natural gas boom 67
Supply and Demand: A Model of a Competitive Market 68
The Demand Curve 69
The Demand Schedule and the Demand Curve 69
Shifts of the Demand Curve 70
GLOBAL COMPARISON: Pay More, Pump Less 71
Understanding Shifts of the Demand Curve 73
ECONOMICS IN ACTION Beating the Traffic 78
The Supply Curve 79
The Supply Schedule and the Supply Curve 79
Shifts of the Supply Curve 80
Understanding Shifts of the Supply Curve 81
ECONOMICS IN ACTION Only Creatures Small and Pampered 85
Supply, Demand, and Equilibrium 86
Finding the Equilibrium Price and Quantity 86
Why Do All Sales and Purchases in a Market Take Place at the Same Price? 87
Why Does the Market Price Fall If It Is Above the Equilibrium Price? 88
Why Does the Market Price Rise If It Is Below the Equilibrium Price? 88
Using Equilibrium to Describe Markets 89
ECONOMICS IN ACTION The Price of Admission 89
Changes in Supply and Demand 90
What Happens When the Demand Curve Shifts 91
What Happens When the Supply Curve Shifts 92
Simultaneous Shifts of Supply and Demand Curves 93
FOR INQUIRING MINDS: Tribulations on the Runway 94
ECONOMICS IN ACTION The Cotton Panic and Crash of 2011 95
Competitive Markets—And Others 96
BUSINESS CASE: An Uber Way to Get a Ride 97
chapter4Consumer and Producer Surplus	103
making gains by the book 103
Consumer Surplus and the Demand Curve 104
Willingness to Pay and the Demand Curve 104
Willingness to Pay and Consumer Surplus 104
How Changing Prices Affect Consumer Surplus 107
FOR INQUIRING MINDS: A Matter of Life and Death 110
ECONOMICS IN ACTION When Money Isn’t Enough 110
Producer Surplus and the Supply Curve 111
Cost and Producer Surplus 111
How Changing Prices Affect Producer Surplus 114
ECONOMICS IN ACTION High Times Down on the Farm 115
Consumer Surplus, Producer Surplus, and the Gains from Trade 116
The Gains from Trade 116
The Efficiency of Markets 117
Equity and Efficiency 121
ECONOMICS IN ACTION Take the Keys, Please 121
A Market Economy 122
Why Markets Typically Work So Well 123
A Few Words of Caution 124
ECONOMICS IN ACTION A Great Leap—Backward 125
BUSINESS CASE: StubHub Shows Up The Boss 126
chapter5Price Controls and Quotas: Meddling with Markets	131
big city, not-so-bright ideas 131
Why Governments Control Prices 132
Price Ceilings 132
Modeling a Price Ceiling 133
How a Price Ceiling Causes Inefficiency 134
FOR INQUIRING MINDS: Winners, Losers, and Rent Control 136
FOR INQUIRING MINDS: Mumbai’s Rent-Control Millionaires 138
So Why Are There Price Ceilings? 139
ECONOMICS IN ACTION Price Controls in Venezuela: “You Buy What They Have” 140
Price Floors 141
How a Price Floor Causes Inefficiency 143
GLOBAL COMPARISON: Check Out Our Low, Low Wages! 145
So Why Are There Price Floors? 146
ECONOMICS IN ACTION The Rise and Fall of the Unpaid Intern 146
Controlling Quantities 147
The Anatomy of Quantity Controls 148
The Costs of Quantity Controls 151
ECONOMICS IN ACTION Crabbing, Quotas, and Caving Lives in Alaska 152
BUSINESS CASE: Medallion Financial: Cruising Right Along 154

chapter6Elasticity	161
taken for a ride 161
Defining and Measuring Elasticity 162
Calculating the Price Elasticity of Demand 162
An Alternative Way to Calculate Elasticities: The Midpoint Method 164
ECONOMICS IN ACTION Estimating Elasticities 165
Interpreting the Price Elasticity of Demand 166
How Elastic Is Elastic? 166
Price Elasticity Along the Demand Curve 171
What Factors Determine the Price Elasticity of Demand? 172
ECONOMICS IN ACTION Responding to Your Tuition Bill 173
Other Demand Elasticities 174
The Cross-Price Elasticity of Demand 174
The Income Elasticity of Demand 175
FOR INQUIRING MINDS: Will China Save the U.S Farming Sector? 176
GLOBAL COMPARISON: Food’s Bite in World Budgets 176
ECONOMICS IN ACTION Spending It 177
The Price Elasticity of Supply 177
Measuring the Price Elasticity of Supply 178
What Factors Determine the Price Elasticity of Supply? 179
ECONOMICS IN ACTION European Farm Surpluses 180
An Elasticity Menagerie 181
BUSINESS CASE: The Airline Industry: Fly Less, Charge More 182
part 3 Individuals and Markets
chapter7Taxes	187
the founding taxers 187
The Economics of Taxes: A Preliminary View 188
The Effect of an Excise Tax on Quantities and Prices 188
Price Elasticities and Tax Incidence 191
ECONOMICS IN ACTION Who Pays the FICA? 193
The Benefits and Costs of Taxation 194
The Revenue from an Excise Tax 194
Tax Rates and Revenue 195
FOR INQUIRING MINDS: French Tax Rates and L’Arc Laffer 197
The Costs of Taxation 198
Elasticities and the Deadweight Loss of a Tax 200
ECONOMICS IN ACTION Taxing the Marlboro Man 202
Tax Fairness and Tax Efficiency 203
Two Principles of Tax Fairness 203
Equity versus Efficiency 204
ECONOMICS IN ACTION Federal Tax Philosophy 205
Understanding the Tax System 206
Tax Bases and Tax Structure 206
Equity, Efficiency, and Progressive Taxation 207
Taxes in the United States 208
GLOBAL COMPARISON: You Think You Pay High Taxes? 209
Different Taxes, Different Principles 209
FOR INQUIRING MINDS: Taxing Income versus Taxing Consumption 209
ECONOMICS IN ACTION The Top Marginal Income Tax Rate 210
BUSINESS CASE: Amazon versus BarnesandNoble.com 211
chapter8International Trade	217
the everywhere phone 217
Comparative Advantage and International Trade 218
Production Possibilities and Comparative Advantage, Revisited 219
The Gains from International Trade 221
Comparative Advantage versus Absolute Advantage 222
GLOBAL COMPARISON: Productivity and Wages Around the World 223
Sources of Comparative Advantage 224
FOR INQUIRING MINDS: Increasing Returns to Scale and International Trade 226
ECONOMICS IN ACTION How Hong Kong Lost Its Shirts 226
Supply, Demand, and International Trade 227
The Effects of Imports 228
The Effects of Exports 230
International Trade and Wages 232
ECONOMICS IN ACTION Trade, Wages, and Land Prices in the Nineteenth Century 233
The Effects of Trade Protection 234
The Effects of a Tariff 234
The Effects of an Import Quota 236
ECONOMICS IN ACTION Trade Protection in the United States 237
The Political Economy of Trade Protection 238
Arguments for Trade Protection 238
The Politics of Trade Protection 238
International Trade Agreements and the World Trade Organization 239
FOR INQUIRING MINDS: Tires Under Pressure 240
Challenges to Globalization 240
ECONOMICS IN ACTION Beefing Up Exports 242
BUSINESS CASE: Li & Fung: From Guangzhou to You 244

part 4 Economics and Decision Making
chapter9Decision Making by Individuals and Firms	249
going back to school 249
Costs, Benefits, and Profits 250
Explicit versus Implicit Costs 250
Accounting Profit versus Economic Profit 251
Making “Either–Or” Decisions 253
FOR INQUIRING MINDS: A Tale of Two Invasions 253
ECONOMICS IN ACTION Farming in the Shadow of Suburbia 254
Making “How Much” Decisions: The Role of Marginal Analysis 255
Marginal Cost 256
Marginal Benefit 258
Marginal Analysis 259
GLOBAL COMPARISON: Portion Sizes 261
A Principle with Many Uses 262
ECONOMICS IN ACTION The Cost of a Life 263
Sunk Costs 263
ECONOMICS IN ACTION A Billion Here, a Billion There… 264
Behavioral Economics 265
Rational, but Human, Too 265
Irrationality: An Economist’s View 266
FOR INQUIRING MINDS: In Praise of Hard Deadlines 267
Rational Models for Irrational People? 269
ECONOMICS IN ACTION “The Jingle Mail Blues” 269
BUSINESS CASE: J. C. Penney’s One-Price Strategy Upsets Its Customers 271
chapter 9 appendix How to Make Decisions Involving Time: Understanding Present Value	277
How to Calculate the Present Value of a One-Year Project 277
How to Calculate the Present Value of Multiyear Projects 278
How to Calculate the Present Value of Projects with Revenues and Costs 279
part 5 The Consumer
chapter10The Rational Consumer	281
the absolute last bite 281
Utility: Getting Satisfaction 282
Utility and Consumption 282
The Principle of Diminishing Marginal Utility 283
FOR INQUIRING MINDS: Is Marginal Utility Really Diminishing? 284
ECONOMICS IN ACTION Oysters versus Chicken 284
Budgets and Optimal Consumption 285
Budget Constraints and Budget Lines 285
Optimal Consumption Choice 287
FOR INQUIRING MINDS: Food for Thought on Budget Constraints 288
ECONOMICS IN ACTION The Great Condiment Craze 289
Spending the Marginal Dollar 290
Marginal Utility per Dollar 291
Optimal Consumption 292
ECONOMICS IN ACTION Buying Your Way Out of Temptation 294
From Utility to the Demand Curve 294
Marginal Utility, the Substitution Effect, and the Law of Demand 294
The Income Effect 295
ECONOMICS IN ACTION Mortgage Rates and Consumer Demand 296
BUSINESS CASE: Having a Happy Meal at McDonald’s 298
chapter 10 appendix Consumer Preferences and Consumer Choice	303
Mapping the Utility Function 303
Indifference Curves 303
Properties of Indifference Curves 306
Indifference Curves and Consumer Choice 307
The Marginal Rate of Substitution 308
The Tangency Condition 311
The Slope of the Budget Line 312
Prices and the Marginal Rate of Substitution 313
Preferences and Choices 315
Using Indifference Curves: Substitutes and Complements 316
Perfect Substitutes 316
Perfect Complements 318
Less Extreme Cases 319

Prices, Income, and Demand 319
The Effects of a Price Increase 319
Income and Consumption 320
Income and Substitution Effects 323
part 6 The Production Decision
chapter 11 Behind the Supply Curve: Inputs and Costs	329
the farmer’s margin 329
The Production Function 330
Inputs and Output 330
GLOBAL COMPARISON: Wheat Yields Around the World 332
From the Production Function to Cost Curves 334
ECONOMICS IN ACTION The Mythical Man-Month 336
Two Key Concepts: Marginal Cost and Average Cost 337
Marginal Cost 337
Average Total Cost 339
Minimum Average Total Cost 342
Does the Marginal Cost Curve Always Slope Upward? 343
ECONOMICS IN ACTION Smart Grid Economics 344
Short-Run versus Long-Run Costs 345
Returns to Scale 348
Summing Up Costs: The Short and Long of It 349
ECONOMICS IN ACTION There’s No Business Like Snow Business 350
BUSINESS CASE: Kiva Systems’ Robots versus Humans: The Challenge of Holiday Order Fulfillment 351
chapter12Perfect Competition and the Supply Curve	357
deck the halls 357
Perfect Competition 358
Defining Perfect Competition 358
Two Necessary Conditions for Perfect Competition 358
Free Entry and Exit 359
FOR INQUIRING MINDS: What’s a Standardized Product? 360
ECONOMICS IN ACTION Paid to Delay 360
Production and Profits 361
Using Marginal Analysis to Choose the Profit-Maximizing Quantity of Output 362
When Is Production Profitable? 364
The Short-Run Production Decision 367
Changing Fixed Cost 370
Summing Up: The Perfectly Competitive Firm’s Profitability and Production Conditions 370
ECONOMICS IN ACTION Farmers Move Up Their Supply Curves 371
The Industry Supply Curve 372
The Short-Run Industry Supply Curve 372
The Long-Run Industry Supply Curve 373
The Cost of Production and Efficiency in Long-Run Equilibrium 377
ECONOMICS IN ACTION From Global Wine Glut to Shortage 378
BUSINESS CASE: Shopping Apps, Showrooming, and the Challenges Facing Brick-and-Mortar Retailers 379
part 7 Market Structure: Beyond Perfect Competition
chapter 13 Monopoly	385
everybody must get stones 385
Types of Market Structure 386
The Meaning of Monopoly 387
Monopoly: Our First Departure from Perfect Competition 387
What Monopolists Do 387
Why Do Monopolies Exist? 389
GLOBAL COMPARISON: The Price We Pay 391
ECONOMICS IN ACTION Newly Emerging Markets: A Diamond Monopolist’s Best Friend 392
How a Monopolist Maximizes Profit 393
The Monopolist’s Demand Curve and Marginal Revenue 393
The Monopolist’s Profit-Maximizing Output and Price 397
Monopoly versus Perfect Competition 398
Monopoly: The General Picture 398
ECONOMICS IN ACTION Shocked by the High Price of Electricity 399
Monopoly and Public Policy 400
Welfare Effects of Monopoly 401
Preventing Monopoly 402
Dealing with Natural Monopoly 402
ECONOMICS IN ACTION Why Is Your Broadband So Slow? And Why Does It Cost So Much? 406
Price Discrimination 407
The Logic of Price Discrimination 408
Price Discrimination and Elasticity 409
Perfect Price Discrimination 410

ECONOMICS IN ACTION Sales, Factory Outlets, and Ghost Cities 412
BUSINESS CASE: Amazon and Hachette Go to War 414
chapter14Oligopoly	419
caught in the act 419
The Prevalence of Oligopoly 420
ECONOMICS IN ACTION Is It an Oligopoly or Not? 421
Understanding Oligopoly 422
A Duopoly Example 422
Collusion and Competition 423
ECONOMICS IN ACTION Bitter Chocolate? 425
Games Oligopolists Play 426
The Prisoners’ Dilemma 426
FOR INQUIRING MINDS: Prisoners of the Arms Race 429
Overcoming the Prisoners’ Dilemma: Repeated Interaction and Tacit Collusion 429
ECONOMICS IN ACTION The Rise and Fall and Rise of OPEC 431
Oligopoly in Practice 433
The Legal Framework 433
GLOBAL COMPARISON: Contrasting Approaches to Antitrust Regulation 434
Tacit Collusion and Price Wars 435
Product Differentiation and Price Leadership 436
How Important Is Oligopoly? 437
ECONOMICS IN ACTION The Price Wars of Christmas 438
BUSINESS CASE: Virgin Atlantic Blows the Whistle … or Blows It? 440
chapter15Monopolistic Competition and Product Differentiation 445
fast-food differentiation 445
The Meaning of Monopolistic Competition 446
Large Numbers 446
Differentiated Products 446
Free Entry and Exit in the Long Run 447
Product Differentiation 447
Differentiation by Style or Type 447
Differentiation by Location 448
Differentiation by Quality 448
ECONOMICS IN ACTION Any Color, So Long As It’s Black 449
Understanding Monopolistic Competition 449
Monopolistic Competition in the Short Run 450
Monopolistic Competition in the Long Run 451
FOR INQUIRING MINDS: Hits and Flops 453
ECONOMICS IN ACTION The Housing Bust and the Demise of the 6% Commission 454
Monopolistic Competition versus Perfect Competition 455
Price, Marginal Cost, and Average Total Cost 455
Is Monopolistic Competition Inefficient? 456
Controversies About Product Differentiation 457
The Role of Advertising 457
Brand Names 458
ECONOMICS IN ACTION The Perfume Industry: Leading Consumers by the Nose 459
BUSINESS CASE: Gillette versus Schick: A Case of Razor Burn? 461
part 8 Microeconomics and Public Policy
chapter 16 Externalities	465
trouble underfoot 465
External Costs and Benefits 466
FOR INQUIRING MINDS: Talking, Texting, and Driving 466
Pollution: An External Cost 467
The Socially Optimum Quantity of Pollution 467
Why a Market Economy Produces Too Much Pollution 468
Private Solutions to Externalities 469
ECONOMICS IN ACTION How Much Does Your Electricity Really Cost? 471
Policies Toward Pollution 472
Environmental Standards 472
Emissions Taxes 473
GLOBAL COMPARISON: Economic Growth and Greenhouse Gases in Six Countries 473
Tradable Emissions Permits 474
Comparing Environmental Policies with an Example 475
ECONOMICS IN ACTION Cap and Trade 477
Positive Externalities 478
Preserved Farmland: An External Benefit 479
Positive Externalities in Today’s Economy 480
ECONOMICS IN ACTION The Impeccable Economic Logic of Early-Childhood Intervention Programs 480
Network Externalities 481
The External Benefits of a Network Externality 481
ECONOMICS IN ACTION The Microsoft Case 483
BUSINESS CASE: Are We Still Friends? A Tale of Facebook, MySpace, and Friendster 485

chapter17Public Goods and Common Resources	489
the great stink 489
Private Goods—and Others 490
Characteristics of Goods 490
Why Markets Can Supply Only Private Goods Efficiently 491
ECONOMICS IN ACTION From Mayhem to Renaissance 492
Public Goods 493
Providing Public Goods 493
How Much of a Public Good Should Be Provided? 494
FOR INQUIRING MINDS: Voting as a Public Good 496
GLOBAL COMPARISON: Voting as a Public Good: The Global Perspective 496
Cost-Benefit Analysis 497
ECONOMICS IN ACTION Old Man River 498
Common Resources 499
The Problem of Overuse 499
FOR INQUIRING MINDS: When Fertile Farmland Turned to Dust 501
The Efficient Use and Maintenance of a Common Resource 501
ECONOMICS IN ACTION Saving the Oceans with ITQs 502
Artificially Scarce Goods 503
ECONOMICS IN ACTION Blacked-Out Games 504
BUSINESS CASE: Mauricedale Game Ranch and Hunting Endangered Animals to Save Them 506
chapter18The Economics of the Welfare State	511
the coming of obamacare 511
Poverty, Inequality, and Public Policy 512
The Logic of the Welfare State 512
FOR INQUIRING MINDS: Justice and the Welfare State 513
The Problem of Poverty 513
GLOBAL COMPARISON: Redistribution and Inequality in Rich Countries 515
Economic Inequality 517
Economic Insecurity 519
ECONOMICS IN ACTION Long-Term Trends in Income Inequality in the United States 519
The U.S. Welfare State 521
Means-Tested Programs 522
Social Security and Unemployment Insurance 523
The Effects of the Welfare State on Poverty and Inequality 523
ECONOMICS IN ACTION Welfare State Programs and Poverty Rates in the Great Recession, 2007–2010 524
The Economics of Health Care 525
The Need for Health Insurance 525
FOR INQUIRING MINDS: A California Death Spiral 527
Government Health Insurance 527
The Problem of the Uninsured Before the Affordable Care Act 528
Health Care in Other Countries 529
The Affordable Care Act 530
ECONOMICS IN ACTION What Medicaid Does 533
The Debate over the Welfare State 534
Problems with the Welfare State 534
The Politics of the Welfare State 535
FOR INQUIRING MINDS: “We Are the 99%!” 536
ECONOMICS IN ACTION French Family Values 536
BUSINESS CASE: Welfare State Entrepreneurs 538
part 9 Factor Markets and Risk
chapter 19 Factor Markets and the Distribution of Income	543
the value of a degree 543
The Economy’s Factors of Production 544
The Factors of Production 544
Why Factor Prices Matter: The Allocation of Resources 544
Factor Incomes and the Distribution of Income 544
FOR INQUIRING MINDS: The Factor Distribution of Income and Social Change in the Industrial Revolution 545
ECONOMICS IN ACTION The Factor Distribution of Income in the United States 545
Marginal Productivity and Factor Demand 546
Value of the Marginal Product 546
Value of the Marginal Product and Factor Demand 548
Shifts of the Factor Demand Curve 550
The Marginal Productivity Theory of Income Distribution 551
The Markets for Land and Capital 553
The Marginal Productivity Theory of Income Distribution 555
ECONOMICS IN ACTION Help Wanted! 555
Is the Marginal Productivity Theory of Income Distribution Really True? 556
Wage Disparities in Practice 557

Marginal Productivity and Wage Inequality 558
Market Power 559
Efficiency Wages 560
Discrimination 561
FOR INQUIRING MINDS: How Labor Works the German Way 561
So Does Marginal Productivity Theory Work? 562
ECONOMICS IN ACTION Marginal Productivity and the “1%” 562
The Supply of Labor 563
Work versus Leisure 563
Wages and Labor Supply 564
FOR INQUIRING MINDS: Why You Can’t Find a Cab When It’s Raining 566
Shifts of the Labor Supply Curve 566
GLOBAL COMPARISON: The Overworked American? 567
ECONOMICS IN ACTION The Decline of the Summer Job 568
BUSINESS CASE: Wages and Workers at Costco and Walmart 569
chapter 19 appendix Indifference Curve Analysis of Labor Supply	575
The Time Allocation Budget Line 575
The Effect of a Higher Wage Rate 576
Indifference Curve Analysis 579
chapter20Uncertainty, Risk, and Private Information	581
extreme weather 581
The Economics of Risk Aversion 582
Expectations and Uncertainty 582
The Logic of Risk Aversion 583
FOR INQUIRING MINDS: The Paradox of Gambling 587
Paying to Avoid Risk 587
ECONOMICS IN ACTION Warranties 588
Buying, Selling, and Reducing Risk 588
Trading Risk 589
Making Risk Disappear: The Power of Diversification 592
FOR INQUIRING MINDS: Those Pesky Emotions 594
The Limits of Diversification 595
ECONOMICS IN ACTION When Lloyd’s Almost Lost It 596
Private Information: What You Don’t Know Can Hurt You 596
Adverse Selection: The Economics of Lemons 597
Moral Hazard 599
ECONOMICS IN ACTION Franchise Owners Try Harder 600
BUSINESS CASE: The Agony of AIG 602
Solutions to “Check Your Understanding” Questions S-1
Glossary G-1
Index I-1

CONTENTS