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 Contents vii

Solved Problem 3.5 63 Chapter 5 Applying Consumer Theory 107

Ad Valorem and Specific Taxes Have Similar
Effects 63 CHALLENGE Per-Hour Versus Lump-Sum
Solved Problem 3.6 64 Childcare Subsidies 107
Subsidies 65 5.1 Deriving Demand Curves 108
APPLICATION The Ethanol Subsidy 66 Indifference Curves and a Rotating
CHALLENGE SOLUTION Who Pays the Budget Line 109
Gasoline Tax? 66 Price-Consumption Curve 110
Summary 67 ■ Questions 68 APPLICATION Smoking Versus Eating
and Phoning 111
The Demand Curve Corresponds to the
Chapter 4 Consumer Choice 72 Price-Consumption Curve 112
Solved Problem 5.1 112
CHALLENGE Why Americans Buy 5.2 How Changes in Income Shift
More E-Books Than Do Germans 72 Demand Curves 113
4.1 Preferences 74 Effects of a Rise in Income 113
Properties of Consumer Preferences 74 Solved Problem 5.2 115
APPLICATION You Can’t Have Too Consumer Theory and Income Elasticities 116
Much Money 75 APPLICATION Fast-Food Engel Curve 119
Preference Maps 76 5.3 Effects of a Price Change 120
Solved Problem 4.1 78 Income and Substitution Effects with a
APPLICATION Indifference Curves Normal Good 120
Between Food and Clothing 82 Solved Problem 5.3 122
4.2 Utility 82 Solved Problem 5.4 123
Utility Function 82 APPLICATION Shipping the Good
Ordinal Preferences 83 Stuff Away 124
Utility and Indifference Curves 83 Income and Substitution Effects with
Marginal Utility 85 an Inferior Good 124
Utility and Marginal Rates of Substitution 86 Solved Problem 5.5 125
4.3 Budget Constraint 86 ★ Compensating Variation and Equivalent
Slope of the Budget Constraint 88 Variation 126
Solved Problem 4.2 88 APPLICATION What’s the Value of Using the
Effect of a Change in Price on the Internet? 126
Opportunity Set 89 5.4 Cost-of-Living Adjustments 126
Effect of a Change in Income on the Inflation Indexes 127
Opportunity Set 90 Effects of Inflation Adjustments 129
Solved Problem 4.3 90 APPLICATION Paying Employees to Relocate 130
4.4 Constrained Consumer Choice 90 5.5 Deriving Labor Supply Curves 132
The Consumer’s Optimal Bundle 91 Labor-Leisure Choice 132
APPLICATION Substituting Alcohol Income and Substitution Effects 135
for Marijuana 92 Solved Problem 5.6 136
Solved Problem 4.4 93 ★ Shape of the Labor Supply Curve 137
★ Optimal Bundles on Convex Sections APPLICATION Working After Winning
of Indifference Curves 94 the Lottery 138
Buying Where More Is Better 95 Income Tax Rates and Labor Supply 139
Food Stamps 96 CHALLENGE SOLUTION Per-Hour Versus
APPLICATION Benefiting from Food Stamps 98 Lump-Sum Childcare Subsidies 141
4.5 Behavioral Economics 98 Summary 142 ■ Questions 143
Tests of Transitivity 98
Endowment Effect 99
APPLICATION Opt In Versus Opt Out 100
Salience and Bounded Rationality 100
Chapter 6 Firms and Production 147
APPLICATION Unaware of Taxes 101 CHALLENGE Labor Productivity During
CHALLENGE SOLUTION Why Americans Recessions 147
Buy More E-Books Than Do Germans 101 6.1 The Ownership and Management of Firms 148
Summary 102 ■ Questions 103 Private, Public, and Nonprofit Firms 148
viii Contents

APPLICATION Chinese State-Owned Effects of Taxes on Costs 191

Enterprises 149 Solved Problem 7.2 192
The Ownership of For-Profit Firms 149 Short-Run Cost Summary 193
The Management of Firms 150 7.3 Long-Run Costs 193
What Owners Want 150 All Costs Are Avoidable in the Long Run 193
6.2 Production Function 151 Minimizing Cost 193
6.3 Short-Run Production 153 Isocost Line 194
Total Product 153 Combining Cost and Production Information 196
Marginal Product of Labor 154 Solved Problem 7.3 198
Solved Problem 6.1 154 Factor Price Changes 199
Average Product of Labor 155 Solved Problem 7.4 199
Graphing the Product Curves 155 The Long-Run Expansion Path and
Law of Diminishing Marginal Returns 157 the Long-Run Cost Function 200
APPLICATION Malthus and the Green Solved Problem 7.5 202
Revolution 158 The Shape of Long-Run Cost Curves 202
APPLICATION Economies of Scale in Nuclear
6.4 Long-Run Production 159
Isoquants 160 Power Plants 205
APPLICATION A Semiconductor Integrated Estimating Cost Curves Versus Introspection 206
Circuit Isoquant 162 7.4 Lower Costs in the Long Run 206
Substituting Inputs 163 Long-Run Average Cost as the Envelope
Solved Problem 6.2 165 of Short-Run Average Cost Curves 207
APPLICATION Long-Run Cost Curves in Beer
6.5 Returns to Scale 166
Constant, Increasing, and Decreasing Manufacturing 208
APPLICATION Choosing an Inkjet or a Laser
Returns to Scale 166
Solved Problem 6.3 167 Printer 208
APPLICATION Returns to Scale in Various Short-Run and Long-Run Expansion Paths 209
Industries 168 The Learning Curve 209
APPLICATION Learning by Drilling 211
Varying Returns to Scale 169
6.6 Productivity and Technical Change 171 7.5 Cost of Producing Multiple Goods 212
APPLICATION Economies of Scope 213
Relative Productivity 171
APPLICATION A Good Boss Raises CHALLENGE SOLUTION Technology Choice
Productivity 171 at Home Versus Abroad 214
Innovations 171 Summary 215 ■ Questions 216
APPLICATION Tata Nano’s Technical and
Organizational Innovations 173 Chapter 8 Competitive Firms and Markets 220
CHALLENGE SOLUTION Labor Productivity
During Recessions 173 CHALLENGE The Rising Cost of Keeping
On Truckin’ 220
Summary 175 ■ Questions 175
8.1 Perfect Competition 221
Chapter 7 Costs 179 Price Taking 221
Why the Firm’s Demand Curve Is Horizontal 222
CHALLENGE Technology Choice Deviations from Perfect Competition 223
at Home Versus Abroad 179 Derivation of a Competitive Firm’s
7.1 The Nature of Costs 180 Demand Curve 224
Opportunity Costs 180 Solved Problem 8.1 225
APPLICATION The Opportunity Cost Why We Study Perfect Competition 226
of an MBA 181 8.2 Profit Maximization 226
Solved Problem 7.1 181 Profit 226
Costs of Durable Inputs 182 Two Steps to Maximizing Profit 227
Sunk Costs 183 8.3 Competition in the Short Run 230
7.2 Short-Run Costs 183 Short-Run Output Decision 231
Short-Run Cost Measures 184 Solved Problem 8.2 233
Short-Run Cost Curves 186 Short-Run Shutdown Decision 234
Production Functions and the Shape APPLICATION Oil, Oil Sands, and Oil Shale
of Cost Curves 187 Shutdowns 236
APPLICATION Short-Run Cost Curves Solved Problem 8.3 237
for a Beer Manufacturer 190 Short-Run Firm Supply Curve 237
 Contents ix

Short-Run Market Supply Curve 238 APPLICATION The Deadweight Cost

Short-Run Competitive Equilibrium 240 of Raising Gasoline Tax Revenue 286
Solved Problem 8.4 242 Solved Problem 9.4 287
8.4 Competition in the Long Run 243 Welfare Effects of a Subsidy 288
Long-Run Competitive Profit Maximization 243 Solved Problem 9.5 288
Long-Run Firm Supply Curve 243 Welfare Effects of a Price Floor 289
APPLICATION The Size of Ethanol Solved Problem 9.6 291
Processing Plants 244 APPLICATION How Big Are Farm Subsidies
Long-Run Market Supply Curve 244 and Who Gets Them? 292
APPLICATION Fast-Food Firms’ Entry Welfare Effects of a Price Ceiling 293
in Russia 245 Solved Problem 9.7 294
APPLICATION Upward-Sloping Long-Run APPLICATION The Social Cost of a
Supply Curve for Cotton 248 Natural Gas Price Ceiling 295
APPLICATION Reformulated Gasoline 9.7 Comparing Both Types of Policies: Imports 295
Supply Curves 252 Free Trade Versus a Ban on Imports 296
Solved Problem 8.5 253 Free Trade Versus a Tariff 297
Long-Run Competitive Equilibrium 254 Free Trade Versus a Quota 299
CHALLENGE SOLUTION The Rising Cost APPLICATION The Chicken Tax Trade War 300
of Keeping On Truckin’ 255 Rent Seeking 300
Summary 256 ■ Questions 257 CHALLENGE SOLUTION “Big Dry” Water
Restrictions 301
Chapter 9 Applying the Competitive Model 262 Summary 303 ■ Questions 303

CHALLENGE “Big Dry” Water Restrictions 262

9.1 Zero Profit for Competitive Firms Chapter 10 General Equilibrium
in the Long Run 263 and Economic Welfare 308
Zero Long-Run Profit with Free Entry 263
Zero Long-Run Profit When Entry Is Limited 264 CHALLENGE Anti-Price Gouging Laws 308
APPLICATION Tiger Woods’ Rent 266 10.1 General Equilibrium 310
The Need to Maximize Profit 266 Feedback Between Competitive Markets 311
9.2 Consumer Welfare 267 Solved Problem 10.1 313
Measuring Consumer Welfare Using Minimum Wages with Incomplete Coverage 314
a Demand Curve 267 Solved Problem 10.2 316
APPLICATION Willingness to Pay APPLICATION Urban Flight 317
and Consumer Surplus on eBay 269 10.2 Trading Between Two People 317
Effect of a Price Change on Consumer Endowments 317
Surplus 270 Mutually Beneficial Trades 319
APPLICATION Goods with a Large Consumer Solved Problem 10.3 321
Surplus Loss from Price Increases 271 Bargaining Ability 321
Solved Problem 9.1 272 10.3 Competitive Exchange 321
9.3 Producer Welfare 273 Competitive Equilibrium 322
Measuring Producer Surplus Using The Efficiency of Competition 323
a Supply Curve 273 Obtaining Any Efficient Allocation Using
Using Producer Surplus 274 Competition 323
Solved Problem 9.2 275 10.4 Production and Trading 324
Competition Maximizes Welfare 276 Comparative Advantage 324
Solved Problem 9.3 278 Solved Problem 10.4 326
APPLICATION Deadweight Loss Efficient Product Mix 328
of Christmas Presents 279 Competition 328
9.5 Policies That Shift Supply and Demand 10.5 Efficiency and Equity 330
Curves 280 Role of the Government 330
Restricting the Number of Firms 281 APPLICATION The Wealth and Income
APPLICATION Licensing Cabs 283 of the 1% 331
Raising Entry and Exit Costs 284 Efficiency 332
9.6 Policies That Create a Wedge Between Equity 334
Supply and Demand 285 APPLICATION How You Vote Matters 336
Welfare Effects of a Sales Tax 285 Efficiency Versus Equity 338
x Contents

CHALLENGE SOLUTION Anti-Price Gouging Why Price Discrimination Pays 386

Laws 339 APPLICATION Disneyland Pricing 388
Summary 340 ■ Questions 341 Which Firms Can Price Discriminate 388
Preventing Resale 389
Chapter 11 Monopoly 344 APPLICATION Preventing Resale
of Designer Bags 390
CHALLENGE Brand-Name and Generic Not All Price Differences Are Price
Drugs 344 Discrimination 390
11.1 Monopoly Profit Maximization 346 Types of Price Discrimination 390
Marginal Revenue 346 12.2 Perfect Price Discrimination 391
Solved Problem 11.1 348 How a Firm Perfectly Price Discriminates 391
Choosing Price or Quantity 350 APPLICATION Google Uses Bidding for
Graphical Approach 351 Ads to Price Discriminate 392
Mathematical Approach 352 Perfect Price Discrimination Is Efficient
APPLICATION Apple’s iPad 353 but Harms Some Consumers 393
Solved Problem 11.2 353 APPLICATION Botox Revisited 395
Effects of a Shift of the Demand Curve 354 Solved Problem 12.1 396
11.2 Market Power 355 Transaction Costs and Perfect Price
Market Power and the Shape of the Discrimination 396
Demand Curve 355 12.3 Group Price Discrimination 396
APPLICATION Cable Cars and Profit APPLICATION Warner Brothers Sets
Maximization 357 Prices for a Harry Potter DVD 397
Lerner Index 358 Group Price Discrimination with
Solved Problem 11.3 358 Two Groups 397
Sources of Market Power 358 Solved Problem 12.2 398
11.3 Market Failure Due to Monopoly Pricing 359 APPLICATION Reselling Textbooks 399
Solved Problem 11.4 361 Solved Problem 12.3 400
11.4 Causes of Monopoly 362 Identifying Groups 402
Cost-Based Monopoly 362 APPLICATION Buying Discounts 402
Solved Problem 11.5 364 Welfare Effects of Group Price Discrimination 403
Government Creation of a Monopoly 364 12.4 Nonlinear Price Discrimination 404
APPLICATION Botox Patent Monopoly 366 12.5 Two-Part Pricing 406
11.5 Government Actions That Reduce Two-Part Pricing with Identical Customers 407
Market Power 367 Two-Part Pricing with Nonidentical
Regulating Monopolies 367 Consumers 408
Solved Problem 11.6 370 APPLICATION iTunes for a Song 410
APPLICATION Natural Gas Regulation 371 12.6 Tie-In Sales 410
Increasing Competition 372 Requirement Tie-In Sale 410
APPLICATION Generic Competition APPLICATION Ties That Bind 411
for Apple’s iPod 373 Bundling 411
Solved Problem 11.7 373 Solved Problem 12.4 413
11.6 Networks, Dynamics, and Behavioral 12.7 Advertising 414
Economics 374 The Decision Whether to Advertise 414
Network Externalities 375 How Much to Advertise 415
Network Externalities and Behavioral APPLICATION Super Bowl Commercials 416
Economics 375 CHALLENGE SOLUTION Sale Prices 417
Network Externalities as an Explanation for Summary 418 ■ Questions 419
Monopolies 376
APPLICATION Critical Mass and eBay 376
A Two-Period Monopoly Model 377 Chapter 13 Oligopoly and Monopolistic
CHALLENGE SOLUTION Brand-Name Competition 424
and Generic Drugs 378
CHALLENGE Government Aircraft Subsidies 424
Summary 379 ■ Questions 379
13.1 Market Structures 426
Chapter 12 Pricing and Advertising 384 13.2 Cartels 427
Why Cartels Form 427
CHALLENGE Sale Prices 384 Laws Against Cartels 429
12.1 Conditions for Price Discrimination 386 APPLICATION Catwalk Cartel 431
 Contents xi

Why Cartels Fail 432 14.3 Sequential Dynamic Games 483

Maintaining Cartels 432 Game Tree 483
APPLICATION Casket Entry 433 Subgame Perfect Nash Equilibrium 484
Mergers 434 Credibility 486
APPLICATION Hospital Mergers: Dynamic Entry Game 487
Market Power Versus Efficiency 434 APPLICATION Dominant Airlines 488
13.3 Cournot Oligopoly 435 Solved Problem 14.3 489
The Duopoly Nash-Cournot Equilibrium 436 14.4 Auctions 490
An Airlines Market Example 436 Elements of Auctions 491
Equilibrium, Elasticity, and the Number Bidding Strategies in Private-Value Auctions 492
of Firms 440 Winner’s Curse 493
APPLICATION Mobile Number Portability 442 APPLICATION Bidder’s Curse 494
Nonidentical Firms 442 14.5 Behavioral Game Theory 494
Solved Problem 13.1 443 APPLICATION GM’s Ultimatum 495
Solved Problem 13.2 445 CHALLENGE SOLUTION Competing E-book
APPLICATION Bottled Water 446 Standards 496
13.4 Stackelberg Oligopoly 447 Summary 497 ■ Questions 498
Graphical Model 447
Solved Problem 13.3 449 Chapter 15 Factor Markets 505
Why Moving Sequentially Is Essential 450
Comparison of Competitive, Stackelberg, CHALLENGE Athletes’ Salaries and
Cournot, and Collusive Equilibria 450 Ticket Prices 505
13.5 Bertrand Oligopoly 451 15.1 Competitive Factor Market 506
Identical Products 452 Short-Run Factor Demand of a Firm 507
Differentiated Products 453 Solved Problem 15.1 509
APPLICATION Welfare Gain from More Solved Problem 15.2 510
Toilet Paper 455 Long-Run Factor Demand 511
Factor Market Demand 512
13.6 Monopolistic Competition 456
APPLICATION Monopolistically Competitive
Competitive Factor Market Equilibrium 514
Food Truck Market 456 15.2 Effects of Monopolies on Factor Markets 515
Equilibrium 457 Market Structure and Factor Demands 515
Solved Problem 13.4 458 A Model of Market Power in Input
Fixed Costs and the Number of Firms 458 and Output Markets 516
Solved Problem 13.5 460 APPLICATION Unions and Profits 519
APPLICATION Zoning Laws as a Barrier Solved Problem 15.3 520
to Entry by Hotel Chains 460 15.3 Monopsony 521
CHALLENGE SOLUTION Government Aircraft Monopsony Profit Maximization 521
Subsidies 461 APPLICATION Walmart’s Monopsony
Summary 462 ■ Questions 463 Power 523
Welfare Effects of Monopsony 524
Solved Problem 15.4 525
CHALLENGE SOLUTION Athletes’ Salaries
Chapter 14 Game Theory 468
and Ticket Prices 525
CHALLENGE Competing E-book Standards 468 Summary 526 ■ Questions 527
14.1 Static Games 470
Normal-Form Games 470 Chapter 16 Interest Rates, Investments, and
Predicting a Game’s Outcome 471 Capital Markets 530
Multiple Nash Equilibria, No Nash
Equilibrium, and Mixed Strategies 474 CHALLENGE Should You Go to College? 530
APPLICATION Tough Love 477 16.1 Comparing Money Today to Money
Solved Problem 14.1 477 in the Future 531
Cooperation 478 Interest Rates 531
APPLICATION Strategic Advertising 479 Using Interest Rates to Connect the Present
14.2 Repeated Dynamic Games 480 and Future 534
Strategies and Actions in Dynamic Games 481 APPLICATION Power of Compounding 534
Cooperation in a Repeated Prisoner’s Stream of Payments 536
Dilemma Game 481 Solved Problem 16.1 537
Solved Problem 14.2 483 APPLICATION Saving for Retirement 538
xii Contents

Inflation and Discounting 539 Violations of Expected Utility Theory 586

APPLICATION Winning the Lottery 540 Prospect Theory 587
16.2 Choices over Time 541 CHALLENGE SOLUTION BP and Limited
Investing 541 Liability 589
Solved Problem 16.2 543 Summary 590 ■ Questions 591
Solved Problem 16.3 544
Rate of Return on Bonds 544 Chapter 18 Externalities, Open-Access,
★ Behavioral Economics: Time-Varying and Public Goods 595
Discounting 545
APPLICATION Falling Discount Rates CHALLENGE Trade and Pollution 595
and Self-Control 546 18.1 Externalities 596
16.3 Exhaustible Resources 546 APPLICATION Negative Externalities
When to Sell an Exhaustible Resource 547 from Spam 597
Price of a Scarce Exhaustible Resource 547 18.2 The Inefficiency of Competition with
APPLICATION Redwood Trees 550 Externalities 597
Why Price May Be Constant or Fall 551 18.3 Regulating Externalities 600
16.4 Capital Markets, Interest Rates, APPLICATION Pulp and Paper Mill
and Investments 553 Pollution and Regulation 602
Solved Problem 16.4 554 Solved Problem 18.1 603
CHALLENGE SOLUTION Should You Go to APPLICATION Why Tax Drivers 603
College? 555 Benefits Versus Costs from Controlling
Summary 557 ■ Questions 557 Pollution 604
APPLICATION Protecting Babies 604
Chapter 17 Uncertainty 561 18.4 Market Structure and Externalities 605
Monopoly and Externalities 605
CHALLENGE BP and Limited Liability 561
Monopoly Versus Competitive Welfare with
17.1 Assessing Risk 563 Externalities 606
Probability 563 Solved Problem 18.2 606
Expected Value 565 Taxing Externalities in Noncompetitive
Solved Problem 17.1 565 Markets 607
Variance and Standard Deviation 566
18.5 Allocating Property Rights to Reduce
17.2 Attitudes Toward Risk 567 Externalities 607
Expected Utility 567 Coase Theorem 607
Risk Aversion 568 APPLICATION Buying a Town 609
Solved Problem 17.2 570 Markets for Pollution 609
APPLICATION Stocks’ Risk Premium 571 APPLICATION Acid Rain Program 610
Risk Neutrality 572 Markets for Positive Externalities 610
Risk Preference 573 18.6 Rivalry and Exclusion 610
APPLICATION Gambling 573
Open-Access Common Property 611
17.3 Reducing Risk 574 Club Goods 612
Obtain Information 575 APPLICATION Piracy 613
Diversify 575 Public Goods 613
APPLICATION Diversifying Retirement Solved Problem 18.3 614
Funds 577 APPLICATION Radiohead’s “Public Good”
Buy Insurance 577 Experiment 615
Solved Problem 17.3 578 APPLICATION What’s Their Beef? 616
APPLICATION Flight Insurance 580 CHALLENGE SOLUTION Trade and Pollution 617
APPLICATION Limited Insurance
Summary 619 ■ Questions 620
for Natural Disasters 581
17.4 Investing Under Uncertainty 582 Chapter 19 Asymmetric Information 623
Risk-Neutral Investing 582
Risk-Averse Investing 582 CHALLENGE Dying to Work 623
Solved Problem 17.4 583 19.1 Adverse Selection 625
17.5 Behavioral Economics of Uncertainty 584 Adverse Selection in Insurance Markets 626
Biased Assessment of Probabilities 584 Products of Unknown Quality 626
APPLICATION Biased Estimates 585 Solved Problem 19.1 629
 Contents xiii

Solved Problem 19.2 629 CHALLENGE SOLUTION Changing Bankers’

19.2 Reducing Adverse Selection 630 Incentives 675
Restricting Opportunistic Behavior 630 Summary 676 ■ Questions 677
Equalizing Information 631
APPLICATION Changing a Firm’s Name 632 Chapter Appendixes A-1
APPLICATION Adverse Selection on eBay
Motors 633 Appendix 2A: Regressions A-1
Appendix 3A: Effects of a Specific Tax on
19.3 Price Discrimination Due to False Beliefs
Equilibrium A-3
About Quality 634
Appendix 4A: Utility and Indifference Curves A-4
APPLICATION Reducing Consumers’
Appendix 4B: Maximizing Utility A-6
Information 635
Appendix 5A: The Slutsky Equation A-8
19.4 Market Power from Price Ignorance 636 Appendix 5B: Labor-Leisure Model A-9
Tourist-Trap Model 636 Appendix 6A: Properties of Marginal and
Solved Problem 19.3 638 Average Product Curves A-10
Advertising and Prices 638 Appendix 6B: The Slope of an Isoquant A-10
19.5 Problems Arising from Ignorance Appendix 6C: Cobb-Douglas Production
When Hiring 638 Function A-10
Cheap Talk 639 Appendix 7A: Minimum of the Average
Education as a Signal 640 Cost Curve A-11
Solved Problem 19.4 642 Appendix 7B: Japanese Beer Manufacturer’s
Screening in Hiring 644 Short-Run Cost Curves A-11
CHALLENGE SOLUTION Dying to Work 646 Appendix 7C: Minimizing Cost A-12
Summary 647 ■ Questions 648 Appendix 8A: The Elasticity of the Residual
Demand Curve A-14
Appendix 8B: Profit Maximization A-15
Chapter 20 Contracts and Moral Hazards 651 Appendix 9A: Demand Elasticities
and Surplus A-15
CHALLENGE Changing Bankers’ Incentives 651 Appendix 11A: Relationship Between
20.1 The Principal-Agent Problem 653 a Linear Demand Curve and Its Marginal
Efficiency 654 Revenue Curve A-16
Symmetric Information 654 Appendix 11B: Incidence of a Specific
Asymmetric Information 655 Tax on a Monopoly A-16
APPLICATION Selfless or Selfish Doctors? 656 Appendix 12A: Perfect Price Discrimination A-17
Solved Problem 20.1 657 Appendix 12B: Group Price Discrimination A-18
20.2 Using Contracts to Reduce Moral Hazard 657 Appendix 12C: Block Pricing A-18
Fixed-Fee Contracts 658 Appendix 12D: Two-Part Pricing A-19
Contingent Contracts 659 Appendix 12E: Profit-Maximizing
Solved Problem 20.2 659 Advertising and Production A-19
Solved Problem 20.3 661 Appendix 13A: Nash-Cournot Equilibrium A-20
Solved Problem 20.4 663 Appendix 13B: Nash-Stackelberg
APPLICATION Contracts and Productivity Equilibrium A-22
in Agriculture 664 Appendix 13C: Nash-Bertrand Equilibrium A-23
Choosing the Best Contract 664 Appendix 15A: Factor Demands A-24
APPLICATION Music Contracts: Appendix 15B: Monopsony A-25
Changing Their Tunes 665 Appendix 16A: Perpetuity A-26
20.3 Monitoring to Reduce Moral Hazard 666 Appendix 18A: Welfare Effects of Pollution
Bonding 667 in a Competitive Market A-26
Solved Problem 20.5 668 Appendix 20A: Nonshirking Condition A-28
Deferred Payments 669
Efficiency Wages 669 Answers to Selected Questions and Problems A-29
Monitoring Outcomes 670 Sources for Challenges and Applications A-46
APPLICATION Abusing Leased Cars 671 References A-56
20.4 Checks on Principals 671 Definitions A-64
APPLICATION Layoffs Versus Pay Cuts 672 Index A-69
20.5 Contract Choice 674 Credits A-96
 Preface

When I was a student, I fell in love with microeconomics because it cleared up many
mysteries about the world and provided the means to answer new questions. I wrote
this book to illustrate that economic theory has practical, problem-solving uses and
is not an empty academic exercise.
This book shows how individuals, policy makers, lawyers and judges, and firms
can use microeconomic tools to analyze and resolve problems. For example, students
learn that
■ individuals can draw on microeconomic theories when deciding about issues
such as whether to invest and whether to sign a contract that pegs prices to the
government’s measure of inflation;
■ policy makers (and voters) can employ microeconomics to predict the impact
of taxes, regulations, and other measures before they are enacted;
■ lawyers and judges use microeconomics in antitrust, discrimination, and con-
tract cases; and
■ firms apply microeconomic principles to produce at minimum cost and maxi-
mize profit, select strategies, decide whether to buy from a market or to produce
internally, and write contracts to provide optimal incentives for employees.
My experience in teaching microeconomics for the departments of economics at MIT;
the University of Pennsylvania; and the University of California, Berkeley; the Depart-
ment of Agricultural and Resource Economics at Berkeley; and the Wharton Business
School has convinced me that students prefer this emphasis on real-world issues.

Features
This book differs from other microeconomics texts in three main ways:
■ It places greater emphasis than other texts on modern theories—such as indus-
trial organization theories, game theory, transaction cost theory, information
theory, contract theory, and behavioral economics—that are useful in analyzing
actual markets.
■ It uses real-world economic examples to present the basic theory and offers
extensive Applications to a variety of real-world situations.
■ It employs step-by-step problem-based learning to demonstrate how to use
microeconomic theory to solve business problems and analyze policy issues.

Modern Theories
This book has all of the standard economic theory, of course. However, what sets it
apart is its emphasis on modern theories that are particularly useful for understanding
how firms behave and the effects of public policy.
xiv
 Preface xv

Industrial Organization. How do firms differentiate their products to increase their

profits? When does market outcome depend on whether firms set prices or quantities?
What effects do government price regulations have on firms’ behavior? These and
many other questions are addressed by industrial organization theories.
Game Theory. What’s the optimal way to bid in an auction? How do firms set prices
to prevent entry of rival firms? What strategy should parents use when their college-
graduate child moves back in with them? Game theory provides a way of thinking
about strategies and it provides methods to choose optimal strategies.
Contract Theory. What kind of a contract should a firm offer a worker to induce
the employee to work hard? How do people avoid being exploited by others who
have superior information? Modern contract theory shows how to write contracts
to avoid or minimize such problems.
Behavioral Economics. Should a firm allow workers to opt in or opt out of a
retirement system? How should people respond to ultimatums? We address questions
such as these using behavioral economics—one of the hottest new areas of economic
theory—which uses psychological research and theory to explain why people deviate
from rational behavior.

Real-World Economics
This book demonstrates that economics is practical and provides a useful way to
understand actual markets and firms’ and consumers’ decisions in two ways. First,
it presents the basic theory using models estimated with real-world data. Second, it
uses the theory to analyze hundreds of real-world applications.
Using Estimated Models to Illustrate Theory. The basic theory is presented using
estimated demand curves, supply curves, production functions, and cost functions in
most chapters. For example, students see how imported oil limits pricing by U.S. oil
producers using estimated supply and demand curves, derive a Japanese beer manu-
facturer’s cost curve based on an estimated production function, examine regulation
of natural gas monopolies using estimated demand and cost curves, and analyze
oligopoly firms’ strategies using estimated demand curves and cost and profit data
from the real-world rivalries between United Airlines and American Airlines and
between Coke and Pepsi.
Applications. Applications use economic theory to predict the price effect of allow-
ing drilling in the Arctic National Wildlife Refuge based on estimated demand and
supply curves, demonstrate how iTunes price increases affect music downloads using
survey data, explain why some top-end designers limit the number of designer bags
customers can buy, measure the value of using the Internet, and analyze how a tariff
on chickens affects the importation of cars.

Problem-Based Learning
People, firms, and policy makers have to solve economic problems daily. This book
uses a problem-solving approach to demonstrate how economic theory can help them
make good decisions.
Solved Problems. After the introductory chapter, each chapter provides an average
of over five Solved Problems. Each Solved Problem poses a qualitative or quantita-
tive question and then uses a step-by-step approach to model good problem-solving
xvi Preface

techniques. These issues range from whether Peter Guber and Joe Lacob should
have bought the Golden State Warriors, how to determine Intel’s and AMD’s profit-
maximizing quantities and prices using their estimated demand curves and marginal
costs, and how regulating a monopoly’s price affects consumers and firms.
Challenges. Starting with Chapter 2, each chapter begins with a Challenge that
presents information about an important, current real-world issue and concludes
with a series of questions about that material. At the end of the chapter, a Challenge
Solution answers these questions using methods presented in that chapter. That is, the
Challenge combines the approaches of Applications and Solved Problems to motivate
the material in the chapter. The issues covered include the effects from introducing
genetically modified foods, why Americans buy more e-books than do Germans, com-
paring rationing water to raising its price during droughts, whether higher salaries
for star athletes raise ticket prices, whether it pays to go to college, and how Heinz
can use sales to increase its profit on ketchup.
End-of-Chapter Questions. Starting with Chapter 2, each chapter ends with an
extensive set of questions, many of which are based on real-world problems. Each
Solved Problem and Challenge has at least one associated end-of-chapter question
that references them and asks students to extend or reapply their analyses. Many
of the questions are related to the Applications. Answers to selected end-of-chapter
questions appear at the end of the book, and all of the end-of-chapter questions are
available in MyEconLab for self-assessment, homework, or testing.

What’s New in the Seventh Edition

The Seventh Edition is substantially updated and modified based on the extremely
helpful suggestions of faculty and students who used the first six editions. Four major
changes run throughout the book:
■ All chapters are revised, and all but two are substantially revised.
■ All the Challenges and almost all the examples and Applications throughout
the book are updated or new.
■ The book has a significant number of new Solved Problems.
■ The end-of-chapter questions are arranged by subject headings, new questions
have been added, and many others updated.

Challenges, Solved Problems, and Questions

All of the Challenges are new or updated. Because many users requested more Solved
Problems, I increased the number of Solved Problems in this edition to 106 from 94
in the previous edition. In addition, many other Solved Problems are new or substan-
tially updated and revised. Starting in this edition, every Solved Problem has at least
one associated Question at the end of the chapter.
About 40% of these Solved Problems are tied to real-world events. Many of these
are associated with an adjacent Application or examples in the text. In addition to the
Challenges, examples of a paired Application and Solved Problem include an inves-
tigation into whether farmers benefit from a major drought, the effect of oil drilling
in the Arctic National Wildlife Refuge on prices, the opportunity cost of getting an
MBA, the social cost of a natural gas price ceiling, Apple’s iPad pricing, and the price
effects of reselling textbooks bought abroad in the United States.
 Preface xvii

Starting with Chapter 2, the end of each chapter has an average of over 40 verbal,
graphical, and mathematical Questions. This edition has 769 Questions, 61 more
than in the previous edition. Over 27% of the Questions are new or updated. Many
of these Questions are based on recent real-life events and issues drawn from news-
papers, journal articles, and other sources.

Applications
The Seventh Edition has 131 Applications, 5 more than in the previous edition. Of
these, 46% are new and 45% are updated, so that 91% are new or updated. The vast
majority of the Applications cover events in 2012 and 2013, a few deal with historical
events, and the remaining ones examine timeless material.
To make room for the new Applications, 27 older Applications from the Sixth
Edition were moved to MyEconLab. Also, several new ones have been added to the
hundreds of Applications and other materials in MyEconLab.

Behavioral Economics
The Seventh Edition has a revised treatment of behavioral economics in the chapters
on consumer choice, monopoly, interest rates, and uncertainty. It also adds a new
behavioral economics section in the game theory chapter.

New and Revised Material in Chapters

Every chapter is revised—including most sections. Virtually every chapter has updated
examples and statistics. Some of the larger changes include:
■ Chapters 2 and 3 use two new empirical studies (avocados and corn) to illus-
trate the basic supply and demand model. They have four new and a number
of revised Solved Problems.
■ Chapters 4 and 5 have three new Solved Problems and extensive updating of
data. Chapter 5 has a new section on compensating and equivalent variations.
■ Chapter 6 adds many new estimated production functions and a new discussion
of returns to scale as a function of firm size.
■ Chapter 7 has substantially revised sections on effects of taxes on costs, long-
run costs, and learning by doing. It uses a new Japanese beer empirical example
to illustrate the theory, and has a new Solved Problem.
■ Chapter 8 has new statistics and a new Solved Problem. Several sections are
substantially revised, including an extended treatment of the shutdown decision.
■ Chapter 9 updates many statistics and has substantially revised sections on
rents, price effects on consumer surplus, and trade, and the Challenge Solution.
The trade section uses a new empirical oil example.
■ Chapter 10 has a revised Challenge Solution and a new Solved Problem.
■ Chapter 11 is reorganized, revised, and updated, particularly the sections on
market failure and the causes of monopoly. The chapter has three new Solved
Problems, two of which now address the iPad.
■ Chapter 12 is completely reorganized and rewritten, particularly the group
discrimination section and the nonlinear pricing section, which is expanded. It
has a new Challenge.
■ Chapter 13 is reorganized. Revised sections include cartel, antitrust laws, merg-
ers, Cournot differentiated products, and Bertrand vs. Cournot.
xviii Preface

■ Chapter 14’s revision removes the discussion of iterative dominance (relying

on dominant strategy and best-response approaches), divides the treatment of
dynamic games into sections on repeated and sequential games, expands the
repeated game material, and adds a new behavioral game theory section.
■ Chapter 17’s major revision includes new section heads and significant revisions
to the sections on probability, attitudes toward risk, and behavioral economics.
The material on uncertainty and discounting is now on MyEconLab.
■ Chapter 18 updates the pollution data, has a new subsection on the benefits
versus costs from controlling pollution, and a new Solved Problem.
■ Chapter 19 is extensively revised and reorganized, with new material on insur-
ance markets and a rewritten section on reducing adverse selection.
■ Chapter 20 is fundamentally rewritten and has four new Solved Problems. The
first half of the chapter is entirely new.

Alternative Organizations
Because instructors differ as to the order in which they cover material, this text has
been designed for maximum flexibility. The most common approach to teaching
microeconomics is to follow the sequence of the chapters in the first half of this
book: supply and demand (Chapters 2 and 3), consumer theory (Chapters 4 and 5),
the theory of the firm (Chapters 6 and 7), and the competitive model (Chapters 8
and 9). Many instructors then cover monopoly (Chapter 11), price discrimination
(Chapter 12), oligopoly (Chapters 13 and 14), input markets (Chapter 15), uncer-
tainty (Chapter 17), and externalities (Chapter 18).
A common variant is to present uncertainty (Sections 17.1 through 17.3) immedi-
ately after consumer theory. Many instructors like to take up welfare issues between
discussions of the competitive model and noncompetitive models, as Chapter 10, on
general equilibrium and economic welfare, does. Alternatively, that chapter may be
covered at the end of the course. Faculty can assign material on factor markets earlier
(Section 15.1 could follow the chapters on competition, and the remaining sections
could follow Chapter 11). The material in Chapters 14–20 can be presented in a
variety of orders, though Chapter 20 should follow Chapter 19 if both are covered,
and Section 17.4 should follow Chapter 16.
Many business school courses skip consumer theory (and possibly some aspects of
supply and demand, such as Chapter 3) to allow more time for consideration of the
topics covered in the second half of this book. Business school faculty may want to
place particular emphasis on game and theory strategies (Chapter 14), capital markets
(Chapter 16), and modern contract theory (Chapters 19 and 20).
Optional, technically demanding sections are marked with a star (★). Subsequent
sections and chapters can be understood even if these sections are skipped.

MyEconLab
MyEconLab’s powerful assessment and tutorial system works hand-in-hand with this book.

Features for Students

MyEconLab puts students in control of their learning through a collection of testing,
practice, and study tools. Students can study on their own, or they can complete
assignments created by their instructor. In MyEconLab’s structured environment,
 Preface xix

students practice what they learn, test their understanding, and pursue a personal-
ized study plan generated from their performance on sample tests and quizzes. In
Homework or Study Plan mode, students have access to a wealth of tutorial features,
including the following:

■ Instant feedback on exercises taken directly from the text helps students under-
stand and apply the concepts.
■ Links to the eText version of this textbook allow the student to quickly revisit
a concept or an explanation.
■ Enhanced Pearson eText, available within the online course materials and
offline via an iPad/Android app, allows instructors and students to highlight,
bookmark, and take notes.
■ Learning aids help students analyze a problem in small steps, much the same
way an instructor would do during office hours.
■ Temporary Access for students who are awaiting financial aid provides a grace
period of temporary access.

Experiments in MyEconLab
Experiments are a fun and engaging way to promote active learning and mastery of
important economic concepts. Pearson’s Experiment program is flexible and easy for
instructors and students to use.

■ Single-player experiments, which can be assigned for homework, allow students

to play against virtual players from anywhere at any time they have an Internet
connection.
■ Multiplayer experiments allow instructors to assign and manage a real-time
experiment with their classes.
■ Pre- and post-questions for each experiment are available for assignment in
MyEconLab.

For a complete list of available experiments, visit www.myeconlab.com.

Features for Instructors

MyEconLab includes comprehensive homework, quiz, text, and tutorial options, where
instructors can manage all assessment needs in one program.

■ All of the end-of-chapter questions are available for assignment and auto-grading.
■ All of the Solved Problems are available for assignment and auto-grading.
■ Test Bank questions are available for assignment or testing.
■ The Custom Exercise Builder allows instructors the flexibility of creating their
own problems for assignments.
■ The powerful Gradebook records each student’s performance and time spent
on the tests, study plan, and homework and can generate reports by student,
class, or chapter.
■ Advanced Communication Tools enable students and instructors to communi-
cate through email, discussion board, chat, and ClassLive.
■ Customization options provide new and enhanced ways to share documents,
add content, and rename menu items.
■ A prebuilt course option provides a turn-key method for instructors to create
a MyEconLab course that includes assignments by chapter.
xx Preface

Supplements
A full range of supplementary materials to support teaching and learning accompa-
nies this book.
■ The Online Instructor’s Manual revised by Jennifer Steele has many useful and
creative teaching ideas. It also offers a chapter outline, additional discussion
questions, additional questions and problems, and solutions for all additional
questions and problems.
■ The Online Solutions Manual provides solutions for all the end-of-chapter ques-
tions in the text.
■ The Online Test Bank by Shana McDermott of the University of New Mexico,
James Swanson of the University of Central Missouri, and Lourenço Paz of
Syracuse University features problems of varying levels of complexity, suitable
for homework assignments and exams. Many of these multiple-choice questions
draw on current events.
■ The Computerized Test Bank reproduces the Test Bank material in the
TestGen software, which is available for Windows and Macintosh. With
TestGen, instructors can easily edit existing questions, add questions, generate
tests, and print the tests in a variety of formats.
■ The Online PowerPoint Presentation by Ting Levy of Florida Atlantic
University contains text figures and tables, as well as lecture notes. These
slides allow instructors to walk through examples from the text during in-class
presentations.
These teaching resources are available online for download at the Instructor
Resource Center, www.pearsonhighered.com/perloff, and on the catalog page for
Microeconomics.

Acknowledgments
My greatest debt is to my students. My students at MIT, the University of Pennsyl-
vania, and the University of California, Berkeley, patiently dealt with my various
approaches to teaching them microeconomics and made useful (and generally polite)
suggestions.
The various editions have benefited from the early work by the two best devel-
opment editors in the business, Jane Tufts and Sylvia Mallory. Jane Tufts reviewed
drafts of the first edition of this book for content and presentation. By showing me
how to present the material as clearly, orderly, and thoroughly as possible, she greatly
strengthened this text. Sylvia Mallory worked valiantly to improve my writing style
and helped to shape and improve every aspect of the book’s contents and appearance
in each of the first four editions.
I am extremely grateful to Adrienne D’Ambrosio, Executive Acquisitions Editor,
and Sarah Dumouchelle, Editorial Project Manager, at Pearson, who helped me plan
this revision and made very valuable suggestions at each stage of the process. Adri-
enne, as usual, skillfully handled all aspects of planning, writing, and producing this
textbook. In addition, Sarah made sure that the new material in this edition is clear,
editing all the chapters, and assisted in arranging the supplements program.
Over the years, many excellent research assistants—Hayley Chouinard, R. Scott
Hacker, Guojun He, Nancy McCarthy, Enrico Moretti, Lisa Perloff, Asa Sajise, Hugo
Salgado, Gautam Sethi, Edward Shen, Klaas van ’t Veld, and Ximing Wu—worked
hard to collect facts, develop examples and figures, and check material.
 Preface xxi

Many people were very generous in providing me with data, models, and exam-
ples, including among others: Thomas Bauer (University of Bochum), Peter Berck
(University of California, Berkeley), James Brander (University of British Columbia),
Leemore Dafny (Northwestern University), Lucas Davis (University of California,
Berkeley), James Dearden (Lehigh University), Farid Gasmi (Université des Sci-
ences Sociales), Avi Goldfarb (University of Toronto), Claudia Goldin (Harvard
University), Rachel Goodhue (University of California, Davis), William Greene
(New York University), Nile Hatch (University of Illinois), Larry Karp (Uni-
versity of California, Berkeley), Ryan Kellogg (University of Michigan), Arthur
Kennickell (Federal Reserve, Washington), Fahad Khalil (University of Washington),
Lutz Kilian (University of Michigan), Christopher Knittel (University of California,
Davis), Jean-Jacques Laffont (deceased), Ulrike Malmendier (University of California,
Berkeley), Karl D. Meilke (University of Guelph), Eric Muehlegger (Harvard Univer-
sity), Giancarlo Moschini (Iowa State University), Michael Roberts (North Carolina
State University), Wolfram Schlenker (Columbia University), Junichi Suzuki (Uni-
versity of Toronto), Catherine Tucker (MIT), Harald Uhlig (University of Chicago),
Quang Vuong (Université des Sciences Sociales, Toulouse, and University of Southern
California), and Joel Waldfogel (University of Minnesota).
Writing a textbook is hard work for everyone involved. I am grateful to the many
teachers of microeconomics who spent untold hours reading and commenting on
proposals and chapters. Many of the best ideas in this book are due to them.
I am particularly grateful to Jim Brander of the University of British Columbia who
provided material for Chapters 13 and 14, has given me many deep and insightful
comments on many editions of this book, and with whom I wrote another, related
book. Much of the new material in this edition was jointly written with him. My
other biggest debt is to James Dearden, Lehigh University, who has made extremely
insightful comments on all prior editions and wrote some of the end-of-chapter
questions.
In earlier editions, Peter Berck made major contributions to Chapter 16. Charles
F. Mason made particularly helpful comments on many chapters. Larry Karp helped
me to develop two of the sections and carefully reviewed the content of several oth-
ers. Robert Whaples, Wake Forest University, read many chapters in earlier editions
and offered particularly useful comments. He also wrote the first draft of one of my
favorite Applications.
I am grateful to the following people who reviewed the book or sent me valuable
suggestions at various stages:

M. Shahid Alam, Northeastern University Jurgen Brauer, Augusta State University

Anne Alexander, University of Wyoming
Samson Alva, Boston College
Richard K. Anderson, Texas A & M University
Niels Anthonisen, University of Western Ontario
Wilma Anton, University of Central Florida
Emrah Arbak, State University of New York at Albany
Scott E. Atkinson, University of Georgia
Talia Bar, Cornell University
Raymond G. Batina, Washington State University
Anthony Becker, St. Olaf College
Robert A. Berman, American University
Gary Biglaiser, University of North Carolina, Chapel Hill
S. Brock Blomberg, Wellesley College
Hein Bogaard, George Washington University
Vic Brajer, California State University, Fullerton
Bruce Brown, Cal Polytech Pomona and UCLA
Cory S. Capps, University of Illinois, Urbana-Champaign
John Cawley, Cornell University
Indranil Chakraborty, University of Oklahoma
Leo Chan, University of Kansas
Joni S. Charles, Southwest Texas State University
Kwang Soo Cheong, University of Hawaii at Manoa
Joy L. Clark, Auburn University, Montgomery
Dean Croushore, Federal Reserve Bank of Philadelphia
Douglas Dalenberg, University of Montana
Andrew Daughety, Vanderbilt University
Carl Davidson, Michigan State University
Ronald Deiter, Iowa State University
Manfred Dix, Tulane University
John Edgren, Eastern Michigan University
xxii Preface
Patrick Emerson, University of Colorado, Denver
Xin Fang, Hawai’i Pacific University
Bernard Fortin, Université Laval
Tom Friedland, Rutgers University
Roy Gardner, Indiana University
Rod Garratt, University of California, Santa Barbara
Wei Ge, Bucknell University
Lisa Giddings, University of Wisconsin, La Crosse
J. Fred Giertz, University of Illinois, Urbana-Champaign
Haynes Goddard, University of Cincinnati
Steven Goldman, University of California, Berkeley
Julie Gonzalez, University of California, Santa Cruz
Rachel Goodhue, University of California, Davis
Srihari Govindan, University of Western Ontario
Gareth Green, Seattle University
Thomas A. Gresik, Pennsylvania State University
Jonathan Gruber, MIT
Steffan Habermalz, University of Nebraska, Kearney
Claire Hammond, Wake Forest University
John A. Hansen, State University of New York, Fredonia
Philip S. Heap, James Madison University
L. Dean Hiebert, Illinois State University
Kathryn Ierulli, University of Illinois, Chicago
Mike Ingham, University of Salford, U.K.
Samia Islam, Boise State University
D. Gale Johnson, University of Chicago
Erik Jonasson, Lund University, Sweden
Charles Kahn, University of Illinois, Urbana-Champaign
Vibha Kapuria-Foreman, Colorado College
Paula M. Kazi, Bucknell University
Carrie Kerekes, Florida Gulf Coast University
Alan Kessler, Providence College
Kristin Kiesel, California State University, Sacramento
Kate Krause, University of New Mexico
Robert Lemke, Lake Forest College
Jing Li, University of Pennsylvania
Qihong Liu, University of Oklahoma
Zhou Lu, City College of New York
Fred Luk, University of California, Los Angeles
Robert Main, Butler University
David Malueg, Tulane University
Steve Margolis, North Carolina State University
Kate Matraves, Michigan State University
James Meehan, Colby College
Claudio Mezzetti, University of North Carolina,
Chapel Hill
Chun-Hui Miao, University of South Carolina
Janet Mitchell, Cornell University
Felix Munoz-Garcia, Washington State University
Babu Nahata, University of Louisville
Kathryn Nantz, Fairfield University
Jawwad Noor, Boston University
Yuka Ohno, Rice University
Patrick B. O’Neil, University of North Dakota
John Palmer, University of Western Ontario
Christos Papahristodoulou, Uppsala University
Silve Parviainen, University of Illinois, Urbana-Champaign
Sharon Pearson, University of Alberta
Anita Alves Pena, Colorado State University
Ingrid Peters-Fransen, Wilfrid Laurier University
Jaishankar Raman, Valparaiso University
Sunder Ramaswamy, Middlebury College
Lee Redding, University of Michigan, Dearborn
David Reitman, Department of Justice
Luca Rigotti, Tillburg University
S. Abu Turab Rizvi, University of Vermont
Bee Yan Aw Roberts, Pennsylvania State University
Richard Rogers, Ashland University
Nancy Rose, Sloan School of Business, MIT
Joshua Rosenbloom, University of Kansas
Roy Ruffin, University of Houston
Matthew Rutledge, Boston College
Alfonso Sanchez-Penalver, University of Massachusetts,
Boston
George Santopietro, Radford College
David Sappington, University of Florida
Rich Sexton, University of California, Davis
Quazi Shahriar, San Diego State University
Jacques Siegers, Utrecht University, The Netherlands
Alasdair Smith, University of Sussex
William Doyle Smith, University of Texas at El Paso
Philip Sorenson, Florida State University
Peter Soule, Park College
Robert Stearns, University of Maryland
Jennifer Lynn Steele, Washington State University
Shankar Subramanian, Cornell University
Albert J. Sumell, Youngstown State University
Beck A. Taylor, Baylor University
Scott Templeton, Clemson University
Mark L. Tendall, Stanford University
Justin Tevie, University of New Mexico
Wade Thomas, State University of New York, Oneonta
Judith Thornton, University of Washington
Vitor Trindade, Syracuse University
Nora Underwood, University of California, Davis
Burcin Unel, University of Florida
Kay Unger, University of Montana
Alan van der Hilst, University of Washington
Bas van der Klaauw, Free University Amsterdam and
Tinbergen Institute
Andrew Vassallo, Rutgers University
Jacob L. Vigdor, Duke University
Peter von Allmen, Moravian College
Eleanor T. von Ende, Texas Tech University
Curt Wells, Lund University
Lawrence J. White, New York University
John Whitehead, East Carolina University
Colin Wright, Claremont McKenna College
Bruce Wydick, University of San Francisco
Peter Zaleski, Villanova University
Artie Zillante, Florida State University
Mark Zupan, University of Arizona
 Preface xxiii

In addition, I thank Bob Solow, the world’s finest economics teacher, who showed
me how to simplify models without losing their essence. I’ve also learned a great deal
over the years about economics and writing from my coauthors on other projects,
especially Dennis Carlton (my coauthor on Modern Industrial Organization), Jackie
Persons, Steve Salop, Michael Wachter, Larry Karp, Peter Berck, Amos Golan, and
Dan Rubinfeld (whom I thank for still talking to me despite my decision to write
this book).
It was a pleasure to work with the good people at Pearson, who were incredibly
helpful in producing this book. Marjorie Williams and Barbara Rifkin signed me to
write it. I would like to thank Donna Battista, Editor-in-Chief for Business Publishing,
and Denise Clinton, Publisher for MyEconLab, who were instrumental in making
the entire process work. Meredith Gertz did her usual outstanding job of supervising
the production process, assembling the extended publishing team, and managing the
design of the handsome interior. She makes the entire process as smooth as possible.
I thank Jonathan Boylan for the cover design. I also want to acknowledge, with
appreciation, the efforts of Melissa Honig, Noel Lotz, and Courtney Kamauf in
developing MyEconLab, the online assessment and tutorial system for the book.
Gillian Hall and the rest of the team at The Aardvark Group Publishing Services
have my sincere gratitude for designing the book and keeping the project on track
and on schedule. As always, I’m particularly thankful to work with Gillian, who is
wonderfully flexible and committed to producing the best book possible. Rebecca
Greenberg did a superior copyediting for this edition—and made many important
contributions to the content.
Finally, and most importantly, I thank my wife, Jackie Persons, and daughter,
Lisa Perloff, for their great patience and support during the nearly endless writing
process. And I apologize for misusing their names—and those of my other relatives
and friends—in the book!
J. M. P.
This page intentionally left blank
Another random document with
no related content on Scribd:
 CHAPTER II
I poured myself some more beer and glanced sideways at Foster. He
didn't look like a nut....
"All I've got to say is," I said, "you're a hell of a spry-looking seventy."
"You find my appearance strangely youthful. What would be your
reaction if I told you that I've aged greatly in the past few months?
That a year ago I could have passed as no older than thirty without
the slightest difficulty—"
"I don't think I'd believe you," I said. "And I'm sorry, Mr. Foster; but I
don't believe the bit about the 1918 hospital either. How can I? It's—"
"I know. Fantastic. But let's go back a moment to the book itself. Look
closely at the paper; it's been examined by experts. They're baffled by
it. Attempts to analyze it chemically failed—they were unable to take
a sample. It's impervious to solvents—"
"They couldn't get a sample?" I said. "Why not just tear off the corner
of one of the sheets?"
"Try it," Foster said.
I picked up the book and plucked at the edge of one of the blank
sheets, then pinched harder and pulled. The paper held. I got a better
grip and pulled again. It was like fine, tough leather, except that it
didn't even stretch.
"It's tough, all right," I said. I took out my pocket knife and opened it
and worked on the edge of the paper. Nothing. I went over to the
bureau and put the paper flat against the top and sawed at it, putting
my weight on the knife. I raised the knife and brought it down hard. I
didn't so much as mark the sheet. I put the knife away.
"That's some paper, Mr. Foster," I said.
"Try to tear the binding," Foster said. "Put a match to it. Shoot at it if
you like. Nothing will make an impression on that material. Now,
you're a logical man, Legion. Is there something here outside ordinary
experience or is there not?"
I sat down, feeling for a cigarette. I still didn't have one.
"What does it prove?" I said.
"Only that the book is not a simple fraud. You're facing something
which can't be dismissed as fancy. The book exists. That is our basic
point of departure."
"Where do we go from there?"
"There is a second factor to be considered," Foster went on. "At some
time in the past I seem to have made an enemy. Someone, or
something, is systematically hunting me."

I tried a laugh, but it felt out of place. "Why not sit still and let it catch
up with you? Maybe it could tell you what the whole thing is about."
Foster shook his head. "It started almost thirty years ago," he said. "I
was driving south from Albany, New York, at night. It was a long
straight stretch of road, no houses. I noticed lights following me. Not
headlights—something that bobbed along, off in the fields along the
road. But they kept pace, gradually moving alongside. Then they
closed in ahead, keeping out of range of my headlights. I stopped the
car. I wasn't seriously alarmed, just curious. I wanted a better look, so
I switched on my spotlight and played it on the lights. They
disappeared as the light touched them. After half a dozen were gone
the rest began closing in. I kept picking them off. There was a sound,
too, a sort of high-pitched humming. I caught a whiff of sulphur then,
and suddenly I was afraid—deathly afraid. I caught the last one in the
beam no more than ten feet from the car. I can't describe the horror of
the moment—"
"It sounds pretty weird," I said. "But what was there to be afraid of? It
must have been some kind of heat lightning."
"There is always the pat explanation," Foster said. "But no
explanation can rationalize the instinctive dread I felt. I started up the
car and drove on—right through the night and the next day. I sensed
that I must put distance between myself and whatever it was I had
met. I bought a home in California and tried to put the incident out of
my mind—with limited success. Then it happened again."
"The same thing? Lights?"
"It was more sophisticated the next time. It started with interference—
static—on my radio. Then it affected the wiring in the house. All the
lights began to glow weakly, even though they were switched off. I
could feel it—feel it in my bones—moving closer, hemming me in. I
tried the car; it wouldn't start. Fortunately, I kept a few horses at that
time. I mounted and rode into town—and at a fair gallop, you may be
sure. I saw the lights, but out-distanced them. I caught a train and
kept going."
"I don't see—"
"It happened again; four times in all. I thought perhaps I had
succeeded in eluding it at last. I was mistaken. I have had definite
indications that my time here is drawing to a close. I would have been
gone before now, but there were certain arrangements to be made."
"Look," I said. "This is all wrong. You need a psychiatrist, not an ex-
tough guy. Delusions of persecution—"

"It seemed obvious that the explanation was to be found somewhere

in my past life," Foster went on. "I turned to the notebook, my only
link. I copied it out, including the encrypted portion. I had photostatic
enlargements made of the initial section—the part written in
unfamiliar characters. None of the experts who have examined the
script have been able to identify it.
"I necessarily, therefore, concentrated my attention on the last section
—the only part written in English. I was immediately struck by a
curious fact I had ignored before. The writer made references to an
Enemy, a mysterious 'they,' against which defensive measures had to
be taken."
"Maybe that's where you got the idea," I said. "When you first read
the book—"
"The writer of the log," Foster said, "was dogged by the same
nemesis that now follows me."
"It doesn't make any sense," I said.
"For the moment," Foster said, "stop looking for logic in the situation.
Look for a pattern instead."
"There's a pattern, all right," I said.
"The next thing that struck me," Foster went on, "was a reference to a
loss of memory—a second point of some familiarity to me. The writer
expresses frustration at the inability to remember certain facts which
would have been useful to him in his pursuit."
"What kind of pursuit?"
"Some sort of scientific project, as nearly as I can gather. The journal
bristles with tantalizing references to matters that are never
explained."
"And you think the man that wrote it had amnesia?"
"Not actually amnesia, perhaps," Foster said. "But there were things
he was unable to remember."
"If that's amnesia, we've all got it," I said. "Nobody's got a perfect
memory."
"But these were matters of importance; not the kind of thing that
simply slip one's mind."
"I can see how you'd want to believe the book had something to do
with your past, Mr. Foster," I said. "It must be a hard thing, not
knowing your own life story. But you're on the wrong track. Maybe the
book is a story you started to write—in code, so nobody would
accidentally read the stuff and kid you about it."
"Legion, what was it you planned to do when you got to Miami?"
The question caught me a little off-guard. "Well, I don't know," I
hedged. "I wanted to get south, where it's warm. I used to know a few
people—"
"In other words, nothing," Foster said. "Legion, I'll pay you well to stay
with me and see this thing through."
I shook my head. "Not me, Mr. Foster. The whole thing sounds—well,
the kindest word I can think of is 'nutty'."
"Legion," Foster said, "do you really believe I'm insane?"
"Let's just say this all seems a little screwy to me, Mr. Foster."
"I'm not asking you just to work for me," Foster said. "I'm asking for
your help."
"You might as well look for your fortune in tea leaves," I said, irritated.
"There's nothing in what you've told me."

"There's more, Legion. Much more. I've recently made an important

discovery. When I know you're with me, I'll tell you. You know enough
now to accept the fact that this isn't entirely a figment of my
imagination."
"I don't know anything," I said. "So far it's all talk."
"If you're concerned about payment—"
"No, damn it," I barked. "Where are the papers you keep talking
about? I ought to have my head examined for sitting here humoring
you. I've got troubles enough—" I stopped talking and rubbed my
hands over my scalp. "I'm sorry, Mr. Foster," I said. "I guess what's
really griping me is that you've got everything I think I want—and
you're not content with it. It bothers me to see you off chasing fairies.
If a man with his health and plenty of money can't enjoy life, what the
hell is there for anybody?"
Foster looked at me thoughtfully. "Legion, if you could have anything
in life you wanted, what would you ask for?"
I swirled the beer in the mug. "Anything? I've wanted a lot of different
things. Once I wanted to be a hero. Later, I wanted to be smart, know
all the answers. Then I had the idea that a chance to do an honest
job, one that needed doing, was the big thing. I never found that job. I
never got smart either, or figured out how to tell a hero from a
coward, without a program."
"In other words," Foster said, "you were looking for an abstraction to
believe in—in this case, Justice. But you won't find justice in nature.
It's a thing that only man expects or acknowledges."
"There are some good things in life; I'd like to get a piece of them."
"Don't lose your capacity for dreaming, in the process."
"Dreams?" I said. "Oh, I've got those. I want an island somewhere in
the sun, where I can spend my time fishing and watching the sea and
working my way through a carefully selected harem and an even
more carefully selected wine cellar."
"You're speaking cynically—but you're still attempting to concretize an
abstraction," Foster said. "But no matter—materialism is simply
another form of idealism."
I looked at Foster. "But I know I'll never have those things—or that
Justice you were talking about, either. Once you really know you'll
never make it...."
"Perhaps unattainability is an essential element of any dream," Foster
said. "But hold onto your dream, whatever it is—don't ever give it up."
"So much for philosophy," I said. "Where is it getting us?"
"You'd like to see the papers," Foster said. He fished a key-ring from
an inner pocket. "If you don't mind going out to the car," he said, "and
perhaps getting your hands dirty, there's a strong-box welded to the
frame. I keep photostats of everything there, along with my passport,
emergency funds, and so on. I've learned to be ready to travel on
very short notice. Lift the floorboards; you'll see the box."
"It's not all that urgent," I said. "I'll take a look in the morning—after
I've caught up on some sleep. But don't get the wrong idea—it's just
my knot-headed curiosity."
"Very well," Foster said. He lay back, sighed. "I'm tired, Legion," he
said. "My mind is tired."
"Yeah," I said, "so is mine—not to mention other portions of my
anatomy."
"Get some sleep," Foster said. "We'll talk again in the morning."

I pushed back the light blanket and slid out of bed. Underfoot, the rug
was as thick and soft as mink. I went across to the closet and pushed
the button that made the door slide aside. My old clothes were still
lying on the floor where I had left them, but I had the clean ones
Foster had lent me. He wouldn't mind if I borrowed them for awhile
longer—it would be cheaper for him in the long run. Foster was as
looney as a six-day bike racer, but there was no point in my waiting
around to tell him so.
The borrowed outfit didn't include a coat. I thought of putting my old
jacket on but it was warm outside and a grey pin-stripe with grease
spots wouldn't help the picture any. I transferred my personal
belongings from the grimy clothes on the floor, and eased the door
open.
Downstairs, the curtains were drawn in the living room. I could
vaguely make out the outline of the bar. It wouldn't hurt to take along
a bite to eat. I groped my way behind the bar, felt along the shelves,
found a stack of small cans that rattled softly. Nuts, probably. I
reached to put a can on the bar and it clattered against something I
couldn't see. I swore silently, felt over the obstruction. It was bulky,
with the cold smoothness of metal, and there were small projections
with sharp corners. It felt for all the world like—
I leaned over it and squinted. With the faint gleam of moonlight from a
chink in the heavy curtains falling just so, I could almost make out the
shape; I crouched a little lower, and caught the glint of light along the
perforated jacket of a .30 calibre machine gun. My eye followed the
barrel, made out the darker square of the entrance hall, and the tiny
reflection of light off the polished brass door-knob at the far end.
I stepped back, flattened against the wall, with a hollow feeling inside.
If I had tried to walk through that door....
Foster was crazy enough for two ordinary nuts. My eyes flicked
around the room. I had to get out quickly before he jumped out and
said Boo and I died of heart-failure. The windows, maybe. I came
around the end of the bar, got down and crawled under the barrel of
the gun, and over to the heavy drapes, pushed them aside. Pale light
glowed beyond the glass. Not the soft light of the moon, but a milky,
churning glow that reminded me of the phosphorescence of sea
water....
I dropped the curtain, ducked back under the gun into the hall, and
pushed through a swinging door into the kitchen. There was a faint
glow from the luminous handle of the refrigerator. I yanked it open,
spilling light on the floor, and looked around. Plenty of gleaming white
fixtures—but no door out. There was a window, almost obscured by
leaves. I eased it open and almost broke my fist on a wrought iron
trellis.

Back in the hall, I tried two more doors, both locked. A third opened,
and I found myself looking down the cellar stairs. They were steep
and dark like cellar stairs always seem to be but they might be the
way out. I felt for a light switch, flipped it on. A weak illumination
showed me a patch of damp-looking floor at the foot of the steps. It
still wasn't inviting, but I went down.
There was an oil furnace in the center of the room, with dusty duct
work spidering out across the ceiling; some heavy packing cases of
rough wood were stacked along one wall, and at the far side of the
room there was a boarded-up coal bin—but no cellar door.
I turned to go back up and heard a sound and froze. Somewhere a
cockroach scuttled briefly. Then I heard the sound again: a faint
grinding of stone against stone. I peered through the cob-webbed
shadows, my mouth suddenly dry. There was nothing.
The thing for me to do was to get up the stairs fast, batter the iron
trellis out of that kitchen window, and run like hell. The trouble was, I
had to move to do it, and the sound of my own steps was so loud it
was paralyzing. Compared to this, the shock of stumbling over the
gun was just a mild kick. Ordinarily I didn't believe in things that went
bump in the night, but this time I was hearing the bumps myself, and
all I could think about was Edgar Allan Poe and his cheery tales
about people who got themselves buried before they were thoroughly
dead.
There was another sound, then a sharp snap, and I saw light spring
up from a crack that opened across the floor in the shadowy corner.
That was enough for me. I jumped for the stairs, took them three at a
time, and banged through the kitchen door. I grabbed up a chair,
swung it up, and slammed it against the trellis. It bounced back and
cracked me across the mouth. I dropped it, tasting blood. Maybe that
was what I needed. The panic faded before a stronger emotion—
anger. I turned and barged along the dark hall to the living room—and
lights suddenly went on. I whirled and saw Foster standing in the hall
doorway, fully dressed.
"OK, Foster!" I yelled. "Just show me the way out of here."
Foster held my eyes, his face tense. "Calm yourself, Mr. Legion," he
said softly. "What happened here?"
"Get over there to that gun," I snapped, nodding toward the .30
calibre on the bar. "Disarm it, and then get the front door open. I'm
leaving."
Foster's eyes flicked over the clothes I was wearing. "So I see," he
said. He looked me in the face again. "What is it that's frightened you,
Legion?"
"Don't act so damned innocent," I said. "Or am I supposed to get the
idea the brownies set up that booby trap while you were asleep?"
His eyes went to the gun and his expression tightened. "It's mine," he
said. "It's an automatic arrangement. Something's activated it—and
without sounding my alarm. You haven't been outside, have you?"
"How could I—"
"This is important, Legion," Foster rapped. "It would take more than
the sight of a machine gun to panic you. What have you seen?"
"I was looking for a back door," I said. "I went down to the cellar. I
didn't like it down there so I came back up."
"What did you see in the cellar?" Foster's face looked strained,
colorless.
"It looked like ..." I hesitated. "There was a crack in the floor, noises,
lights...."
"The floor," Foster said. "Certainly. That's the weak point." He seemed
to be talking to himself.
I jerked a thumb over my shoulder. "Something funny going on
outside your windows, too."

Foster looked toward the heavy hangings. "Listen carefully, Legion,"

he said. "We are in grave danger—both of us. It's fortunate you arose
when you did. This house, as you must have guessed by now, is
something of a fortress. At this moment, it is under attack. The walls
are protected by some rather formidable defense. I can't say as much
for the cellar floor; it's merely three feet of ferro-concrete. We'll have
to go now—very swiftly, and very quietly."
"OK—show me," I said. Foster turned and went back along the hall to
one of the locked doors, pressed something. The door opened and I
followed him inside a small room. He crossed to a blank wall, pressed
against it. A panel slid aside—and Foster jumped back.
"God's wounds!" he gasped. He threw himself at the wall, and the
panel closed. I stood stock still; from somewhere there was a smell
like sulphur.
"What the hell goes on?" I said. My voice cracked, like it always does
when I'm scared.
"That odor!" Foster said. "Quickly—the other way!"
I stepped back and Foster pushed past me and ran along the hall,
with me at his heels. I didn't look back to see what was at my own
heels. Foster took the stairs three at a time, pulled up short on the
landing. He went to his knees, shoved back an Isfahan rug as supple
as sable, and gripped a steel ring set in the floor. He looked at me,
his face white.
"Invoke thy gods," he said hoarsely, and heaved at the ring. A section
of floor swung up, showing the first step of a flight leading down into a
black hole. Foster didn't hesitate; he dropped his feet in, scrambled
down. I followed. The stairs went down about ten feet, ending on a
stone floor. There was the sound of a latch turning, and we stepped
out into a larger room. I saw moonlight through a row of high
windows, and smelled the fragrance of fresh night air.
"We're in the garage," Foster whispered. "Go around to the other side
of the car and get in—quietly." I touched the smooth flank of the
rakish cabriolet, felt my way around it, and eased the door open. I
slipped into the seat and closed the door gently. Beside me, Foster
touched a button and a green light glowed in the dash.
"Ready?" he said.
"Sure."
The starter whined half a turn and the engine caught, and without
waiting, Foster gunned it, let in the clutch. The car leaped for the
closed doors, and I ducked, then saw the doors snap aside as the
low-slung car roared out into the night. We took the first turn in the
drive at forty, and rounded onto the highway at sixty, tires screaming.
I took a look back, and caught a glimpse of the house, its stately
facade white in the moonlight—and then we were out of sight.
"What's it all about?" I called over the rush of air. The needle touched
ninety, kept going.
"Later," Foster barked. I didn't feel like arguing. I watched the mirror
for a few minutes, wondering where all the cops were tonight. Then I
settled down in the padded seat and watched the speedometer eat
up the miles.
 CHAPTER III
It was nearly four-thirty and a tentative grey streak showed through
the palm fronds to the east before I broke the silence.
"By the way," I said. "What was the routine with the steel shutters and
the bullet-proof glass in the kitchen, and the handy home model
machine gun covering the front door? Mice bad around the place, are
they?"
"Those things were necessary—and more."
"Now that the short hairs along my spine have relaxed," I said, "The
whole thing looks pretty silly. We've run far enough now to be able to
stop and turn around and stick our tongues out."
"Not yet—not for a while."
"Why don't we just go back home," I went on, "and—"
"No!" Foster said sharply. "I want your word on that, Legion. No
matter what—don't ever go near that house again."
"It'll be daylight soon," I said. "We'll feel pretty asinine about this little
trip after the sun comes up, but don't worry, I won't tell anybody—"
"We've got to keep moving," Foster said. "At the next town, I'll
telephone for seats on a flight from Miami."
"Hold on," I said. "You're raving. What about your house? We didn't
even stick around long enough to make sure the TV was turned off.
And what about passports, and money, and luggage? And what
makes you think I'm going with you?"
"I've kept myself in readiness for this emergency," Foster said. "There
are disposition instructions for the house on file with a legal firm in
Jacksonville. There is nothing to connect me with my former life, once
I've changed my name and disappeared. As for the rest—we can buy
luggage in the morning. My passport is in the car; perhaps we'd better
go first to Puerto Rico, until we can arrange for one for you."
"Look," I said. "I got spooked in the dark; that's all. Why not just admit
we made fools of ourselves?"
Foster shook his head. "The inherent inertia of the human mind," he
said. "How it fights to resist new ideas."
"The kind of new ideas you're talking about could get both of us
locked up in the chuckle ward," I said.
"Legion," Foster said, "I think you'd better write down what I'm going
to tell you. It's important—vitally important. I won't waste time with
preliminaries. The notebook I showed you—it's in my jacket. You
must read the English portion of it. Afterwards, what I'm about to say
may make more sense."
"I hope you don't feel your last will and testament coming on, Mr.
Foster," I said. "Not before you tell me what that was we were both so
eager to get away from."
"I'll be frank with you," Foster said flatly. "I don't know."

Foster wheeled into the dark drive of a silent service station, eased to
a stop, set the brake, and slumped back in the seat.
"Do you mind driving for a while, Legion?" he said. "I'm not feeling
very well."
"Sure, I'll drive," I said. I opened the door and got out and went
around to his side. Foster sat limply, eyes closed, his face drawn and
strained. He looked older than he had last night—years older. The
night's experiences hadn't taken anything off my age, either.
Foster opened his eyes, looked at me blankly. He seemed to gather
himself with an effort. "I'm sorry," he said. "I'm not myself."
He moved over and I got in the driver's seat. "If you're sick," I said,
"we'd better find a doctor."
"No, it's all right," he said blurrily. "Just keep going...."
"We're a hundred and fifty miles from Mayport now," I said.
Foster turned to me, started to say something—and slumped in a
dead faint. I grabbed for his pulse; it was strong and steady. I rolled
up an eyelid and a dilated pupil stared sightlessly. He was all right—I
hoped. But the thing to do was get him in bed and call a doctor. We
were at the edge of a small town. I let the brake off and drove slowly
into town, swung around the corner and pulled in in front of the
sagging marquee of a rundown hotel. Foster stirred as I cut the
engine.
"Foster," I said. "I'm going to get you into a bed. Can you walk?" He
groaned softly and opened his eyes. They were glassy. I got out and
got him to the sidewalk. He was still half out. I walked him into the
dingy lobby and over to a reception counter where a dim bulb burned.
I dinged the bell. It was a minute before an old man shuffled out from
where he'd been sleeping. He yawned, eyed me suspiciously, looked
at Foster.
"We don't want no drunks here," he said. "Respectable house."
"My friend is sick," I said. "Give me a double with bath. And call a
doctor."
"What's he got?" the old man said. "Ain't contagious, is it?"
"That's what I want a doctor to tell me."
"I can't get the doc 'fore in the morning. And we got no private
bathrooms."
I signed the register and we rode the open-cage elevator to the fourth
floor and went along a gloomy hall to a door painted a peeling brown.
It didn't look inviting; the room inside wasn't much better. There was a
lot of flowered wallpaper and an old-fashioned wash stand, and two
wide beds. I stretched Foster out on one. He lay relaxed, a serene
expression on his face—the kind undertakers try for but never quite
seem to manage. I sat down on the other bed and pulled off my
shoes. It was my turn to have a tired mind. I lay on the bed and let it
sink down like a grey stone into still water.
I awoke from a dream in which I had just discovered the answer to
the riddle of life. I tried to hold onto it, but it slipped away; it always
does.
Grey daylight was filtering through the dusty windows. Foster lay
slackly on the broad sagging bed, a ceiling lamp with a faded fringed
shade casting a sickly yellow light over him. It didn't make things any
cheerier; I flipped it off.
Foster was lying on his back, arms spread wide, breathing heavily.
Maybe it was only exhaustion and he didn't need a doctor after all.
He'd probably wake up in a little while, raring to go. As for me, I was
feeling hungry again. I'd have to have a buck or so for sandwiches. I
went over to the bed and called Foster's name. He didn't move. If he
was sleeping that soundly, maybe I wouldn't bother him.
I eased his wallet out of his coat pocket, took it to the window and
checked it. It was fat. I took a ten, put the wallet on the table. I
remembered Foster had said something about money in the car. I
had the keys in my pocket. I got my shoes on and let myself out
quietly. Foster hadn't moved.
Down on the street, I waited for a couple of yokels who were looking
over Foster's car to move on, then slid into the seat, leaned over and
got the floorboards up. The strong-box was set into the channel of the
frame. I scraped the road dirt off the lock and opened it with a key
from Foster's key-ring, took out the contents. There was a bundle of
stiffish papers, a passport, some maps—marked up—and a wad of
currency that made my mouth go dry. I rifled through it; fifty grand if it
was a buck.
I stuffed the papers, the money and the passport back in the box and
locked it, and climbed out onto the sidewalk. A few doors down the
street there was a dirty window lettered MAE'S EAT. I went in,
ordered hamburgers and coffee to go, and sat at the counter with
Foster's keys in front of me, and thought about the car that went with
them. The passport only needed a little work on the picture to get me
wherever I wanted to go, and the money would buy me my choice of
islands. Foster would have a nice long nap, and then take a train
home. With his dough, he'd hardly miss what I took.
The counterman put a paper bag in front of me and I paid him and
went out. I stood by the car, jingling the keys on my palm and
thinking. I would be in Miami in an hour, and I knew where to go for
the passport job. Foster was a nice guy, and I liked him—but I'd never
have a break like this again. I reached for the car door and a voice
said, "Paper, Mister?"
I jumped and looked around. A dirty-faced kid was looking at me.
"Sure," I said. I gave him a single and took the paper, flipped it open.
A Mayport dateline caught my eye:
"Police Raid Hideout. A surprise raid by local police led to the
discovery here today of a secret gangland fortress. Chief Chesters of
the Mayport Police stated that the raid came as an aftermath of the
arrival in the city yesterday of a notorious northern gang member. A
number of firearms, including army-type machine guns, were seized
in the raid on a house 9 miles from Mayport on the Fernandina road.
The raid was said by Chief Chesters to be the culmination of a
lengthy investigation. C. R. Foster, 50, owner of the property, is
missing and feared dead. Police are seeking an ex-convict who
visited the house last night. Chief Chesters stated that Foster may
have been the victim of a gangland murder."

I banged through the door to the darkened room and stopped short.
In the gloom I could see Foster sitting on the edge of my bed, looking
my way.
"Look at this," I yelped, flapping the paper in his face. "Now the cops
are dragging the state for me—and on a murder rap at that! Get on
the phone and get this thing straightened out—if you can. You and
your little green men! The cops think they've stumbled on Al
Capone's arsenal. You'll have fun explaining that one...."
Foster looked at me interestedly. He smiled.
"What's funny about it, Foster?" I yelled. "Your dough may buy you
out, but what about me?"
"Forgive me for asking," Foster said pleasantly. "But—who are you?"

There are times when I'm slow on the uptake, but this wasn't one of
them; the implications of what Foster had said hit me hard enough to
make my knees go weak.
"Oh, no, Mr. Foster," I said. "You can't lose your memory again—not
right now, not with the police looking for me. You're my alibi; you're
the one that has to explain all the business about the guns and the ad
in the paper. I just came to see about a job, remember?"
My voice was getting a little shrill. Foster sat looking at me, wearing
an expression between a frown and a smile, like a credit manager
turning down an application.
He shook his head slightly. "My name is not Foster."
"Look," I said. "Your name was Foster yesterday—that's all I care
about. You're the one that owns the house the cops are all upset
about. And you're the corpse I'm supposed to have knocked off.
You've got to go to the cops with me—right now—and tell them I'm
just an innocent bystander."
I went to the window and raised the shades to let some light into the
room, turned back to Foster.
"I'll explain to the cops about you thinking the little men were after you
—" I stopped talking and stared at Foster. For a wild moment I
thought I'd made a mistake—that I'd wandered into the wrong room. I
knew Foster's face, all right; the light was bright enough now to see
clearly; but the man I was talking to couldn't have been a day over
twenty years old.
I went close to him, staring hard. There were the same cool blue
eyes, but the lines around them were gone. The black hair grew lower
and thicker than I remembered it, and the skin was clear and vibrant.
I sat down hard on my bed. "Mama mia," I said.
"¿Que es la dificultad?" Foster said.
"Shut up," I moaned. "I'm confused enough in one language." I was
trying hard to think but I couldn't seem to get started. A few minutes
earlier I'd had the world by the tail—just before it turned around and
bit me. Cold sweat popped out on my forehead when I thought about
how close I had come to driving off in Foster's car; every cop in the
state would be looking for it by now—and if they found me in it, the
jury wouldn't be ten minutes reaching a verdict of guilty.
Then another thought hit me—the kind that brings you bolt upright
with your teeth clenched and your heart hammering. It wouldn't be
long before the local hick cops would notice the car out front. They'd
come in after me, and I'd tell them it belonged to Foster. They'd take
a look at him and say, nuts, the bird we want is fifty years old, and
where did you hide the body?
I got up and started pacing. Foster had already told me there was
nothing to connect him with his house in Mayport; the locals there
had seen enough of him to know he was pushing middle age, at
least. I could kick and scream and tell them this twenty year-old kid
was Foster, but I'd never make it stick. There was no way to prove my
story; they'd figure Foster was dead and that I'd killed him—and
anybody who thinks you need a corpus to prove murder better read
his Perry Mason again.
I glanced out of the window and did a double-take. Two cops were
standing by Foster's car. One of them went around to the back and
got out a pad and took down the license number, then said something
over his shoulder and started across the street. The second cop
planted himself by the car, his eye on the front of the hotel.
I whirled on Foster. "Get your shoes on," I croaked. "Let's get the hell
out of here."
We went down the stairs quietly and found a back door opening on
an alley. Nobody saw us go.

An hour later, I sagged in a grimy coach seat and studied Foster,

sitting across from me—a middle-aged nut with the face of a young
kid and a mind like a blank slate. I had no choice but to drag him with
me; my only chance was to stick close and hope he got back enough
of his memory to get me off the hook.
It was time for me to be figuring my next move. I thought about the
fifty thousand dollars I had left behind in the car, and groaned. Foster
looked concerned.
"Are you in pain?" he said.
"And how I'm in pain," I said. "Before I met you I was a homeless
bum, broke and hungry. Now I can add a couple more items: the cops
are after me, and I've got a mental case to nursemaid."
"What law have you broken?" Foster said.
"None, damn it," I barked. "As a crook, I'm a washout. I've planned
three larcenies in the last twelve hours, and flunked out on all of
them. And now I'm wanted for murder."
"Whom did you kill?" Foster enquired courteously.
I leaned across so I could snarl in his face: "You!" Then, "Get this
through your head, Foster. The only crime I'm guilty of is stupidity. I
listened to your crazy story; because of you I'm in a mess I'll never
get straightened out." I leaned back. "And then there's the question of
old men that take a nap and wake up in their late teens; we'll go into
that later, after I've had my nervous breakdown."
"I'm sorry if I've been the cause of difficulty," Foster said. "I wish that I
could recall the things you've spoken of. Is there anything I can do to
assist you now?"
"And you were the one who wanted help," I said. "There is one thing;
let me have the money you've got on you; we'll need it."
Foster got out his wallet, after I told him where it was, and handed it
to me. I looked through it; there was nothing in it with a photo or
fingerprints. When Foster said he had arranged matters so that he
could disappear without a trace, he hadn't been kidding.
"We'll go to Miami," I said. "I know a place in the Cuban section
where we can lie low, cheap. Maybe if we wait a while, you'll start
remembering things."
"Yes," Foster said. "That would be pleasant."

"You haven't forgotten how to talk, at least," I said. "I wonder what
else you can do. Do you remember how you made all that money?"
"I can remember nothing of your economic system," Foster said. He
looked around. "This is a very primitive world, in many respects. It
should not be difficult to amass wealth here."
"I never had much luck at it," I said. "I haven't even been able to
amass the price of a meal."
"Food is exchanged for money?" Foster asked.
"Everything is exchanged for money," I said. "Including most of the
human virtues."
"This is a strange world," Foster said. "It will take me a long while to
become accustomed to it."
"Yeah, me, too," I said. "Maybe things would be better on Mars."
Foster nodded. "Perhaps," he said. "Perhaps we should go there."
I groaned, then caught myself. "No, I'm not in pain," I said. "But don't
take me so literally, Foster."
We rode along in silence for a while.
"Say, Foster," I said. "Have you still got that notebook of yours?"
Foster tried several pockets, came up with the book. He looked at it,
turned it over, frowning.