Models in Microeconomic Theory: Expanded Second Edition (He)

The He version of Osborne and Rubinstein’s Models in Microeconomic Theory develops a precise vocabulary for choice, market equilibrium, strategic interaction and institutional design. Its expanded second edition builds from individual preferences to the coordination of many decision-makers, using elementary mathematics and careful logical reasoning.

How to study this book

Before solving an example, list the alternatives, preferences, constraints and information. Then write the exact optimality or stability condition being tested. Reconstruct proofs in your own words and look for counterexamples when an assumption is removed. This version uses masculine pronouns; its theoretical sequence is the same as the companion She version.

Chapter and section guide

Chapter 1 — Preferences and Utility

The opening model separates an individual’s ranking of alternatives from the numerical notation used to represent it. Completeness and transitivity impose structure on comparisons, whereas utility numbers generally do not measure how much an individual cares. Understanding that distinction prevents later calculations from importing interpersonal or psychological claims the model never made.

Study task: Give two different utility functions for one finite ranking and explain what information they share.

Chapter 2 — Choice

Observed choices are the starting point here: which option is selected when the menu changes? Rational choice connects those observations with preferences, and consistency properties test whether such a connection can be maintained. The alternatives of satisficing and experimentally observed inconsistency show why identifying a choice rule is a separate task from assuming that utility maximisation describes it.

Study task: Add an alternative to a menu and construct one consistent and one inconsistent change in choice.

Chapter 3 — Preferences under Uncertainty

An uncertain prospect is represented as a lottery over outcomes, allowing the analysis to compare risks explicitly. Expected utility and risk aversion require attention to the axioms governing those comparisons. Do not substitute the expected monetary payoff for the individual’s evaluation: two prospects with equal monetary means may be ranked differently under the model.

Study task: Calculate expected utility for two lotteries under one specified utility function and distinguish the result from expected money.

Chapter 4 — Consumer Preferences

Consumer theory begins by specifying attitudes toward bundles before introducing purchasing constraints. Each regularity condition has a role: monotonicity concerns increases in goods, convexity concerns mixtures, and continuity rules out certain abrupt changes in ranking. Use examples that separate these properties so that familiar smooth indifference curves do not conceal stronger assumptions than intended.

Study task: Produce a ranking that is monotone but not convex and describe the consumption preference it expresses.

Chapter 5 — Consumer Behavior

Demand is the outcome of choosing from a budget set, not an independent list of quantities attached to prices. This chapter relates demand functions to rational consumer behaviour and examines the restrictions that rationalisation places on them. Work with the full set of affordable bundles and check corner solutions rather than assuming every optimum is an interior tangency.

Study task: Choose a budget and preferences that produce a corner solution, then verify optimality directly.

Chapter 6 — Producer Behavior

Production possibilities and objectives are distinct ingredients in the producer model. The text studies output, profit and cost while explicitly allowing preferences other than profit maximisation. This lets readers see which conclusions reflect technology and which reflect a particular account of what the producer wants. A cost function is a useful summary only after the underlying minimisation problem is understood.

Study task: List the feasible production plans in a finite example and rank them by output and by profit.

Chapter 7 — Monopoly

The monopoly analysis varies the seller’s pricing opportunities. A common posted price differs from personalised offers or arrangements that induce consumers to sort themselves. Each version changes the information and constraints facing the seller, so the associated allocation cannot be explained by market power alone. Derive buyer responses first, then assess which permitted offer is best for the monopolist.

Study task: Compare revenue from two posted prices for a small buyer group and explain what extra possibilities direct discrimination would require.

Chapter 8 — A Jungle

Power provides the organising institution of the jungle. An allocation is tested against the acquisitions stronger agents could make from weaker ones, and the welfare analysis asks how such an allocation relates to Pareto stability. The ordering of power is a model primitive, not a synonym for prices or initial wealth. Changing it can alter the result without changing anyone’s tastes.

Study task: Reverse the power order in a three-agent object-allocation example and identify the first equilibrium condition that changes.

Chapter 9 — A Market

The initial market framework makes equilibrium a combination of decentralised choice and compatible allocation. Indivisibilities require care in constructing and checking candidate outcomes. Existence, welfare and uniqueness must each be established rather than inferred from the word market. Use the chapter to develop the habit of checking all conditions, including feasibility, instead of inspecting prices in isolation.

Study task: Propose a candidate allocation that is feasible but fails an individual optimality condition at stated prices.

Chapter 10 — An Exchange Economy

Exchange introduces trade from endowments, giving each consumer a budget linked to the market value of initial holdings. Competitive equilibrium connects individual demands, while the core and Pareto comparisons ask different questions about possible improvements. The Edgeworth box makes these relationships visible in a two-consumer setting, but the geometric picture must still be tied to definitions.

Study task: Move the initial endowment in an Edgeworth box and explain how budgets can change even when preferences remain fixed.

Chapter 11 — Variants of an Exchange Economy

The variants examine what happens when exchange includes indivisible consumption or state-dependent uncertainty. The definition of a commodity and the timing of trade become especially important. Earlier intuitions about smooth adjustment need to be rechecked rather than carried over automatically. Identify which parts of the basic exchange model remain intact and which new constraints enter each example.

Study task: Compare ordinary consumption goods with state-contingent goods and state which additional description a contract requires.

Chapter 12 — A Market with Consumers and Producers

With firms present, equilibrium must coordinate production decisions as well as household demand. Inputs are scarce resources, outputs enter consumption possibilities, and ownership determines how production returns reach consumers. The capital-and-labour example makes these links explicit. A consistent account follows the same resources through the system and avoids treating production as a source of goods without corresponding inputs.

Study task: Write a simple resource balance for a production economy and show where household income from ownership enters.

Chapter 13 — Equilibrium with Prices and Expectations

Prices alone do not describe every relevant aspect of an economic environment. In the chapter’s examples, expectations influence choices and must fit the conditions those choices generate. Bank congestion, adverse selection and fishing illustrate different feedback structures. Separate the forecast an agent takes as given from the consistency requirement imposed when the entire outcome is checked.

Study task: Describe an expectation that leads to choices contradicting it, then explain why it cannot be part of the proposed equilibrium.

Chapter 14 — A Market with Asymmetric Information

Asymmetric information makes the distinction between hidden characteristics and visible actions central. In the labour-market model, education can affect what employers infer about workers. Pooling and separation depend on incentives and beliefs, not simply on the observation that different people obtain different qualifications. Record who can imitate whom before accepting a candidate signalling pattern.

Study task: Check whether one worker type would prefer to imitate the other under a proposed wage and education arrangement.

Chapter 15 — Strategic Games

Strategic interaction gives each player preferences over combinations of actions. A best response holds others’ actions fixed, and a Nash equilibrium satisfies that test simultaneously for all players. The chapter extends the discussion through randomisation, correlation and other concepts. Keep these definitions separate so that the reason an outcome qualifies under one concept remains clear.

Study task: Find pure-strategy best responses in a small game and explain how a mixed strategy differs from uncertainty about an opponent’s fixed action.

Chapter 16 — Extensive Games

An extensive game records sequence and information, but solving it requires complete contingent strategies. Subgame perfection rules out some threats that a Nash calculation based only on the realised path can leave in place. Bargaining and repeated games show how future play changes present incentives. Work backwards through an appropriate finite tree before discussing the economic interpretation.

Study task: Describe two strategy profiles with the same realised path but different off-path actions and compare their credibility.

Chapter 17 — Mechanism Design

Mechanism design reverses the usual question by asking how rules can induce desired outcomes when information is privately held. The public-project examples and Vickrey–Clarke–Groves mechanism make transfers and truthful reporting central objects of analysis. Incentive compatibility must be checked for possible reports, while other aims such as budget balance remain distinct requirements.

Study task: Write the outcome and transfer consequences of two reports by one participant, holding others’ reports fixed.

Chapter 18 — Matching

A matching is stable when no pair can upset it by forming a mutually preferred partnership. Deferred acceptance supplies a constructive route to stability in the specified environment. Its sequence also reveals why the side making proposals matters. This is an institutional problem without the same structure as ordinary price-mediated exchange, so avoid importing an unearned welfare interpretation.

Study task: Run deferred acceptance with each side proposing and compare the partners obtained by one participant.

Chapter 19 — Socialism

The book’s treatment of socialism is an exercise in defining and characterising an economic system through axioms. Read the properties as precise restrictions on allocation rather than as loose descriptions of historical governments. The conclusion is meaningful within the model’s domain, and its assumptions identify the scope. Reconstruct that logical chain before applying familiar political associations to the label.

Study task: Create a model-sheet listing the objects, properties and conclusion of the characterisation argument.

Chapter 20 — Aggregating Preferences

The closing chapter investigates the tension among requirements for collective rankings and collective choice. Arrow’s result and Gibbard–Satterthwaite’s result concern related but distinct problems, including aggregation and strategic reporting. Read their domain assumptions closely. An impossibility theorem identifies an incompatible package of conditions; it does not eliminate every possible collective procedure.

Study task: Compare one requirement you might relax in preference aggregation with one you might relax in strategy-proof choice.

Applied assignment

Create a comparison notebook for a jungle, an exchange economy and a strategic game. Use a small numerical or finite example for each, verify every equilibrium condition and then alter one primitive. Explain why the permitted deviations differ and why the three equilibrium concepts should not be treated as interchangeable.

Suggested reading plan

Begin with the seven chapters on individual behaviour. Continue through the seven equilibrium chapters, followed by the two game-theory chapters and four institutional topics. Schedule separate problem sessions after each part; return to a definition whenever a solution relies on an intuitive use of a technical word.

Questions for reflection

• What information does an ordinal utility representation leave unspecified?
• How does the choice of institution determine which improvements count against equilibrium?
• When does a mathematically desirable property depend on a restricted domain?

Edition and source notes

Based on the 2023 expanded second edition, He version, DOI 10.11647/OBP.0362. The guide covers all twenty chapters. He and She are the authors’ alternative pronoun versions of the same theory, not different levels or subjects. The chapter explanations and exercises here are original study material, not reproduced proofs or an answer manual.

Consult the official source and full text.