MICROECONOMICS

AND BEHAVIOR

Ninth Edition

ROBERT H. FRANK
Cornell University

Mc
Graw
Hill
Education
 # BRIEF CONTENTS

PART I Introduction
1 Thinking Like an Economist 3
2 Supply and Demand 25
PART 2 The Theory of Consumer Behavior
3 Rational Consumer Choice 55
4 Individual and Market Demand 95
5 Applications of Rational Choice and Demand Theories 139
6 The Economics of Information and Choice under Uncertainty 169
7 Departures from Standard Rational Choice Models
(With and Without Regret) 213
PART 3 The Theory of the Firm and Market Structure
8 Production 248
9 Costs 281
10 Perfect Competition 317
II Monopoly 355
12 A Game-Theoretic Approach to Strategie Behavior 397
13 Oligopoly and Monopolistic Competition 427
PART 4 Factor Markets
14 Labor 459
15 Capital 503
PART 5 General Equilibrium and Weifare
16 Externalities, Property Rights, and the Coase Theorem 533
17 General Equilibrium and Market Efficiency 567
18 Government 589
Index 619

xiii
 CONTENTS
PART I Introduction
Chapter I Thinking Like an Economist 3
The Cost-ßenefit Approach to Decisions 4
Example 1.1: Comparing Costs and Benefits 5
The Role of Economic Theory 6
Common Pitfalls in Decision Making 7
Example 1.2: Implicit Cost 7
Example 1.3: Costs and Benefits Are Reciprocal 8
Example 1.4: Opportunity Cost 9
Example 1.5: Sunk Cost Part 1 10
Example 1.6: Sunk Cost Part 2 10
Example 1.7: Comparing Costs and Benefits
Part 1 12
Example 1.8: Comparing Costs and Benefits
Part 2 12
Example 1.9: Marginal Cost and Benefit vs.
Ave rage Cost and Benefit 13
Example 1.10: Applying the Cost-Benefit
Principle 14
Using Marginal Benefit and Marginal Cost
Graphically 15
Example 1.11: Comparing Marginal Benefit and
Cost Graphically 15
The Invisible Hand 16
Example 1.12: Applying Marginal Benefit and
Cost Graphically 17
Would Patents Want Their Daughter or Son to Marry
Homo Economicus? 17
The Economic Naturalist 18
ECONOMIC NATURALIST l.l: Why IsAirline
Food So Bad? 18
ECONOMIC NATURALIST 1.2: Why Do Many Manual
Transmissions Have Six Forward Speeds, Many Automatics
Only Four? 19
Positive Questions and Normative Questions 20
Microeconomics and Macroeconomics 20
Summary 20 • Review Questions 21 •
21 * fo Comcgpf 24 *
Chapter 2 Supply and Demand 25
Chapter Preview 25
Supply and Demand Curves 26
Equilibrium Quantity and Price 29
Adjustment to Equilibrium 30
Some Weifare Properties of Equilibrium 31
Free Markets and the Poor 32
Example 2.1: Alternate Allocation
Mechanisms 32
Example 2.2: Excess Demand 35
Price Supports 36
Determinants of Supply and Demand 37
Predicting and Explaining Changes in Price and
Quantity 40
ECONOMIC NATURALIST 2.1: Why Do the Prices of
Some Goods, Such as Apples, Go Down during the Months of
Heaviest Consumption While the Prices of Others, Such as
Beachfront Cottages, Go Up? 40
Example 2.3: Increasing Opportunity Cost 41
The Algebra of Supply and Demand 42
Summary 43 • Review Questions 43 •
Problems 44 • Answers to Concept Checks 45 •
Appendix 2A How Do Taxes Affect Equilibrium
Prices And Quantitiesf 47
PART 2 The Theory of Consumer
Behavior
Chapter 3 Rational Consumer Choice 55
Chapter Preview 55
The Opportunity Set or Budget Constraint 56
Budget Shifts Due to Price or Income Changes 58
Example 3.1: Quantity Discounts 61
Example 3.2: Budget Constraints 62
Consumer Preferences 63
The Best Feasible Bündle 69
Example 3.3: Corner Solutions 72
Example 3.4: Rational Choice Model in
Action 73
ECONOMIC NATURALIST 3.1: Why Do People Often
Give Gifts in Kind Instead of Cash? 75
Summary 76 • Review Questions 77 •
Problems 77 • Answers to Concept Checks 80 •
Appendix 3A Tbe Utility Function Approach to the
Consumer Budgeting Problem 83
XV
 CONTENTS
Chapter 4 Individual and Market Demand 95
Chapter Preview 95
The Effects of Changes in Price 96
The Effects of Changes in Income 98
The Income and Substitution Effects of a Price
Change 100
Example 4.1: Perfect Complements 104
Example 4.2: Perfect Substitutes 105
Consumer Responsiveness to Changes in Price 106
Example 4.3: Individual Demand Curves for
Perfect Complements 108
Market Demand: Aggregating Individual Demand
Curves 109
Example 4.4: Market Demand HO
Example 4.5: Market Demand with Identical
Consumers III
Price Elasticity of Demand III
Elasticity and Total Expenditure 116
Example 4.6: Market Demand for Transit 118
The Dependence of Market Demand on Income 121
Example 4.7: The Engel Curve 121
ECONOMIC NATURALIST 4.1: Why Has the Nature of
Outdoor Cooking Appliances Changed Dramatically in
Recent Decades? 124
Application: Forecasting Economic Trends 125
Cross-Price Elasticities of Demand 126
126 * ReMßw Qw&s&ofK 128 "
Problems 128 • Ansivers to Concept Checks 131 •
Appendix 4A Additional Topics in Demand Theory 133
Chapter 5 Applications of Rational Choice and
Demand Theories 139
Chapter Preview 139
Using the Rational Choice Model to Answer Policy
Questions 140
Consumer Surplus 144
Example 5.1: Consumer Surplus 145
ECONOMIC NATURALIST 5.1: Why Do SomeTennis
Clubs Have an Annual Membership Charge in Addition to
Their Hourly Court Pees? 146
ECONOMIC NATURALIST 5.2: Why Do Some
Amüsement Parks Charge Only a Fixed Admission Fee, with
no Additional Charge even for rides with long lines? 147
Overall Weifare Comparisons 147
Example 5.2: Budget Constraints 148
Using Price Elasticity of Demand 153
The Intertemporal Choice Method 155
Example 5.3: Marginal Rate of Time
Preference 160
Summary 163 • Review Questions 164 •
Problems 166 • Ansivers to Concept Checks 166 •
Chapter 6 The Economics of Information and
Choice under Uncertainty 169
Chapter Preview 169
The Economics of Information 170
The Costly-to-Fake Principle 171
ECONOMIC NATURALIST 6.1: Why Is Coyness Often
an Attractive Attribute? 173
ECONOMIC NATURALIST 6.2: Why Do Residents of
SmallTowns Spend Less on Professional ClothesThan Their
Counterparts in Big Cities? 174
The Full-Disclosure Principle 175
ECONOMIC NATURALIST 6.3: Why Do "Almost New"
Used Cars Seil for So Much Less Than Brand New Ones? 177
Choice under Uncertainty 178
Example 6.1: Expected Utility 180
Example 6.2: Expected Value of Wealth 182
Example 6.3: Risk Neutral 184
Example 6.4: Expected Utility 185
Example 6.5: Expected Benefit 186
Insuring against Bad Outcomes 187
ECONOMIC NATURALIST 6.4: Why Was American
Health Reform Legislation So Complicated? 191
Statistical Discrimination 193
Summary 195 • Review Questions 195 •
Problems 196 • Answers to Concept Checks 199 •
Curse 201
Chapter 7 Departures from Standard
Rational Choice Models
(With and Without Regret) 213
Chapter Preview 215
An Application of the Present-Aim Standard: Altruistic
Preferences 215
Example 7.1: Altruistic Preferences 217
The Strategie Role of Preferences 217
Tastes Not Only Can Differ, They Must Differ 221
ECONOMIC NATURALIST 7.1: Why Do PeopleVote in
Presidential Elections? 222
Example 7.2: A Symmetrie Problem 225
Bounded Rationality 227
Affective Forecasting Errors 231
Judgmental Heuristics and Biases 234
ECONOMIC NATURALIST 7.2: Why Does the Rookie of
theYear In Baseball Often Have a Mediocre Second
Season? 236
The Psychophysics of Perception 238
ECONOMIC NATURALIST 7.3: Why Do Real Estate Agents
Often Show Clients Two HousesThat Are Nearly Identical, Even
Though One Is Cheaper and in Better Condition than the
Other? 240

The Self-Control Pitfall 241
Summary 242 • Review Questions 243 •
Problems 244 • Answers to Concept Checks 246 •
PART 3 The Theory of the Firm and
Market Structure
Chapter 8 Production 248
Chapter Preview 249
The Input-Output Relationship, or Production
Function 250
Production in the Short Run 252
ECONOMIC NATURALIST 8.1: Why Can'tAII the
World's People Be Fed from the Amount of Grain Grown in
a Single Flowerpot? 253
Total, Marginal, and Average Products 255
Example 8.1: Interior Solution 258
Example 8.2: Production Decision 260
Example 8.3: Efficient Allocation 260
Production in the Long Run 261
Returns to Scale 264
ECONOMIC NATURALIST 8.2: Why Do Builders Use
Prefabricated Frames for Roofs but Not for Walls? 265
Summary 267 • Review Questions 267 •
Problems 268 • Answers to Concept Checks 270 •
Appendix 8A Mathematical Extensions of Production
Theory 271
Chapter 9 Costs 281
Chapter Preview 281
Costs in the Short Run 282
Graphing the Total, Variable, and Fixed
Cost Curves 284
Example 9.1: Graphing the Cost
Functions 285
Other Short-Run Costs 286
Example 9.2: Determining Production
Costs 289
Example 9.3: Graphing Cost Curves 291
Allocating Production between Two Processes 292
Example 9.4: Minimum-Cost Production 293
The Relationship Among MP, AP, MC,
and AVC 294
Costs in the Long Run 295
ECONOMIC NATURALIST 9.1: Why Is Gravel Made by
Hand in Nepal but by Machine in the United States? 298
ECONOMIC NATURALIST 9.2: Why Do Urions Support
Minimum Wage Laws So Strongly? 299
ECONOMIC NATURALIST 9.3: Why Would a Bathroom
Equipment Manufacturer Bake the Image of a Housefly onto
the Center of Its Ceramic Urinais? 300
CONTENTS
Long-Run Costs and the Structure of Industry 303
The Relationship between Long-Run and Short-Run
Cost Curves 305
Summary 306 • Review Questions 307 •
Problems 307 • Answers to Concept Checks 309 •
Appendix 9A Mathematical Extensions of the Theory
of Costs 311
Chapter 10 Perfect Competition 317
Chapter Preview 317
The Goal of Profit Maximization 318
Example 10.1: Accounting Profits vs. Economic
Profits 318
The Four Conditions for Perfect
Competition 321
The Short-Run Condition for Profit
Maximization 322
The Short-Run Competitive Industry Supply 326
Example 10.2: Industry Supply Curve 327
Example 10.3: Consumer and Producer
Surplus 333
The Invisible Hand 336
The Long-Run Competitive Industry
Supply Curve 339
ECONOMIC NATURALIST 10.1: Why Do Color
Photographs Cost Less than Black-and-White
Photographs? 342
Applying the Competitive Model 345
ECONOMIC NATURALIST 10.2: Why Did I8-Wheel
CargoTrucks Suddenly Begin Using Airfoils in the
Mid-1970s? 348
Summary 349 • Review Questions 350 •
Problems 350 • Answers to Concept
Checks 353 •
Chapter 11 Monopol/ 355
Chapter Preview 355
Defining Monopoly 356
Five Sources of Monopoly 357
The Profit-Maximizing Monopolist 361
Example 11.1: Marginal Revenue Curve 367
Example 11.2: Profit Maximization 368
A Monopolist Has No Supply Curve 372
Price Discrimination 373
Example 11.3: Profits in Two Different Markets 374
ECONOMIC NATURALIST I I. I: Why Do Some Doctors
and Lawyers Offer Discounts to People with Low
Incomes? 375
ECONOMIC NATURALIST 11.2: Why Do Theater
Owners Offer Student Discounts on Admission Tickets but
Not on Popcorn? 376
 CONTENTS
The Efficiency Loss from Monopoly 380
Public Policy toward Natural Monopoly 382
Example 11.4: The Impact of Innovation on
Profits 390
Summary 391 • Review Questions 392 •
Prob/ems 392 * Answers fo Comcepf CÄec6s 394 *
Chapter 12 A Game-Theoretic Approach to
Strategie Behavior 397
Chapter Preview 397
The Prisoner's Dilemma: An Introduction to the
Theory of Games 398
ECONOMIC NATURALIST 12.1: Why Do Cigarette
Companies Advertise "Too Much"? 400
ECONOMIC NATURALIST 12.2: Why Night a Company
Make an Investment It Knew ItWould Never Use? 408
ECONOMIC NATURALIST 12.3: WhyWould a Firm
Build a Factory with More Capacity than ItWould Ever
Need? 410
The Evolution of Strategie Preferences 410
The Commitment Problem 414
Illustration: The Cheating Problem 415
Summary 420 • Review Questions 421 •
Problems 421 • Answers to Concept Checks 424 •
Chapter 13 Oligopoly and Monopolistic
Competition 427
Chapter Preview 428
Some Specific Oligopoly Models 428
Example 13.1: The Cournot Model 430
Example 13.2: The Bertrand Model 432
Example 13.3: The Stackelberg Model 433
Competition When There Are Increasing Returns to
Scale 435
Monopolistic Competition 437
A Spatial Interpretation of Monopolistic
Competition 442
ECONOMIC NATURALIST 13.1: Why Are There Fewer
Grocery Stores in Cities than There Were in 1930? Why Do
Neighborhoods in New York City Have More Grocery Stores
than Neighborhoods in LA? 447
Consumer Preferences and Advertising 451
453 * QwesfmMS 454 *
Problems 454 • Answers to Concept Checks 456 •
PART 4 Factor Markets
Chapter 14 Labor 459
Chapter Preview 460
The Perfectly Competitive Firm's Demand for
Labor 460
An Imperfect Competitor's Demand for Labor 463
The Supply of Labor 464
Example 14.1: Labor Supply Curve 466
ECONOMIC NATURALIST 14.1: Why Is It So Hard to
Find aTaxi on Rainy Days? 467
Example 14.2: Leisure Demand 467
The Market Supply Curve 470
Example 14.3: Market Supply 470
Monopsony 472
Minimum Wage Laws 476
Labor Unions 478
Discrimination in the Labor Market 480
The Internal Wage Structure 485
Winner-Take-All Markets 488
Summary 489 • Review Questions 490 •
Problems 490 • Answers to Concept
CÄec&s 493 * 14A TÄe EcoMom/cs of
Workplace Safety 497
Chapter 15 Capital 503
Chapter Preview 503
Financial Capital and Real Capital 504
The Relationship between the Rental Rate and the
Interest Rate 505
The Criterion for Buying a Capital Good 505
Interest Rate Determination 506
Real versus Nominal Interest Rates 507
The Market for Stocks and Bonds 508
ECONOMIC NATURALIST 15.1: Why Is Owning Stock
in a Monopoly No Better than Owning Stock in a Perfectly
Competitive Firm? 512
Economic Rcnt 515
Peak-Load Pricing 516
Exhaustible Resources as Inputs in Production 518
Summary 519 • Review Questions 520 •
Problems 521 • Answers to Concept Checks 522 •
Appendix 15A More Detailed Look at Exhaustible
Rgsowrce 523
PART 5 General Equilibrium and Weifare
Chapter 16 Externalities, Property Rights, and
the Coase Theorem 533
Chapter Preview 533
The Reciprocal Nature of Externalities 534
Example 16.1: Shutdown Decision Part 1 535
Example 16.2: Shutdown Decision Part 2 536
Example 16.3: Efficient Negotiation Part 1 536
Example 16.4: Efficient Negotiation Part 2 537
Example 16.5: Negotiation at a Cost 538
Example 16.6: Bartiers to Negotiation 539
 CONTENTS xix

Application: External Effects from Nuclear Power Efficiency in Production 575

Plants 540 Efficiency in Product Mix 577
Property Rights 541 Gains from International Trade 580
ECONOMIC NATURALIST 16.1: Why Does the Law Example 17.1: The Trade Decision 581
Permit Airlines to Operate Flights over Private Land without Taxes in General Equilibrium 582
Permission 541 Other Sources of In efficiency 583
ECONOMIC NATURALIST 16.2: Why Does the Law of Summary 585 • Review Questions 586 •
Trespass Not Apply along Waterfront Property? 542 Problems 586 • Answers to Concept Checks 587 •
ECONOMIC NATURALIST 16.3: Why Are Property
Rights Often Suspended during Storms? 543 Chapter 18 Government 589
ECONOMIC NATURALIST 16.4: Why Do Building
Chapter Preview 589
Height Limits Vary from City to City? 544
Public Goods 590
Example 16.7: Tragedy of the Commons 546
Private Provision of Public Goods 594
Example 16.8: Compromise vs. Cost 550
Example 18.1: Free-Rider Problem 595
Positive Externalities 551
Public Choice 598
Positional Externalities 552
Example 18.2: Cost-Benefit Analysis vs. Majority
Taxing Externalities 555
Rule 602
Example 16.9: Taxing Externalities 555
Example 18.3: Lobbying Wars 604
Example 16.10: Regulation vs. Taxation 557
Income Distribution 604
Summary 559 • Review Questions 560 •
Summary 614 • Review Questions 615 •
Problems 560 • Answers to Concept Checks 566 •
Problems 615 • Answers to Concept Checks 617 •
Chapter 17 General Equilibrium and Market
Efficiency 567 Index 619
Chapter Preview 567
A Simple Exchange Economy 568