Lecture Notes in Microeconomic Theory

1 Lecture Notes inMicroeconomic TheoryThis is a revised version of the book, first published in document was updated on November 1st, e-mail me with comments or solution manual is available upon request by instructors only (seemy home-page).Ariel Rubinsteine-mail: Notes inMicroeconomic TheoryThe Economic AgentSecond EditionAriel RubinsteinP R I N C E T O N U N I V E R S I T Y P R E S SP R I N C E T O N A N D O X F O R DCopyrightc 2012 by Princeton University PressPublished by Princeton University Press, 41 William Street, Princeton,New Jersey 08540In the United Kingdom: Princeton University Press, 60 Oxford Street,Woodstock, Oxfordshire OX20 Rights ReservedLibrary of Congress Cataloging-in-Publication DataRubinstein, Notes in Microeconomic Theory : the economic agent /Ariel Rubinstein.

2 2nd bibliographical references and 978-0-691-15413-8 (pbk. : alk. paper)1. microeconomics . 2. Economics. I. dc232011026862 British Library Cataloging-in-Publication Data is availableThis book has been composed in on acid-free paper. Typeset by S R Nova Pvt Ltd, Bangalore, IndiaPrinted in the United States of America10 9 8 7 6 5 4 3 2 1 ContentsPrefaceviiIntroductionixLecture 1. Preferences1 Problem Set 110 Lecture 2. Utility12 Problem Set 221 Lecture 3. Choice24 Problem Set 344 Lecture 4. Consumer Preferences48 Problem Set 461 Lecture 5. Demand: Consumer Choice63 Problem Set 576 Lecture 6. More Economic Agents:a Consumer Choosing Budget Sets,b Dual Consumer and a Producer78 Problem Set 690 Lecture 7.

3 Expected Utility94 Problem Set 7105 Lecture 8. Risk Aversion108 Problem Set 8120 Lecture 9. Social Choice122 Problem Set 912860 Review Problems131 References158 PrefaceThis is the 2018 revision of the second edition of my Lecture Notes for thefirst quarter of a microeconomics course for PhD (or MA) economics stu-dents. The Lecture Notes were developed over a period of 20 years duringwhich I taught the course at Tel Aviv University, Princeton University,and New York published this book for the first time in 2007 and have revised itannually since then. I was hesitant about writing this book since severalsuperb books were already on the shelves. Foremost among them arethose of David Kreps. Kreps (1990) pioneered the shift of the game-theoretic revolution from research papers to textbooks.

4 His book coversthe material in depth and includes many ideas for future research. Hismore recent book, Kreps (2013), is even better than his first and is nowmy clear favorite for a graduate microeconomics other books are on my shortlist: Mas-Colell, Whinston andGreen (1995) is a very comprehensive textbook; Bowles (2003) bringseconomics back to its authentic political economics roots; and Jehle andReny (1997) with its very precise style. They constitute an impressivecollection of textbooks for an advanced microeconomics book covers only the first quarter of the standard course. It doesnot aim to compete with these other books. I published it and continueupdating it only because I think that it reflects a different point of viewon economic Theory and some of the didactic ideas presented might bebeneficial to both students and Updated VersionsAs a matter of principle, the book is posted on the web and is availablefree of charge.

5 I am grateful to Princeton University Press for allowingit to be downloaded for free immediately after 2007, I have updated the book annually, adding material andcorrecting mistakes. My plan is to continue revising the book annuallyas long as I teach the course. To access the latest electronic version goto: ManualTeachers (and only teachers) of the course can also get an updated solu-tion manual. I do my best to make the manual available only to teachersof a graduate course in microeconomics . Requests for the manual shouldbe made at: the book I use only male pronouns. This is my deliberatechoice and does not reflect the policy of the editors or the publishers. Ibelieve that continuous reminders of the he/she issue simply divert read-ers attention.

6 Language is of course important in shaping our thinking,but I feel it is more effective to raise the issue of discrimination againstwomen in the discussion of the issues rather than raising flags on everypage of a book on economic would like to thank all of my teaching assistants who made helpfulcomments during the many years I taught the course prior to the firstedition: Rani Spiegler, Kfir Eliaz, Yoram Hamo, Gabi Gayer, and TamirTshuva at Tel Aviv University; Bilge Yilmaz, Ronny Razin, WojciechOlszewski, Attila Ambrus, Andrea Wilson, Haluk Ergin, and DaisukeNakajima at Princeton; and Sophie Bade and Anna Ingster at Simmer and Rafi Aviav helped me with the English Shlain prepared the thanks to Benjamin Bachi for his devoted work in producingthe revised versions of the book for about a a graduate student just starting out, you are at the beginning of anew stage in your life.

7 In a few months you will be overloaded withdefinitions, concepts, and models. Your teachers will be guiding youinto the wonders of economics and will rarely stop to raise fundamentalquestions about what these models are supposed to mean. It is notunlikely that you will be brainwashed by the professionally soundinglanguage and hidden assumptions. I am afraid I am about to initiate youinto this inevitable process. Still, I want to pause for a moment and alertyou to the fact that many economists have strong and conflicting viewsabout what economic Theory is. Some see it as aset of theoriesaboutthe interaction between individuals in economic situations, theories thatcan be tested.

8 Others see it as abag of toolsto be used by economicagents. Many see it as aframeworkthrough which academic economistsview the own view may disappoint those of you who have come to thiscourse with practical motives. In my view, economic Theory is just anarena for theinvestigation of conceptswe use in thinking about real-lifeeconomic situations. What makes a theoretical model economics isthat the concepts we are analyzing are taken from real-life reasoningabout economic issues. Through the investigation of these concepts, wetry to better understand reality, and the models provide a language thatenables us to think about economic interactions in a systematic way. ButI do not view economic models as an attempt to describe the world, toprovide tools for predicting the future or to prescribe how people shouldbehave.

9 I object to looking for an ultimate truth in economic Theory , andI do not expect it to be the foundation for any policy is holy in economic Theory and everything in it is the creationof people like , this course consists of a discussion ofconceptsandmodelsrelated to the behavior of a single economic agent. Although we willbe studying formal concepts and models, they will always be given aninterpretation. An economic model differs substantially from a purelymathematical model in that it is acombinationof a mathematical modeland itsinterpretation. When mathematicians use terms such as field or ring that are in everyday use, it is only for the sake of they name a collection of sets a filter , they are doing so in anassociative manner; in principle, they could call it ice cream cone.

10 When they use the term well-ordering , they are not making an ethicaljudgment. In contrast to mathematics, interpretation is an essentialingredient of an economic model and the names of the mathematicalobjects are an integral part of an economic word model sounds more scientific than fable or fairy tale ,but I don t see much difference between them. The author of a fabledraws a parallel to a situation in real life and often has some moral hewishes to impart to the reader. A fable is an imaginary situation that issomewhere between fantasy and reality. Any fable can be dismissed asbeing unrealistic or simplistic, but this is also its advantage. As some-thing between fantasy and reality, a fable is free of extraneous details andannoying diversions.