ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee ii 1111//2222//1133 55::1188 PPMM ff--449944 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess MICROECONOMICS AND BEHAVIOR ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee iiii 1111//2266//1133 99::3300 AAMM ff--449966 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess THE McGRAW-HILL/IRWIN SERIES IN ECONOMICS ESSENTIALS OF ECONOMICS Economy Today ADVANCED ECONOMICS Nineteenth Edition Brue, McConnell, and Flynn Romer Essentials of Economics Slavin Advanced Macroeconomics Third Edition Economics, Microeconomics, and Fourth Edition Macroeconomics Mandel Eleventh Edition MONEY AND BANKING Economics: The Basics Second Edition Cecchetti and Schoenholtz ECONOMICS OF SOCIAL ISSUES Money, Banking, and Financial Schiller Guell Markets Essentials of Economics Issues in Economics Today Fourth Edition Ninth Edition Seventh Edition URBAN ECONOMICS PRINCIPLES OF ECONOMICS Sharp, Register, and Grimes Economics of Social Issues O’Sullivan Colander Twentieth Edition Urban Economics Economics, Microeconomics, and Eighth Edition Macroeconomics Ninth Edition ECONOMETRICS LABOR ECONOMICS Gujarati and Porter Frank and Bernanke Borjas Basic Econometrics Principles of Economics, Principles Labor Economics Fifth Edition of Microeconomics, and Principles Sixth Edition of Macroeconomics Gujarati and Porter Fifth Edition Essentials of Econometrics McConnell, Brue, and Macpherson Contemporary Labor Economics Fourth Edition Frank and Bernanke Tenth Edition Brief Editions: Principles of Hilmer and Hilmer Economics, Principles of Practical Econometrics PUBLIC FINANCE Microeconomics, and Principles First Edition Rosen and Gayer of Macroeconomics Public Finance Second Edition MANAGERIAL ECONOMICS Tenth Edition Karlan and Morduch Baye and Prince Seidman Economics, Microeconomics, and Managerial Economics and Public Finance Macroeconomics Business Strategy First Edition First Edition Eighth Edition McConnell, Brue, and Flynn Brickley, Smith, and Zimmerman ENVIRONMENTAL ECONOMICS Economics, Microeconomics, and Managerial Economics and Field and Field Macroeconomics Organizational Architecture Environmental Economics: Twentieth Edition Fifth Edition An Introduction McConnell, Brue, and Flynn Thomas and Maurice Sixth Edition Brief Editions: Economics, Managerial Economics Microeconomics, and Eleventh Edition INTERNATIONAL ECONOMICS Macroeconomics Appleyard and Field Second Edition INTERMEDIATE ECONOMICS International Economics Miller Bernheim and Whinston Eighth Edition Principles of Microeconomics Microeconomics King and King First Edition Second Edition International Economics, Samuelson and Nordhaus Dornbusch, Fischer, and Startz Globalization, and Policy: Economics, Microeconomics, and Macroeconomics A Reader Macroeconomics Twelfth Edition Fifth Edition Nineteenth Edition Frank Pugel Schiller Microeconomics and Behavior International Economics The Economy Today, The Micro Ninth Edition Fifteenth Edition Economy Today, and The Macro ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee iiiiii 1111//2222//1133 55::1188 PPMM ff--449944 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess MICROECONOMICS AND BEHAVIOR Ninth Edition ROBERT H. FRANK Cornell University ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee iivv 1111//2266//1133 99::3300 AAMM ff--449966 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess 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 978-0-07-802169-5 MHID 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 copy- right 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. www.mhhe.com ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee vv 1111//2222//1133 55::1188 PPMM ff--449944 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess For David, Jason, Chris, and Hayden ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee vvii 1111//2222//1133 55::1188 PPMM ff--449944 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess A B O U T T H E A U T H O R Robert H. Frank is the Henrietta Johnson Louis Prof essor of Management and Professor of Economics at the Johnson Graduate School of Management at Cornell University. His “Economic View” column ap- pears 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 U niversity of California at Berkeley, he began his teaching career at Cornell. During leaves of absence from the u niversity, he served as chief econo- mist 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 Soci- ety, 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 Business- Week’s list of the 10 best books 1995. His Luxury Fever was named to the Knight- Ridder Best Books list for 1999. He is past president of the Eastern Economic Association, a co-recipient of the 2004 Leontief Prize for A dvancing the Frontiers of Economic Thought, and a r ecipient 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 ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee vviiii 1111//2222//1133 55::1188 PPMM ff--449944 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess P R E F A C E M y goal in writing Microeconomics and Behavior means of examples and applications drawn from every- was to produce an intellectually challenging day experience. Microeconomics and Behavior teaches text that would also be accessible and engaging students to see each feature of the manmade landscape to students. The more common approach in this market as the reflection of an implicit or explicit cost-benefit has been to emphasize one of these dimensions or the calculation. other. For example, some texts have done well by sacri- To illustrate, an Economic Naturalist is someone ficing rigor in the name of user-friendliness. But although who wonders why the business manager of the eco- such books sometimes keep students happy, they often nomics department was delighted when I began putting fail to prepare them for upper-division courses in the the lecture notes for my course on the university’s in- major. Others texts have succeeded by sacrificing acces- tranet server, whereas the very same move troubled the sibility in the name of rigor, where rigor all too often associate dean in the management school, where I also means little more than mathematical density. These teach. About a week into the term, I got an urgent letter courses overwhelm many undergraduates, and even from this dean telling me that henceforth I should make those few who become adept at solving well-posed hardcopies of my lecture notes for distribution to stu- mathematical optimization problems are often baffled dents free of charge. No similar instruction came from by questions drawn from everyday contexts. I have the business manager of the economics department. always believed that a text could at once be rigorous When I asked for clarification, the management school’s and user-friendly. And to judge by the breadth of dean told me that students had been downloading my Microeconomics and Behavior’s adoption list, many of notes and printing them in the school’s computer labs you apparently agree. at a cost of 5 cents a page, which was far more than I wrote this book in the conviction that the teach- the 1.25 cents the school’s copy center was charging at ing of intuition and the teaching of technical tools are the time. Fair enough. But then why was the economics complements, not substitutes. Students who learn only department’s administrator not worried about the same technical tools rarely seem to develop any real affection problem? (When I asked whether he wanted me to dis- for our discipline; and even more rarely do they acquire tribute hardcopies of my notes, he replied “Don’t you that distinctive mindset we call “thinking like an econo- dare!”) mist.” By contrast, students who develop economic in- Their different viewpoints, I soon discovered, had tuition are stimulated to think more deeply about the nothing to do with the very different cultures of the technical tools they learn, and to find more interesting two units. Instead, they stemmed from a small but im- ways to apply them. Most important, they usually end portant difference in economic incentives: In the man- up liking economics. agement school, the same administrator pays for Microeconomics and Behavior develops the core printing in both the computer labs and the copy center. analytical tools with patience and attention to detail. At The economics department administrator, however, the same time, it embeds these tools in a uniquely pays only for printing on the department copier. When diverse collection of examples and applications to illu- economics students print my lecture notes off the Web minate the power and versatility of the economic way in the various campus computer laboratories in the of thinking. Arts College, the bills go directly to the College. From the economics department’s point of view, these copies ECONOMIC NATURALISM were free. Year in and year out, the most valuable assignments In more than forty years of teaching, I have found no in my course are the two brief papers in which I ask stu- more effective device for developing intuition than to dents to report on their efforts to become economic nat- train students to become “Economic Naturalists.” uralists. Their specific charge is to use microeconomic Studying biology enables people to observe and marvel principles to answer a question prompted by a personal at many details of life that would otherwise have es- observation. In recent terms, students have grappled caped notice. In much the same way, studying micro- with questions like these: Why do the keypads of drive- economics can enable students to see the mundane up ATM machines have Braille dots? Why do top female details of ordinary existence in a sharp new light. models earn more than top male models? Why do brides Throughout the text, I try to develop intuition by spend so much money on wedding dresses, while grooms vii ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee vviiiiii 1111//2266//1133 99::3300 AAMM ff--449966 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess viii PREFACE often rent cheap tuxedos (even though grooms could po- likely to wear them than is someone who spent $400 out tentially wear their tuxedos on many other occasions of his own pocket for those same shoes.) Especially in the and brides will never wear their dresses again)? Why are chapters on consumer behavior, I call students’ attention child safety seats required in cars but not for air travel? to situations in which they themselves are likely to make Why do airlines charge their highest prices to passengers irrational choices. Because student resources are limited, who buy at the last minute, while the practice is exactly it makes sense to focus on precisely those issues for which the reverse for Broadway theaters? knowing price theory is most likely to be helpful. The beauty of this assignment is not only that most It may seem natural to wonder whether discussing students enjoy writing these papers, but also that few examples of irrational choices might confuse students manage to complete them without becoming life-long who are struggling to master the details of the rational economic naturalists. For those who would like to learn choice model. It’s a reasonable question, but my experi- more about the assignment, my lecture on it is posted ence has been exactly to the contrary. Such examples in the Authors@google series here: www.youtube.com/ actually underscore the normative message of the tradi- watch?v5QalNVxeIKEE. tional theory. Students who are exposed to them invari- ably gain a deeper understanding of the basic theoretical principles at issue. Indeed, they often seem to take an FOCUS ON PROBLEM SOLVING almost conspiratorial pride in being able to see through the errors of judgment that many consumers make. For Most economists agree that a critical step in learning instructors who want to pursue how cognitive limita- price theory is to solve problems. More than any other tions affect consumer behavior in greater detail, there is text currently available in the marketplace, Micro- an entire chapter devoted to this topic. When the first economics and Behavior prepares students for its end- edition of Microeconomics and Behavior appeared in of-chapter problems by taking them through a sequence 1990, many in the economics profession were skeptical of carefully crafted examples and concept checks within about the emerging field of behavioral economics. But each chapter. Because most of these examples and as evidenced by U.C. Berkeley economist Matthew concept checks are drawn from familiar contexts, and Rabin’s receipt of the John Bates Clark Award in 2000 because students engage more readily with the concrete (the honor bestowed every two years by the American than with the abstract, this approach has proven Economics Association on the most outstanding Ameri- effectiveness. In the absence of such groundwork, many can economist under the age of 40) and by Daniel students would reach the end-of-chapter problems with Kahneman’s receipt of the Nobel Prize in Economics in little or no idea how to proceed. 2002, the behavioral approach is now part of the mi- croeconomics mainstream. OPTIMAL TOPIC COVERAGE A BROADER CONCEPTION OF A guiding principle in the evolution of Microeconomics and Behavior has been that topics should be empha- SELF-INTEREST sized in proportion both to their importance and to the difficulty that students have in mastering them. Because Another of my goals has been to incorporate a broader the basic rational choice model is the building block for conception of preferences into models of individual much of what comes later in the course, I have devoted choice. Most texts mention at the outset that the rational considerably more attention to its development than choice model takes people’s tastes as given. They may be competing texts do. I have also allocated extra space for altruists, sadists, or masochists; or they may be con- elasticity and its applications in demand theory, and for cerned solely with advancing their narrow material in- the average-marginal distinction in production theory. terests. But having said that, most texts then proceed to As an additional means for discovering which topics ignore all motives other than narrow self-interest. It is are most difficult to master, I have used research in be- easy to see why, because economic research has scored havioral economics that identifies systematic departures its most impressive gains on the strength of this por- from the prescriptions of the rational choice model. For trayal of human motivation. It tells us, for example, why example, whereas the model says that rational persons Ford discontinued production of its 7,500-pound Excur- will ignore sunk costs, many people are in fact strongly sion SUV in the wake of gasoline price increases; and influenced by them. (Someone who receives an expensive, why thermostats are generally set lower in apartments but painfully tight, pair of shoes as a gift is much less that have separately metered utilities. ffrraa2211669933__ffmm__ii--xxxx..iinndddd PPaaggee iixx 1111//2266//1133 99::3300 AAMM ff--449966 //220033//MMHH0022001166//ffrraa2211669933__ddiisskk11ooff11//00007788002211669933//ffrraa2211669933__ppaaggeeffiilleess PREFACE ix And yet, as students are keenly aware, our Homo the longer a student had studied economics. Question- economicus caricature is patently at odds with much of naire responses also indicated that freshmen in their what we know about human behavior. People vote in first microeconomics course were more likely at the end presidential elections. They give anonymously to public of the term to expect opportunistic behavior from oth- television stations and private charities. They donate ers than they were at the beginning. bone marrow to strangers with leukemia. They endure There are thus at least some grounds for concern great trouble and expense to see justice done, even that, by stressing only the narrow self-interest motive, when it will not undo the original injury. At great risk economists may have undermined our students’ pro- to themselves, they pull people from burning buildings, pensities for cooperative behavior. The irony is that the and jump into icy rivers to rescue people who are about internal logic of the economic model never predicted to drown. Soldiers throw their bodies atop live gre- such narrowly self-interested behavior in the first place. nades 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 trav- ADDITIONAL PEDAGOGICAL eling in square orbits. Indeed, many students are strongly alienated by our self-interest model, which FEATURES they perceive as narrow and mean-spirited. Unlike most intermediate texts, Microeconomics and Microeconomics and Behavior freely concedes the Behavior contains no boxed applications, which tend importance of the self-interest motive in many contexts. to distract students from the thread of argument being But it also highlights the role of unselfish motives in developed. Instead, applications and examples are inte- social and economic transactions. Employing elemen- grated fully into the text. Many of these have the added tary game theory, Chapter 12 identifies circumstances advantage of being drawn from experiences to which in which people who hold such motives have a com- students can personally relate. petitive advantage over pure opportunists. It shows, for The chapter introductions and summaries are an- example, that people known to have cooperative pre- other innovative feature of Microeconomics and Behav- dispositions can often solve prisoner’s dilemmas and ior. Most chapters begin with an anecdote that poses a other commitment problems in ways that purely self- problem or question that the material developed in the interested persons cannot. chapter will enable the student to answer. These intro- Our theoretical models of human nature are im- ductions have proved especially helpful for the many portant, not least because they mold our expectations students who find that getting started is often the hard- about how others will behave. Economics is the social est step. The chapter summaries in most current texts science most closely identified with the self-interest consist of brief annotated lists of the topics covered. The model of human behavior. Does this model color our chapter summaries in Microeconomics and Behavior, by expectations of others, and perhaps even our own be- contrast, are written in a narrative form that carefully havior? When Cornell psychologists Tom Gilovich, synthesizes the material covered in the chapters. Dennis Regan, and I investigated this question, we Each chapter concludes with a selection of problems found numerous indications that economists are much that range in difficulty from routine to highly challeng- more likely than others to behave opportunistically in ing. These problems have all been class-tested to assure social dilemmas.1 For example, academic economists their accuracy and effectiveness in helping students mas- were more than twice as likely as the members of any ter the most important concepts in the chapters. other discipline we surveyed to report that they give no Answers to all in-text concept checks appear at the money at all to any private charity. In an experiment, end of the chapter in which they occur. Variations and we also found that economics majors were more than extensions of these concept checks are echoed in the twice as likely as nonmajors to defect when playing end-of-chapter problems, which enables students to one-shot prisoner’s dilemmas with strangers. approach these problem sets with greater confidence. This difference was not merely a reflection of the Detailed answers to all end-of-chapter problems are fact that people who chose to major in economics were included in the instructor’s manual. more opportunistic to begin with. We found, for ex- Evidence suggests that introductory economics ample, that the difference in defection rates grew larger courses leave little measurable trace on the students who take them. Six months after having taken them, 1See R. H. Frank, T. D. Gilovich, and D. T. Regan, “Does Studying for example, students score no better on tests that Economics Inhibit Cooperation?” Journal of Economics Perspectives, Spring 1993. probe their knowledge of basic economic principles