Class Notes for InMicro, 2018 Edition

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Instructor’s Manual
InMicro
FIRST EDITION
R. Glenn Hubbard
Anthony Patrick O’Brien

Contents
Chapter 1: Economics: Foundations and Models 1
Appendix: Using Graphs and Formulas 12
Chapter 2: Trade-offs, Comparative Advantage, and the Market System 14
Chapter 3: Where Prices Come From: The Interaction of Demand and Supply 22
Chapter 4: Economic Efficiency, Government Price Setting, and Taxes 34
Appendix: Quantitative Demand and Supply Analysis 42
Chapter 5: Externalities, Environmental Policy, and Public Goods 45
Chapter 6: Elasticity: The Responsiveness of Demand and Supply 56
Chapter 7: The Economics of Health Care 69
Chapter 8: Firms, the Stock Market, and Corporate Governance 79
Appendix: Tools to Analyze Firms’ Financial Information 90
Chapter 9: Comparative Advantage and the Gains from International Trade 93
Chapter 10: Consumer Choice and Behavioral Economics 109
Appendix: Using Indifference Curves and Budget Lines to Understand
Consumer Behavior 119
Chapter 11: Technology, Production, and Costs 122
Appendix: Using Isoquants and Isocost Lines to Understand Production and Cost 137

Chapter 12: Firms in Perfectly Competitive Markets 141
Chapter 13: Monopolistic Competition: The Competitive Model in a More
Realistic Setting 156
Chapter 14: Oligopoly: Firms in Less Competitive Markets 171
Chapter 15: Monopoly and Antitrust Policy 188
Chapter 16: Pricing Strategy 202
Chapter 17: The Markets for Labor and Other Factors of Production 208
Chapter 18: Public Choice, Taxes, and the Distribution of Income 222
Preface
Features of this Instructor’s Manual
Each chapter of this Instructor’s Manual contains the following elements:

Chapter Summary: An overview of the main economic concepts covered.
Learning Objectives: A list of the student learning goals listed at the beginning of each chapter.
Chapter Outline with Teaching Tips: Detailed descriptions of the economic concepts in the course, key
term definitions, and teaching tip boxes. The teaching tip boxes include recommendations on how to
integrate key figures.
Extra Solved Problems: Each chapter of the main course has a Solved Problem to support two of the
chapter’s learning objectives. This Instructor’s Manual includes extra Solved Problems that you can
assign as homework or present during classroom lectures.
Extra Economics in Your Life: Each chapter of the course opens and closes with a special feature entitled
Economics in Your Life that emphasizes the connection between the material and the students’ personal
experiences and questions. This Instructor’s Manual includes an extra Economics in Your Life for each
chapter to present in class.
Extra Apply the Concept: Each chapter of the course has two or more Apply the Concept features to
provide real-world reinforcement of key concepts. This Instructor’s Manual includes extra Apply the
Concept to present in class.

Organizing Your Syllabus
The Instructor’s Manual can be a valuable resource for both experienced and first-time instructors. Both
the Revel course and Instructor’s Manual provide comprehensive coverage of economic theory, policy,
and real-world applications.
This course covers relatively new developments in the field, such as the economics of information
(Chapter 7, “The Economics of Health Care”) and personnel economics (Chapter 17, “The Markets for
Labor and Other Factors of Production”). The authors include business applications in each chapter and
have a dedicated chapter on firms, the stock market, and corporate governance (Chapter 8, “Firms, the
Stock Market, and Corporate Governance”). The comprehensive coverage of microeconomics and
business topics allows instructors to select chapters for diverse groups of students.
Most instructors will not want to cover indifference curve analysis or isoquant and isocost curves, but
those who wish to will find these topics covered in the appendices to Chapter 10, “Consumer Choice and
Behavioral Economics,” and Chapter 11, “Technology, Production, and Costs,” respectively. Chapter 14 of
this instructor’s manual, “Oligopoly: Firms in Less Competitive Markets,” includes coverage of the kinked
demand curve that does not appear in the main course.
First-time users of the Revel course should be aware that some topics introduced in one chapter are
applied in a later chapter. Chapter 4, “Economic Efficiency, Government Price Setting, and Taxes,”
introduces consumer, producer, and economic surplus to describe the impact of government-imposed
price controls. The appendix to Chapter 4, “Quantitative Demand and Supply Analysis,” explains in detail
how consumer and producer surplus are calculated using linear demand and supply curves. Chapter 9,
“Comparative Advantage and the Gains from International Trade,” uses the same tools to measure the
effect of tariffs and quotas on international trade.

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The following chart helps you organize your syllabus based on your teaching preferences and objectives:
CORE POLICY OPTIONAL
Chapter 1: Economics: Foundations
and Models
Chapter 2: Trade-offs, Comparative
Advantage, and the Market
System
Chapter 3: Where Prices Come
From: The Interaction of Demand
and Supply
Chapter 6: Elasticity: The
Responsiveness of Demand and
Supply
Chapter 9: Comparative Advantage
and the Gains from International
Trade
Chapter 11: Technology, Production,
and Costs
Chapter 12: Firms in Perfectly
Competitive Markets
Chapter 13: Monopolistic
Competition: The Competitive
Model in a More Realistic Setting
Chapter 14: Oligopoly: Firms in Less
Competitive Markets
Chapter 15: Monopoly and Antitrust
Policy
Chapter 4: Economic Efficiency,
Government Price Setting, and
Taxes
Chapter 5: Externalities,
Environmental Policy, and Public
Goods
This chapter may be delayed until
after Chapter 15.
Chapter 7: The Economics of
Health Care
Chapter 18: Public Choice, Taxes,
and the Distribution of Income
Chapter 1 Appendix: Using Graphs
and Formulas
Chapter 4 Appendix: Quantitative
Demand and Supply Analysis
Chapter 8: Firms, the Stock Market,
and Corporate Governance

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Other Supplements for Instructors
▪ Test Item File
▪ TestGen Computerized Test Program
▪ PowerPoint Lecture Presentation
▪ Digital Interactives
Test Item File (in electronic TestGen format)
The Test Item File includes more than 4,000 multiple-choice, short answer, and graphing questions.
Test questions are annotated with the following information:
Difficulty: 1 for straight recall, 2 for some analysis, 3 for complex analysis
Type: multiple-choice, true/false, short-answer, essay
Topic: the term or concept the question supports
Learning outcome
AACSB (see description that follows)
The Association to Advance Collegiate Schools of Business (AACSB)
The test bank authors have connected select test bank questions to the general knowledge and skill
guidelines found in the AACSB standards.
What Is the AACSB?
AACSB is a not-for-profit corporation of educational institutions, corporations, and other organizations
devoted to the promotion and improvement of higher education in business administration and
accounting. A collegiate institution offering degrees in business administration or accounting may
volunteer for AACSB accreditation review. The AACSB makes initial accreditation decisions and conducts
periodic reviews to promote continuous quality improvement in management education. Pearson
Education is a proud member of the AACSB and is pleased to provide advice to help you apply AACSB
Learning Standards.
What Are AACSB Learning Standards?
One of the criteria for AACSB accreditation is the quality of the curricula. Although no specific courses
are required, the AACSB expects a curriculum to include learning experiences in such areas as:
• Written and Oral Communication
• Ethical Understanding and Reasoning

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• Analytical Thinking Skills
• Information Technology
• Diverse and Multicultural Work
• Reflective Thinking
• Application of Knowledge
These categories are AACSB Learning Standards. Questions that test skills relevant to these standards are
tagged with the appropriate standard. For example, a question testing the moral questions associated
with externalities would receive the Ethical Reasoning tag.
How Can Instructors Use the AACSB Tags?
Tagged questions help you measure whether students are grasping the course content that aligns with
the AACSB guidelines noted above. In addition, the tagged questions may help instructors identify
potential applications of these skills. This in turn may suggest enrichment activities or other educational
experiences to help students achieve these skills.
TestGen
The computerized TestGen package allows instructors to customize, save, and generate classroom tests.
The test program permits instructors to edit, add, or delete questions from the test banks; edit existing
graphics and create new graphics; analyze test results; and organize a database of tests and student
results. This software allows for extensive flexibility and ease of use. It provides many options for
organizing and displaying tests, along with search and sort features. The software and the test banks can
be downloaded from the Instructor’s Resource Center (www.pearsonhighered.com).
PowerPoint Slides
PowerPoint slides can be used by instructors for class presentations or by students for lecture preview or
review. These slides include graphs, tables, and equations from the Revel course. They are presented in a
step-by-step mode, in which you can build graphs as you would on a blackboard, and automated mode,
in which you use a single click per slide.
Digital Interactives
Focused on a single core topic and organized in progressive levels, each interactive immerses students in
an assignable and auto-graded activity. Digital Interactives are also engaging lecture tools for traditional,
online, and hybrid courses, many incorporating real-time data, data displays, and analysis tools for rich
classroom discussions.

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CHAPTER 1 | Economics: Foundations
and Models
Brief Chapter Summary and Learning Objectives
1.1 Three Key Economic Ideas
Explain these three key economic ideas: People are rational; people respond to economic
incentives; and optimal decisions are made at the margin.
▪ People must make choices as they try to attain their goals. People make choices because
resources are scarce.
1.2 The Economic Problem That Every Society Must Solve
Discuss how an economy answers these questions: What goods and services will be produced? How
will the goods and services be produced? Who will receive the goods and services produced?
▪ A limited amount of resources will produce a limited amount of goods and services.
▪ The cost of producing more of one good is the value of what must be given up to produce it.
1.3 Economic Models
Describe the role of models in economic analysis.
▪ Economists use models—simplified versions of reality—to analyze real-world issues.
1.4 Microeconomics and Macroeconomics
Distinguish between microeconomics and macroeconomics.
1.5 A Preview of Important Economic Terms
Define important economic terms.
Appendix: Using Graphs and Formulas
Use graphs and formulas to analyze economic situations.
Key Terms
Allocative efficiency. A state of the economy in
which production is in accordance with consumer
preferences; in particular, every good or service is
produced up to the point where the last unit
provides a marginal benefit to society equal to the
marginal cost of producing it.
Centrally planned economy. An economy in
which the government decides how economic
resources will be allocated.
Economic model. A simplified version
of reality used to analyze real-world economic
situations.
Economic variable

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2 CHAPTER 1 | Economics: Foundations and Models
Equity. The fair distribution of economic
benefits.
Macroeconomics. The study of the economy as
a whole, including topics such as inflation,
unemployment, and economic growth.
Marginal analysis. Analysis that involves
comparing marginal benefits and marginal costs.
Market. A group of buyers and sellers of a good
or service and the institution or arrangement by
which they come together to trade.
Market economy. An economy in which the
decisions of households and firms interacting in
markets allocate economic resources.
Microeconomics. The study of how households
and firms make choices, how they interact in
markets, and how the government attempts to
influence their choices.
Mixed economy. An economy in which most
economic decisions result from the interaction of

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CHAPTER 1 | Economics: Foundations and Models 3
Teaching Tips
There are special features in the course:
1. The introduction, or chapter opener, uses a real-world business example to preview the economic
issues discussed in the chapter.
2. A boxed feature titled Economics in Your Life complements the business example that opens the
chapter. Economics in Your Life poses questions that help students make a personal connection with the
chapter theme. At the end of the chapter, the authors use the concepts described in the chapter to answer
these questions. Extra Economics in Your Life features are included in the Instructor’s Manual

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4 CHAPTER 1 | Economics: Foundations and Models
C. Optimal Decisions Are Made at the Margin
Economists use the word marginal to mean an extra or additional benefit or cost from making a decision.
The optimal decision is to continue any activity to the point where the marginal benefit equals the marginal
cost. Marginal analysis is analysis that involves comparing marginal benefits and marginal costs.
Extra Solved Problem 1.1
A Doctor Makes a Decision at the Margin
A doctor receives complaints from patients that her office isn’t open enough hours. So the doctor asks her
office manager to analyze the effect of keeping her office open 9 hours per day rather than 8 hours. The
doctor’s office manager tells her: “Keeping the office open an extra hour is a good idea because the
revenue from your practice will increase by $300,000 per year when the office is open 9 hours per day.”
Do you agree with the office manager’s reasoning? What, if any, additional information do you need to
decide whether the doctor should keep her office open an additional hour per day?
Solving the Problem
Step 1: Review the chapter material.
This problem is about making decisions, so you may want to review the section “

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