Models in Microeconomic Theory: Expanded Second Edition (She)

The She version of Models in Microeconomic Theory uses feminine pronouns while retaining Osborne and Rubinstein’s formal exploration of individual choice, equilibrium, games and collective institutions. This expanded second edition develops precise reasoning about models with relatively little calculus and sustained attention to definitions and logical argument.

How to study this book

Work through the four parts in order, keeping a glossary of preferences, feasible sets and equilibrium conditions. For each proposition, identify the assumptions before reading the proof and test a small example independently. Write down what the model claims and what it leaves unspecified. The She label identifies the pronoun version; it does not indicate a different economic theory.

Chapter and section guide

Chapter 1 — Preferences and Utility

A preference relation describes how an individual ranks alternatives; a utility function represents that ranking when the required conditions are met. The numbers are a representation rather than a direct measure of the strength of feeling. Distinguish completeness and transitivity from stronger claims about psychology, and keep preference formation separate from the formal properties imposed on a given relation.

Study task: Build a ranking over four alternatives, represent it numerically and show why an increasing transformation preserves the ordering.

Chapter 2 — Choice

Choice specifies what is selected from a feasible set, while rationalisation asks whether a preference relation can account for those selections. Consistency requirements connect choices across different menus. Satisficing and experimental evidence complicate the idea that all observed behaviour follows one stable ranking. The chapter teaches the difference between describing a choice procedure and proving that it has a preference representation.

Study task: Construct choices from overlapping menus and test whether one ranking can rationalise them all.

Chapter 3 — Preferences under Uncertainty

Lotteries provide a formal language for uncertain outcomes. Expected utility represents some preferences over lotteries, but its structure depends on substantive assumptions rather than on uncertainty alone. Risk aversion must be interpreted through the utility representation and the available comparisons. The discussion of theory and experiments invites readers to distinguish a useful mathematical model from an unrestricted description of actual decisions.

Study task: Compare a certain outcome with a two-outcome lottery of the same expected monetary value and explain the preference under a concave utility function.

Chapter 4 — Consumer Preferences

Bundles replace abstract alternatives with combinations of goods. Monotonicity, continuity, convexity and differentiability describe different properties, each doing distinct work in the analysis. Read indifference diagrams as consequences of assumptions, not as universally correct pictures. A consumer’s preference for mixtures, for example, should not be confused with the claim that more of every good is always better.

Study task: Draw two preference patterns that differ in convexity and explain the economic meaning of the difference.

Chapter 5 — Consumer Behavior

A budget set translates prices and resources into feasible bundles, and a demand function records the consumer’s choices across such environments. Optimality depends jointly on preferences and constraints. The chapter connects the model to rationalising demand and to restrictions on demand behaviour. Attend to boundary choices and general definitions before relying on a tangency diagram or differentiation.

Study task: Solve a small two-good choice problem, change one price and explain why the new budget set must be calculated before predicting demand.

Chapter 6 — Producer Behavior

The producer is modelled through feasible production choices and an objective, with output maximisation and profit maximisation treated distinctly. Cost functions summarise the resources required to achieve output, but the book does not assume that every producer must value profit above everything else. Separate technology, available inputs and the producer’s ranking of outcomes so that changing an objective does not silently change the feasible set.

Study task: Analyse one technology under two objectives and identify which part of the resulting difference comes from preferences rather than production possibilities.

Chapter 7 — Monopoly

A monopolist’s decision depends on the permitted pricing arrangement and the responses of buyers. Uniform pricing, discriminatory pricing and indirect forms of discrimination allocate choices and surplus differently. The model requires attention to what the seller can observe or condition an offer upon. Compare outcomes under a stated demand environment rather than treating monopoly as a single fixed price-setting formula.

Study task: Use a small set of buyers to compare a uniform-price offer with buyer-specific prices, identifying the information required for each.

Chapter 8 — A Jungle

The jungle replaces exchange through prices with a power relation that determines which holdings can be taken. Equilibrium concerns the absence of beneficial seizures allowed by that relation. The chapter examines its relationship with Pareto stability and explores the effects of controlling the power ordering or introducing externalities. A formal efficiency property should be kept distinct from a judgement that coercive allocation is desirable.

Study task: Allocate distinct objects among three ranked agents and check every permitted seizure before declaring an equilibrium.

Chapter 9 — A Market

The market model introduces equilibrium through an allocation problem with indivisible goods, linking individual choice at prices with aggregate consistency. Existence, construction, welfare and uniqueness are separate questions. Follow how the equilibrium conditions combine feasible allocation with optimality, and do not assume that an arbitrary efficient assignment is automatically supported by the particular prices under consideration.

Study task: For a small market, propose prices and an allocation, then check both individual choice and overall feasibility.

Chapter 10 — An Exchange Economy

Consumers arrive with endowments and trade goods at common prices. Competitive equilibrium requires their demands to fit together, making the value of initial holdings central to budget constraints. The chapter connects equilibrium with Pareto stability and the core, while the Edgeworth box offers a geometric view of two-person exchange. Keep the existence of supporting prices separate from strategic questions about manipulating the system.

Study task: Draw an Edgeworth box, mark the endowment and compare a feasible improvement with a competitive allocation.

Chapter 11 — Variants of an Exchange Economy

The exchange framework is extended to an indivisible good with money and to uncertainty. These settings test which earlier arguments depend on divisible goods or on a known state of the world. When outcomes depend on states, specify what is contracted or traded and what information is available. The variations demonstrate why changing the commodity description can alter the equilibrium problem itself.

Study task: Describe a state-contingent consumption plan and distinguish it from a bundle that delivers the same amount in every state.

Chapter 12 — A Market with Consumers and Producers

Production adds transformations of resources to an economy of consumption and exchange. Consumers’ holdings, firms’ decisions and the distribution of production returns must fit one another at equilibrium prices. The capital-and-labour example makes the interaction concrete. Work through the ownership and budget relationships so that firm revenue is not counted as an unexplained extra resource available to everyone.

Study task: Create a resource-flow diagram identifying consumer endowments, production inputs, outputs and the recipients of firms’ returns.

Chapter 13 — Equilibrium with Prices and Expectations

The chapter explores environments in which beliefs about conditions or others’ behaviour interact with prices. Examples involving bank branches, adverse selection and fishing show different ways that expectations must be consistent with the outcome. Identifying the feedback is essential: an agent acts on a forecast, while the aggregate result helps determine whether that forecast can be sustained.

Study task: Choose one example and write a loop connecting beliefs, individual decisions and the realised aggregate condition.

Chapter 14 — A Market with Asymmetric Information

When a relevant characteristic is privately known, an observed choice may carry information as well as a direct economic consequence. The education and labour-market model helps examine how different types can generate separating or pooling patterns. Distinguish the assumptions supporting an informational signal from a claim that the action necessarily creates productivity.

Study task: Specify what an employer observes, what remains hidden and what beliefs would support a proposed education pattern.

Chapter 15 — Strategic Games

A strategic game specifies players, available actions and preferences over action profiles. Nash equilibrium requires that no player gain by changing action alone while the others’ actions remain fixed. Mixed strategies, correlated equilibrium and alternative concepts broaden the discussion. The key discipline is to apply the appropriate deviation test, rather than equate equilibrium with cooperation, fairness or the best total payoff.

Study task: Construct a payoff matrix, mark best responses and compare a Nash outcome with an outcome preferred by both players.

Chapter 16 — Extensive Games

Timing and contingent plans become explicit in extensive games. A strategy specifies actions even at decision points that may never be reached, and subgame perfection tests behaviour throughout the tree. Backward induction, bargaining and repeated interaction illustrate the importance of credible continuation behaviour. Distinguish an observed path from the complete strategies needed to support it.

Study task: Draw a short bargaining tree and identify a Nash threat that fails the test of optimal behaviour in a continuation subgame.

Chapter 17 — Mechanism Design

A mechanism connects reported private information to a collective decision and possibly transfers. The public-project setting introduces strategy-proofness and the Vickrey–Clarke–Groves approach. Desirable incentives must be checked against the exact environment and payment rule, and they should not be conflated with every other design objective. Write out who reports what before evaluating truthful behaviour.

Study task: For a small public-project example, compare a participant’s payoff under a truthful report and a specified false report.

Chapter 18 — Matching

A matching problem assigns partners using preferences on both sides. Stability excludes a blocking pair that would prefer to be matched together, a requirement different from maximising a sum of utilities. The Gale–Shapley procedure constructs a stable matching under the chapter’s assumptions. Track proposals and rejections carefully, and compare the roles of the proposing and receiving sides.

Study task: Run deferred acceptance on a three-by-three example and verify that no unmatched pair can block the result.

Chapter 19 — Socialism

The chapter develops an axiomatic analysis of economic systems rather than a general historical survey. A formal model and specified properties lead to a characterisation of socialism within that framework. The learning task is to understand what the definitions include, what the assumptions rule out and how the conclusion follows. Avoid replacing the formal argument with everyday uses of the political label.

Study task: Rewrite each defining property in plain language and explain which aspect of an allocation rule it constrains.

Chapter 20 — Aggregating Preferences

Individual rankings are combined into social rankings or choices, raising questions about how collective procedures should respond to disagreement. Arrow’s theorem and the Gibbard–Satterthwaite theorem address different objects and conditions, so their conclusions should be kept distinct. The force of an impossibility result lies in the combination of requirements, not in an unrestricted assertion that all collective decisions are impossible.

Study task: State the object and main requirements of each theorem, then explain how restricting a domain can change the problem.

Applied assignment

Build a portfolio with one consumer-choice problem, one exchange equilibrium, one game and one matching problem. State each model completely, solve a small instance and explain which assumptions drive the outcome. End by comparing what equilibrium or stability means in the four settings.

Suggested reading plan

Study Chapters 1–7 as the foundation in individual behaviour, 8–14 as the main sequence on equilibrium, 15–16 for strategic interaction and 17–20 for institutional topics. Allow two sessions for a difficult proof: one to reconstruct it and another to test the importance of its assumptions.

Questions for reflection

• Which numerical utility statements preserve only an ordering rather than measuring intensity?
• How do competitive equilibrium, Nash equilibrium and stable matching differ?
• Which conclusions fail when information, feasible choices or permitted deviations change?

Edition and source notes

Based on the 2023 expanded second edition, She version, DOI 10.11647/OBP.0361. All twenty numbered chapters are covered. The authors offer He and She versions of the same theoretical content; the distinction is their use of pronouns. These original explanations and tasks supplement the formal text rather than reproduce its proofs or exercise solutions.

Consult the official source and full text.