MICROECONOMICS
AND
BEHAVIOR
Seventh Edition
ROBERT H. FRANK
Cornell University
McGraw-Hill
Irwin
Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis
Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi , Santiago Seoul Singapore Sydney Taipei Toronto
CONTENTS
ECONOMIC NATURALIST 10.2: Why Do Unions Support Minimum Wage
Laws So Strongly? 315
ECONOMIC NATURALIST 10.3: Why Would a Bathroom Equipment Manager Bake
the Image of a Housefly onto the Center of Its Ceramic Urinals? 316
Long-Run Costs and the Structure of Industry 319
The Relationship between Long-Run and Short-Run Cost Curves
Summary 322
Questions for Review 323
Problems 323
Answers to In-Chapter Exercises 325
Appendix 10 Mathematical Extensions of the Theory of Costs
Chapter 11
Perfect Competition
321
327
333
Chapter Preview 333
The Goal of Profit Maximization 334
Example 11.1: Should the Owner of Valdosta, Georgia's, Miniature Golf
Course Move the Operation to Manhattan? 335
The Four Conditions for Perfect Competition 337
The Short-Run Condition for Profit Maximization 339
The Short-Run Competitive Industry Supply 343
Example 11.2: What Is the Industry Supply Curve for an Industry with
200 Firms? 344
Short-Run Competitive Equilibrium 344
The Efficiency of Short-Run Competitive Equilibrium 346
Producer Surplus 347
Example 11.3: Should the Legislature Ban Fireworks? 349
Adjustments in the Long Run 350
The Invisible Hand 353
Application: The Cost of Extraordinary Inputs 354
The Long-Run Competitive Industry Supply Curve 356
ECONOMIC NATURALIST I I.I: Why Do Color Photographs Cost Less Than Blackand-White Photographs? 359
The Elasticity of Supply 360
Applying the Competitive Model
361
ECONOMIC NATURALIST 11.2: Why Did I8-Wheel Cargo Trucks Suddenly Begin
Using Airfoils in the Mid-1970s? 365
v
Summary 366
Questions for Review 367
Problems 367
Answers to In-Chapter Exercises 369
Chapter 12
Monopoly
371
Chapter Preview 371
Defining Monopoly 372
Five Sources of Monopoly 373
The Profit-Maximizing Monopolist 377
Example 12.1: Finding a Marginal Revenue Curve for a Given Demand
Curve 383
Example 12.2: What Is a Monopolist's Profit-Maximizing Price, and How
Much Economic Profit Is Earned? 385
A Monopolist Has No Supply Curve 388
Adjustments in the Long Run 389
CONTENTS
Price Discrimination 389
Example 12.3: Finding and Graphing the Monopolist's Quantity and Price in
the Home Market 390
ECONOMIC NATURALIST 12.1: Why Do Some Doctors and Lawyers Offer Discounts
to People with Low Incomes? 392
ECONOMIC NATURALIST 12.2: Why Do Theater Owners Offer Student Discounts on
Admission Tickets but Not on Popcorn? 392
The Efficiency Loss from Monopoly 397
Public Policy toward Natural Monopoly 398
Example 12.4: Will the Monopolist Introduce a New Lightbulb That Lasts
10,000 Hours? 406
Summary 407
Questions for Review 408
Problems 408
Answers to In-Chapter Exercises 410
Chapter 13
imperfect Competition: A Game-Theoretic Approach
Chapter Preview 414
An Introduction to the Theory of Games
413
414
ECONOMIC NATURALIST 13.1: Why Do Cigarette Companies Advertise
"Too Much"? 417
ECONOMIC NATURALIST 13.2: Why Might a Company Make an Investment It Knew It
Would Never Use? 424
ECONOMIC NATURALIST 13.3: Why Would a Firm Build a Factory with More
Capacity Than It Would Ever Need? 426
Some Specific Oligopoly Models 426
Example 13.1: Deriving the Reaction Functions for Cournot Duopolists 429
Example 13.2: Finding the Equilibrium Price and Quantity for Bertrand
Duopolists 430
Example 13.3: Finding the Equilibrium Price and Quantity for a Stackelberg
Leader and Follower 431
Competition When There Are Increasing Returns to Scale 433
Chamberlin Model of Monopolistic Competition 435
A Spatial Interpretation of Monopolistic Competition 440
ECONOMIC NATURALIST 13.4: Why Are There Fewer Grocery Stores in Cities Than
There Were in 1930? Why Do Neighborhoods in Manhattan Have More Grocery Stores
Than Neighborhoods in Los Angeles? 445
Historical Note: Hotelling's Hot Dog Vendors 449
Consumer Preferences and Advertising 450
Summary 452
Questions for Review 452
Problems 453
Answers to In-Chapter Exercises 454
PART 4
Chapter 14
Factor Markets
457
Labor 459
Chapter Preview 460
The Perfectly Competitive Firm's Short-Run Demand for Labor 460
The Perfectly Competitive Firm's Long-Run Demand for Labor 462
The Market Demand Curve for Labor 462
An Imperfect Competitor's Demand for Labor 463
XXVI
CONTENTS
The Supply of Labor 464
Example 14.1: The Labor Supply Curve for Someone
with a Target Level of Income 466
ECONOMIC NATURALIST 14.1: Why Is It So Hard to Find a Taxi on Rainy Days?
Example 14.2: The Optimal Leisure Demand for Someone Who Views
Income and Leisure as Perfect Complements 467
Is Leisure a Giffen Good? 469
The Noneconomist's Reaction to the Labor Supply Model
The Market Supply Curve 470
467
469
Example 14.3: How Do Rising MBA Enrollments Affect the Salaries and
Employment of Economists in Liberal Arts Colleges? 470
Monopsony 472
Minimum Wage Laws 476
Labor Unions 478
Discrimination in the Labor Market
Statistical Discrimination 482
The Internal Wage Structure 485
Winner-Take-All Markets 488
480
Summary 489
Questions for Review 490
Problems 490
Answers to In-Chapter Exercises 493
Appendix 14 The Economics of Workplace Safety
Chapter 15
Capital
497
505
Chapter Preview 506
Financial Capital and Real Capital 506
The Demand for Real Capital 506
The Relationship between the Rental Rate and the Interest Rate
The Criterion for Buying a Capital Good 508
Interest Rate Determination 508
Real versus Nominal Interest Rates 510
The Market for Stocks and Bonds 510
507
ECONOMIC NATURALIST 15.1: Why Is Owning Stock in a Monopoly No Better Than
Owning Stock in a Perfectly Competitive Firm? 514
The Anomaly of the Investment Newsletter 514
Tax Policy and the Capital Market 516
Economic Rent 517
Peak-Load Pricing 518
Exhaustible Resources as Inputs in Production 519
Summary 521
Questions for Review 522
Problems 522
Answers to In-Chapter Exercises 523
Appendix 15 A More Detailed Look at Exhaustible Resource Allocation
PART 5
Chapter 16
Externailities, Public Goods, and Welfare
533
Externalities, Property Rights, and the Coase Theorem
Chapter Preview 536
The Reciprocal Nature of Externalities
536
535
525
CONTENTS
xxvii
Example 16.1: The Confectioner and the Doctor (I): Making the
Confectioner Liable for Noise Damage 537
Example 16.2: The Confectioner and the Doctor (II): Changing Costs and
Benefits 538
Example 16.3: The Confectioner and the Doctor (III): Installing a
Soundproofing Device 538
Example 16.4: The Confectioner and the Doctor (IV): Should the Doctor
Rearrange His Office? 539
Example 16.5: The Confectioner and the Doctor (V): Costly Negotiation
When the Confectioner Can Make the Least-Cost Adjustment 540
Example 16.6: The Confectioner and the Doctor (VI): Costly Negotiation
When the Doctor Can Make the Least-Cost Adjustment 541
Application: External Effects from Nuclear Power Plants 542
Property Rights 543
ECONOMIC NATURALIST 16.1: Why Does the Law Permit Airlines to Operate Flights
over Private Land without Permission 543
ECONOMIC NATURALIST 16.2: Why Does the Law of Trespass Not Apply along
Waterfront Property? 544
ECONOMIC NATURALIST 16.3: Why Are Property Rights Often Suspended during
Storms? 545
ECONOMIC NATURALIST 16.4: Why Do Building Height Limits Vary from
City to City? 545
Example 16.7: If Village Residents Make Their Investment Decisions
Independently, How Many of Their Steers Will Graze on the
Commons? 546
Externalities, Efficiency, and Free Speech 550
Smoking Rules, Public and Private 550
Example 16.8: Should Smoker Smith Live with Nonsmoker Jones, or Find a
Separate Apartment? 551
Positive Externalities 552
Positional Externalities 552
Taxing Externalities 555
Example 16.9: The Confectioner and the Doctor (VII): Taxing the
Confectioner for Noise 556
Example 16.10: What Is the Best Way for the City Council to Reduce Air
Pollution? 557
Summary 560
Questions for Review 560
Problems 560
Answers to In-Chapter Exercises 566
Chapter 17
Government
567
Chapter Preview 568
Public Goods 568
Example 17.1: Should the Network Broadcast Jerry Springer or Masterpiece
Theater? 573
Public Choice 576
Example 17.2: If Two People, One Rich and One Poor, Have Opposite Views
on a Proposed Public Project, on What Basis Would Each Like to See the
Decision Made, Cost-Benefit Analysis or Majority Rule? 580
Example 17.3: Which Company Will Win the Cedar Rapids Cable TV
Franchise? 582
xxviii
CONTENTS
Income Distribution
582
Summary 591
Questions for Review 592
Problems 593
Answers to In-Chapter Exercises 594
Index
Chapter I8W
597
General Equilibrium and Market Efficiency (online)
18W-1
Chapter Preview 18W-1
A Simple Exchange Economy 18W-2
Efficiency in Production 18W-10
Efficiency in Product Mix 18W-11
Gains from International Trade 18W-15
Example 18W.1: General Equilibrium and Market Efficiency
Taxes in General Equilibrium 18W-16
Other Sources of Inefficiency 18W-18
Summary 18W-20
Questions for Review 18W-20
Problems 18W-21
Answers to In-Chapter Exercises 18W-22
18W-16