Gary S. Becker - Economic Theory

Economic Theory

Economic Theory

Gary S. Becker

With the assistance of

Micheal Grossman and Robert T. Michael

With a new introduction by the author

To my girls JUDY and CATHY

Of course, highly technical exercises may be quite difficult, but my experience is that students nowadays generally have less trouble with technique than students in the past had because students now are much better prepared in mathematics, probability theory, engineering, and other technical subjects. However, a technical background does not better prepare students to use economic concepts to understand behavior, the consequences of public policies, and natural events in the world around us, or in worlds that existed in the past. Some even argue, I am not sure they are right, that better technical training is partly at the expense of a greater study of history and the humanities that would have helped students get a better feel or intuition for economic applications.

The fact is that the vast majority of advanced undergraduates or graduate economics students, whether in the past or at present, start out with little intuition for economics. Fortunately, economic intuition, like a command of technical concepts, can be learned despite the dictionary association of the word intuition with the ability to know something without the need for reasoning. Economic intuition can be greatly improved through lectures that give many applications of economic theory and analysis. But no matter how many applications in the lectures, a working command of economic tools, a good economic intuition, requires trying to solve problems that deal with individual and market responses to changes in incomes, prices, technologies, market structure, institutions, policies, and natural events.

The problems in this book will help provide such a working command of economics. Most of the new problems are not easy, many are difficult, and trying to solve them will help improve ones working knowledge of economic theory. To assist in learning how to apply this theory to particular questions, detailed answers are provided to all but a small number of the new problems. Studying these answers, after trying to answer them before reading our answers, is an important part of the training in how to use economic concepts.

Some of the problems and answers deal with important economic questions that I believe are new, and could be converted into articles for economics journals. Examples include aggregation and household production exercises in Part 1, the approach to non-convexities and lotteries in Part 2, in Part 3 the referral exercise, the discussion of the optimal slaughtering of turkeys, the analysis of migration and social capital, and some of the common property exercises, and in Part 4 the pricing of durable goods when there is expected technological progress, the determination and effects of geographic clusters, and economic aspects of the determination of queues.

Economic Theory also contains problems at the end of each lecture. Many of these are still interesting and useful, and also test knowledge of economic concepts. These problems are on the whole easier than the new ones, but some are challenging (they are marked with an asterisk [*], including parts of some problems). These harder problems include one on social interactions (problem 8.4), on why educa tion improves health even when more educated persons spend less on medical care (10.1), on the interaction between self-protection and market insurance (13.1), on whether racial discrimination occurs under perfect competition (16.5), on whether there is over-or under-investment in new knowledge (27.2), on the effects of unions on wages (28.7), on the effects of migration between countries on wages and rental rates on capital (31.2), and on how changes in mortality rates impact consumption and savings (38.4).

As this course on price theory has evolved over time, it has preserved the emphasis on providing a useful command of economic tools and concepts, but we now use more mathematics than is found in Economic Theory. This is partly because students nowadays have better math backgrounds than my Columbia students had, and partly because economics has evolved toward a much greater use of mathematics. I was fortunate to have studied much mathematics and statistical theory as an undergraduate and graduate student, which allowed me to keep up with the transition to the greater emphasis on mathematical analysis and reasoning.