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Assignment #6 Chapter 8, p 269 ANSWERS: Due: March 8 MICROECONOMICS AND BEHAVIOR THE McGRAW-HILL/IRWIN SERIES IN ECONOMICS ESSENTIALS OF ECONOMICS Brue, McConnell, and Flynn Essentials of Economics Third Edition Mandel Economics: The Basics Second Edition Schiller Essentials of Economics Ninth Edition PRINCIPLES OF ECONOMICS Colander Economics, Microeconomics, and Macroeconomics Ninth Edition Frank and Bernanke Principles of Economics, Principles of Microeconomics, and Principles of Macroeconomics Fifth Edition Frank and Bernanke Brief Editions: Principles of Economics, Principles of Microeconomics, and Principles of Macroeconomics Second Edition Economy Today Nineteenth Edition Slavin Economics, Microeconomics, and Macroeconomics Eleventh Edition ECONOMICS OF SOCIAL ISSUES Guell Issues in Economics Today Seventh Edition Sharp, Register, and Grimes Economics of Social Issues Twentieth Edition ECONOMETRICS Gujarati and Porter Basic Econometrics Fifth Edition Gujarati and Porter Essentials of Econometrics Fourth Edition Hilmer and Hilmer Practical Econometrics First Edition MANAGERIAL ECONOMICS ADVANCED ECONOMICS Romer Advanced Macroeconomics Fourth Edition MONEY AND BANKING Cecchetti and Schoenholtz Money, Banking, and Financial Markets Fourth Edition URBAN ECONOMICS O’Sullivan Urban Economics Eighth Edition LABOR ECONOMICS Borjas Labor Economics Sixth Edition McConnell, Brue, and Macpherson Contemporary Labor Economics Tenth Edition PUBLIC FINANCE Rosen and Gayer Public Finance Tenth Edition Karlan and Morduch Economics, Microeconomics, and Macroeconomics First Edition Baye and Prince Managerial Economics and Business Strategy Eighth Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twentieth Edition Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Fifth Edition McConnell, Brue, and Flynn Brief Editions: Economics, Microeconomics, and Macroeconomics Second Edition Thomas and Maurice Managerial Economics Eleventh Edition Miller Principles of Microeconomics First Edition Bernheim and Whinston Microeconomics Second Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition Dornbusch, Fischer, and Startz Macroeconomics Twelfth Edition King and King International Economics, Globalization, and Policy: A Reader Fifth Edition Frank Microeconomics and Behavior Ninth Edition Pugel International Economics Fifteenth Edition Schiller The Economy Today, The Micro Economy Today, and The Macro INTERMEDIATE ECONOMICS Seidman Public Finance First Edition ENVIRONMENTAL ECONOMICS Field and Field Environmental Economics: An Introduction Sixth Edition INTERNATIONAL ECONOMICS Appleyard and Field International Economics Eighth Edition MICROECONOMICS AND BEHAVIOR Ninth Edition ROBERT H. FRANK Cornell University MICROECONOMICS & BEHAVIOR, NINTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2015 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2010, 2008, and 2006. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOR/DOR 1 0 9 8 7 6 5 4 ISBN MHID 978-0-07-802169-5 0-07-802169-3 Senior Vice President, Products & Markets: Kurt L. Strand Vice President, Content Production & Technology Services: Kimberly Meriwether David Managing Director: Douglas Reiner Executive Brand Manager: Michele Janicek Executive Director of Development: Ann Torbert Managing Development Editor: Christina Kouvelis Director of Digital Content: Doug Ruby Digital Development Editor: Kevin Shanahan Marketing Manager: Katie Hoenicke Director, Content Production: Terri Schiesl Content Project Manager: Kristin Bradley Buyer: Nicole Baumgartner Design: Matthew Baldwin Cover Image: Patrizia Savarese/Getty Images Senior Content Licensing Specialist: Jeremy Cheshareck Typeface: 10/12 Sabon LT Std Roman Compositor: Aptara,® Inc. Printer: R. R. Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Frank, Robert H. Microeconomics and behavior / Robert H. Frank, Cornell University.—Ninth edition. pages cm Includes index. ISBN 978-0-07-802169-5 (hardback)—ISBN 0-07-802169-3 (hardback) 1. Microeconomics. 2. Economic man. 3. Self-interest. 4. Consumer behavior. I. Title. HB171.5.F733 2015 338.5—dc23 2013042880 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. For David, Jason, Chris, and Hayden ABOUT THE AUTHOR Robert H. Frank is the Henrietta Johnson Louis Professor of Management and Professor of Economics at the Johnson Graduate School of Management at Cornell University. His “Economic View” column appears monthly in The New York Times. After receiving his B. S. from Georgia Tech, he taught math and science for two years as a Peace Corps volunteer in rural Nepal. After receiving his M. A. in statistics and his Ph.D. in economics from the University of California at Berkeley, he began his teaching career at Cornell. During leaves of absence from the university, he served as chief economist for the Civil Aeronautics Board, a Fellow at the Center for Advanced Study in the Behavioral Sciences, Professor of American Civilization at l’École des Hautes Études en Sciences Sociales in Paris, and the Peter and Charlotte Schoenfeld Visiting Scholar at the NYU Stern School of Business. His research has focused on rivalry and cooperation in economic and social behavior. His books on these themes, which include Choosing the Right Pond, What Price the Moral High Ground?, Passions Within Reason, The Economic Naturalist, Falling Behind, and The Darwin Economy, have been translated into 22 languages. Other books include The Economic Naturalist’s Field Guide and Principles of Economics, co-authored with Ben Bernanke. The Winner-Take-All Society, co-authored with Philip Cook, received a Critic’s Choice Award, was named a Notable Book of the Year by The New York Times, and was included on BusinessWeek’s list of the 10 best books 1995. His Luxury Fever was named to the KnightRidder Best Books list for 1999. He is past president of the Eastern Economic Association, a co-recipient of the 2004 Leontief Prize for Advancing the Frontiers of Economic Thought, and a recipient of the Merrill Scholars Program Outstanding Educators Citation. At the Johnson School, he was awarded the Russell Distinguished Teaching Award in 2004, 2010, and 2012, and the Apple Distinguished Teaching Award in 2005. vi PREFACE y goal in writing Microeconomics and Behavior was to produce an intellectually challenging text that would also be accessible and engaging to students. The more common approach in this market has been to emphasize one of these dimensions or the other. For example, some texts have done well by sacrificing rigor in the name of user-friendliness. But although such books sometimes keep students happy, they often fail to prepare them for upper-division courses in the major. Others texts have succeeded by sacrificing accessibility in the name of rigor, where rigor all too often means little more than mathematical density. These courses overwhelm many undergraduates, and even those few who become adept at solving well-posed mathematical optimization problems are often baffled by questions drawn from everyday contexts. I have always believed that a text could at once be rigorous and user-friendly. And to judge by the breadth of Microeconomics and Behavior’s adoption list, many of you apparently agree. I wrote this book in the conviction that the teaching of intuition and the teaching of technical tools are complements, not substitutes. Students who learn only technical tools rarely seem to develop any real affection for our discipline; and even more rarely do they acquire that distinctive mindset we call “thinking like an economist.” By contrast, students who develop economic intuition are stimulated to think more deeply about the technical tools they learn, and to find more interesting ways to apply them. Most important, they usually end up liking economics. Microeconomics and Behavior develops the core analytical tools with patience and attention to detail. At the same time, it embeds these tools in a uniquely diverse collection of examples and applications to illuminate the power and versatility of the economic way of thinking. M ECONOMIC NATURALISM In more than forty years of teaching, I have found no more effective device for developing intuition than to train students to become “Economic Naturalists.” Studying biology enables people to observe and marvel at many details of life that would otherwise have escaped notice. In much the same way, studying microeconomics can enable students to see the mundane details of ordinary existence in a sharp new light. Throughout the text, I try to develop intuition by means of examples and applications drawn from everyday experience. Microeconomics and Behavior teaches students to see each feature of the manmade landscape as the reflection of an implicit or explicit cost-benefit calculation. To illustrate, an Economic Naturalist is someone who wonders why the business manager of the economics department was delighted when I began putting the lecture notes for my course on the university’s intranet server, whereas the very same move troubled the associate dean in the management school, where I also teach. About a week into the term, I got an urgent letter from this dean telling me that henceforth I should make hardcopies of my lecture notes for distribution to students free of charge. No similar instruction came from the business manager of the economics department. When I asked for clarification, the management school’s dean told me that students had been downloading my notes and printing them in the school’s computer labs at a cost of 5 cents a page, which was far more than the 1.25 cents the school’s copy center was charging at the time. Fair enough. But then why was the economics department’s administrator not worried about the same problem? (When I asked whether he wanted me to distribute hardcopies of my notes, he replied “Don’t you dare!”) Their different viewpoints, I soon discovered, had nothing to do with the very different cultures of the two units. Instead, they stemmed from a small but important difference in economic incentives: In the management school, the same administrator pays for printing in both the computer labs and the copy center. The economics department administrator, however, pays only for printing on the department copier. When economics students print my lecture notes off the Web in the various campus computer laboratories in the Arts College, the bills go directly to the College. From the economics department’s point of view, these copies were free. Year in and year out, the most valuable assignments in my course are the two brief papers in which I ask students to report on their efforts to become economic naturalists. Their specific charge is to use microeconomic principles to answer a question prompted by a personal observation. In recent terms, students have grappled with questions like these: Why do the keypads of driveup ATM machines have Braille dots? Why do top female models earn more than top male models? Why do brides spend so much money on wedding dresses, while grooms vii viii PREFACE often rent cheap tuxedos (even though grooms could potentially wear their tuxedos on many other occasions and brides will never wear their dresses again)? Why are child safety seats required in cars but not for air travel? Why do airlines charge their highest prices to passengers who buy at the last minute, while the practice is exactly the reverse for Broadway theaters? The beauty of this assignment is not only that most students enjoy writing these papers, but also that few manage to complete them without becoming life-long economic naturalists. For those who would like to learn more about the assignment, my lecture on it is posted in the Authors@google series here: watch?v5QalNVxeIKEE. FOCUS ON PROBLEM SOLVING Most economists agree that a critical step in learning price theory is to solve problems. More than any other text currently available in the marketplace, Microeconomics and Behavior prepares students for its endof-chapter problems by taking them through a sequence of carefully crafted examples and concept checks within each chapter. Because most of these examples and concept checks are drawn from familiar contexts, and because students engage more readily with the concrete than with the abstract, this approach has proven effectiveness. In the absence of such groundwork, many students would reach the end-of-chapter problems with little or no idea how to proceed. likely to wear them than is someone who spent $400 out of his own pocket for those same shoes.) Especially in the chapters on consumer behavior, I call students’ attention to situations in which they themselves are likely to make irrational choices. Because student resources are limited, it makes sense to focus on precisely those issues for which knowing price theory is most likely to be helpful. It may seem natural to wonder whether discussing examples of irrational choices might confuse students who are struggling to master the details of the rational choice model. It’s a reasonable question, but my experience has been exactly to the contrary. Such examples actually underscore the normative message of the traditional theory. Students who are exposed to them invariably gain a deeper understanding of the basic theoretical principles at issue. Indeed, they often seem to take an almost conspiratorial pride in being able to see through the errors of judgment that many consumers make. For instructors who want to pursue how cognitive limitations affect consumer behavior in greater detail, there is an entire chapter devoted to this topic. When the first edition of Microeconomics and Behavior appeared in 1990, many in the economics profession were skeptical about the emerging field of behavioral economics. But as evidenced by U.C. Berkeley economist Matthew Rabin’s receipt of the John Bates Clark Award in 2000 (the honor bestowed every two years by the American Economics Association on the most outstanding American economist under the age of 40) and by Daniel Kahneman’s receipt of the Nobel Prize in Economics in 2002, the behavioral approach is now part of the microeconomics mainstream. OPTIMAL TOPIC COVERAGE A guiding principle in the evolution of Microeconomics and Behavior has been that topics should be emphasized in proportion both to their importance and to the difficulty that students have in mastering them. Because the basic rational choice model is the building block for much of what comes later in the course, I have devoted considerably more attention to its development than competing texts do. I have also allocated extra space for elasticity and its applications in demand theory, and for the average-marginal distinction in production theory. As an additional means for discovering which topics are most difficult to master, I have used research in behavioral economics that identifies systematic departures from the prescriptions of the rational choice model. For example, whereas the model says that rational persons will ignore sunk costs, many people are in fact strongly influenced by them. (Someone who receives an expensive, but painfully tight, pair of shoes as a gift is much less A BROADER CONCEPTION OF SELF-INTEREST Another of my goals has been to incorporate a broader conception of preferences into models of individual choice. Most texts mention at the outset that the rational choice model takes people’s tastes as given. They may be altruists, sadists, or masochists; or they may be concerned solely with advancing their narrow material interests. But having said that, most texts then proceed to ignore all motives other than narrow self-interest. It is easy to see why, because economic research has scored its most impressive gains on the strength of this portrayal of human motivation. It tells us, for example, why Ford discontinued production of its 7,500-pound Excursion SUV in the wake of gasoline price increases; and why thermostats are generally set lower in apartments that have separately metered utilities. PREFACE And yet, as students are keenly aware, our Homo economicus caricature is patently at odds with much of what we know about human behavior. People vote in presidential elections. They give anonymously to public television stations and private charities. They donate bone marrow to strangers with leukemia. They endure great trouble and expense to see justice done, even when it will not undo the original injury. At great risk to themselves, they pull people from burning buildings, and jump into icy rivers to rescue people who are about to drown. Soldiers throw their bodies atop live grenades to save their comrades. Seen through the lens of the self-interest theory emphasized in most textbooks, such behavior is the human equivalent of planets traveling in square orbits. Indeed, many students are strongly alienated by our self-interest model, which they perceive as narrow and mean-spirited. Microeconomics and Behavior freely concedes the importance of the self-interest motive in many contexts. But it also highlights the role of unselfish motives in social and economic transactions. Employing elementary game theory, Chapter 12 identifies circumstances in which people who hold such motives have a competitive advantage over pure opportunists. It shows, for example, that people known to have cooperative predispositions can often solve prisoner’s dilemmas and other commitment problems in ways that purely selfinterested persons cannot. Our theoretical models of human nature are important, not least because they mold our expectations about how others will behave. Economics is the social science most closely identified with the self-interest model of human behavior. Does this model color our expectations of others, and perhaps even our own behavior? When Cornell psychologists Tom Gilovich, Dennis Regan, and I investigated this question, we found numerous indications that economists are much more likely than others to behave opportunistically in social dilemmas.1 For example, academic economists were more than twice as likely as the members of any other discipline we surveyed to report that they give no money at all to any private charity. In an experiment, we also found that economics majors were more than twice as likely as nonmajors to defect when playing one-shot prisoner’s dilemmas with strangers. This difference was not merely a reflection of the fact that people who chose to major in economics were more opportunistic to begin with. We found, for example, that the difference in defection rates grew larger 1 See R. H. Frank, T. D. Gilovich, and D. T. Regan, “Does Studying Economics Inhibit Cooperation?” Journal of Economics Perspectives, Spring 1993. ix the longer a student had studied economics. Questionnaire res ...
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