Microeconomics: Optimization, Experiments, and Behavior

Microeconomics: Optimization, Experiments, and Behavior

Microeconomics: Optimization, Experiments, and Behavior

Microeconomics: Optimization, Experiments, and Behavior

Synopsis

In this book, John P. Burkett presents microeconomics as an evolving science, interacting with mathematics, psychology, and other disciplines and offering solutions to a growing range of practical problems. The book shows how early contributors such as Xenophon, Ibn Khaldun, and David Hume posed the normative and positive questions central to microeconomics. It expounds constrained optimization techniques, as developed by economists and mathematicians from Daniel Bernoulli to Leonid Kantorovich, emphasizing their value in deriving norms of rational behavior and testable hypotheses about typical behavior. Applying these techniques, the book introduces partial equilibrium analysis of particular markets and general equilibrium analysis of market economies. The book both explains how laboratory and field experiments are used in testing economic hypotheses and provides materials for classroom experiments. It gives extensive and innovative coverage of recent findings in cognitive psychology and behavioral economics, which not only document behavior inconsistent with some traditional theories, but also advance positive theories with superior predictive power.

Excerpt

A modern introduction to microeconomics should, in my opinion, (1) convey a sense of how microeconomics has developed in response to a changing array of practical problems and anomalies; (2) maintain a clear distinction between normative and positive theories; (3) integrate findings of behavioral and experimental economics; (4) cover recent, as well as classic, works; (5) feature clear and concise exposition; (6) move from simple, concrete applications to more difficult and abstract ones; (7) offer enough quantitative examples and exercises to show how microeconomic theory is applied and to help students to begin developing the mathematical skills required for success in advanced economics; and (8) provide—through footnotes and citations—links to more advanced treatments. With those goals in mind, I wrote the present text.

The most innovative feature of the book is its extensive coverage of recent research in behavioral and experimental economics. This research not only documents behavior inconsistent with some elements of traditional theory but also advances positive theories with superior predictive power. The research I cover includes studies of loss aversion, referencedependent preferences, the context and framing of choice, hyperbolic discounting and inconsistent intertemporal choice, predictable errors in updating probabilities, nonlinear weighting of probabilities, and prospect theory. The importance of this material was highlighted by the Swedish Academy of Sciences when it awarded the 2002 Prize in Economic Sciences to Daniel Kahneman (a psychologist who helped lay the foundations of behavioral economics) and Vernon Smith (an experimental economist). Although the topics are [advanced] in the sense that they are near the frontier of economic research and seldom covered in textbooks, they are readily comprehended because they center on simple controlled experiments and relate to everyday concerns.

Covering results from behavioral and experimental economics along with traditional microeconomic doctrine involves rebalancing three key components of economics: issues, theory, and data. Traditional introductions emphasize issues, sketch theory, and use data only to illustrate theory. More advanced texts traditionally focus on theory, relegating issues and data to asides. Any data in traditional texts are usually from observational (nonexperimental) studies. The relationship between theory and observational data is likely to be ambiguous until probed by advanced econometric methods and may remain so even then. Recognizing that few students have the econometric skills needed for serious analysis of observational data, some authors focus their texts almost exclusively on theory and issues. Although widely used, such texts arouse misgivings in students and professors to whom data-free exposition smells of indoctrination (Leamer 1997). In comparison to traditional texts, this book places more emphasis on experimental data, both when they support received theory and when they reveal anomalies. Thus the book covers both feedlot experiments that . . .

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