Microeconomics and Behavior, 10th Edition PDF by Robert H Frank

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Microeconomics and Behavior, Tenth Edition

By Robert H. Frank

Microeconomics and Behavior, 10th Edition PDF by Robert H Frank

Contents:

PART 1 Introduction

Chapter 1 Thinking Like an Economist 1

The Cost-Benefit Approach to Decisions 2

The Role of Economic Theory 3

Common Pitfalls in Decision Making 4

Pitfall 1. Ignoring Implicit Costs 4

Pitfall 2. Failing to Ignore Sunk Costs 6

Pitfall 3. Measuring Costs and Benefits as Proportions

Rather Than Absolute Dollar Amounts 9

Pitfall 4. Failure to Understand the Average-Marginal Distinction 10

Using Marginal Benefit and Marginal Cost Graphically 12

The Invisible Hand 13

Self-Interest and Homo Economicus 14

The Economic Naturalist 15

ECONOMIC NATURALIST 1.1 16

ECONOMIC NATURALIST 1.2 16

Should You Think Like an Economist? 17

Microeconomics and Macroeconomics 17

Summary 18 ∙ Key Terms 18 ∙ Review

Questions 18 ∙ Problems 19 ∙ Answers to

Self-Texts 21

Chapter 2 Supply and Demand 23

Chapter Preview 23

Supply and Demand Curves 24

Equilibrium Quantity and Price 27

Adjustment to Equilibrium 28

Some Welfare Properties of Equilibrium 29

Free Markets and The Poor 30

Rent Controls 32

Price Supports 34

The Rationing and Allocative Functions of Prices 35

Determinants of Supply and Demand 36

Determinants of Demand 36

Determinants of Supply 37

Changes in Demand versus Changes in the Quantity

Demanded 38

Predicting and Explaining Changes

in Price and Quantity 39

ECONOMIC NATURALIST 2.1 39

The Algebra of Supply and Demand 40

Summary 41 ∙ Key Terms 42 ∙ Review

Questions 42 ∙ Problems 43 ∙ Answers to Self-

Tests 44 ∙ APPENDIX: How do Taxes Affect Equilibrium

Prices and Quantities? 45 ∙ Problems 48 ∙ Answers to

Appendix Self-Tests 50

PART 2 The Theory of Consumer Behavior

Chapter 3 Rational Consumer Choice 51

Chapter Preview 52

The Opportunity Set or Budget Constraint 52

Budget Shifts Due to Price or Income Changes 54

Budgets Involving More Than Two Goods 56

Kinked Budget Constraints 57

If the Budget Constraint Is the Same, the Decision Should

be the Same 58

Consumer Preferences 59

Indifference Curves 61

Trade-offs between Goods 64

Using Indifference Curves to Describe Preferences 65

The Best Feasible Bundle 65

Corner Solutions 67

Indifference Curves When There Are

More Than Two Goods 69

An Application of the Rational Choice Model 69

ECONOMIC NATURALIST 3.1 71

Summary 72 ∙ Key Terms 72 ∙ Review

Questions 73 ∙ Problems 73 ∙ Answers to Self-

Tests 75 ∙ APPENDIX: The Utility Function Approach to the Consumer Budgeting Problem 77

The Utility Function Approach to Consumer Choice 77

Cardinal Versus Ordinal Utility 81

Generating Indifference Curves Algebraically 83

Using Calculus to Maximize Utility 83

The Method of Lagrangian Multipliers 83

An Alternative Method 85

A Simplifying Technique 85

Problems 86

Chapter 4 Individual and Market Demand 87

Chapter Preview 87

The Effects of Changes in Price 88

The Price-Consumption Curve 88

The Individual Consumer’s Demand Curve 89

The Effects of Changes in Income 90

The Income-Consumption Curve 90

The Engel Curve 90

Normal and Inferior Goods 91

The Income and Substitution Effects of a Price Change 92

Giffen Goods 94

Consumer Responsiveness to Changes in Price 97

Market Demand: Aggregating Individual Demand

Curves 100

Price Elasticity of Demand 103

A Geometric Interpretation of Price Elasticity 103

The Unit-Free Property of Elasticity 105

Some Representative Elasticity Estimates 105

Elasticity and Total Expenditure 107

Determinants of Price Elasticity of Demand 110

The Dependence of Market Demand on Income 112

ECONOMIC NATURALIST 4.1 115

Application: Forecasting Economic Trends 116

Cross-Price Elasticities of Demand 116

Summary 117 ∙ Key Terms 118 ∙ Review Questions 119 ∙

Problems 119 ∙ Answers to Self-Tests 121 ∙ APPENDIX:

Additional Topics in Demand Theory 123

The Constant Elasticity Demand Curve 123

Segment-Ratio Method 124

The Income-Compensated Demand Curve 126

Answers to Appendix Self-Tests 127

Chapter 5 Applications of Rational Choice and Demand Theories 129

Chapter Preview 129

Using the Rational Choice Model to Answer Policy Questions 130

Application: A Gasoline Tax and Rebate Policy 130

Application: School Vouchers 132

Consumer Surplus 134

Using Demand Curves to Measure Consumer Surplus 134

Application: Two-Part Pricing 136

ECONOMIC NATURALIST 5.1 136

ECONOMIC NATURALIST 5.2 137

Overall Welfare Comparisons 138

Application: The Welfare Effects of Changes in Housing Prices 139

Application: A Bias in the Consumer Price Index 140

Quality Change: Another Bias in the CPI? 142

Using Price Elasticity of Demand 143

Application: The MARTA Fare Increase 143

Application: The Price Elasticity of Demand for Alcohol 144

The Intertemporal Choice Model 145

Intertemporal Consumption Bundles 145

The Intertemporal Budget Constraint 146

Intertemporal Indifference Curves 147

Application: The Permanent Income and Life-Cycle

Hypotheses 150

Application: The Social Cost of Carbon 151

Factors Accounting for Differences in Time Preference 154

Summary 155 ∙ Key Terms 156 ∙ Review Questions 156 ∙

Problems 156 ∙ Answers to Self-Tests 158

Chapter 6 The Economics of Information

and Choice under Uncertainty 161

Chapter Preview 161

The Economics of Information 162

Communication between Potential Adversaries 162

The Costly-to-Fake Principle 163

Product Quality Assurance 163

Choosing a Trustworthy Employee 164

Choosing a Hard-Working, Smart Employee 165

Choosing a Relationship 165

ECONOMIC NATURALIST 6.1 165

Conspicuous Consumption as Ability Signaling 166

ECONOMIC NATURALIST 6.2 166

The Full-Disclosure Principle 167

Product Warranties 168

Regulating the Employment Interviewer 168

The Lemons Principle 169

ECONOMIC NATURALIST 6.3 169

The Stigma of the Newcomer 170

Choice Under Uncertainty 170

Probability and Expected Value 170

The Von Neumann–Morgenstern Expected Utility

Model 172

Are Entrepreneurs Risk-Seeking? 179

Insuring Against Bad Outcomes 180

Risk Pooling 180

Adverse Selection 182

ECONOMIC NATURALIST 6.4 183

Moral Hazard 184

Statistical Discrimination 185

Application: Always Self-Insure against Small

Losses 186

Can We Insure against Climate Catastrophe 187

Summary 188 ∙ Key Terms 188 ∙ Review Questions 189 ∙

Problems 189 ∙ Answers to Self-Tests 191 ∙ APPENDIX:

Search Theory and the Winner’s Curse 193

The Search for High Wages and Low Prices 193

The Winner’s Curse 197

Some Pitfalls for the Expected Utility Maximizer 200

Problems 202 ∙ Answers to Appendix Self-Tests 202

Chapter 7 Departures from Standard Rational

Choice Models (With and Without Regret) 203

Chapter Preview 204

Present Aim and Self-Interest Standards of Rationality 204

An Application of the Present-Aim Standard: Altruistic

Preferences 205

The Strategic Role of Preferences 207

How Strategic Preferences Can Help Solve Commitment

Problems 208

A Simple Thought Experiment 210

Tastes Not Only Can Differ, They Must Differ 211

ECONOMIC NATURALIST 7.1 212

Application: Predicting Variations in Voter Turnout 212

Application: Concerns about Fairness 213

The Importance of Tastes 215

Departures from Traditional Rational Choice

Models (With Regret) 216

Bounded Rationality 217

The Asymmetric Value Function 218

Sunk Costs 220

Out-of-Pocket Costs Versus Implicit Costs 220

Affective Forecasting Errors 221

Judgmental Heuristics and Biases 223

Availability 223

Representativeness 224

ECONOMIC NATURALIST 7.2 225

Anchoring and Adjustment 226

The Psychophysics of Perception 227

The Difficulty of Actually Deciding 227

ECONOMIC NATURALIST 7.3 229

The Self-Control Pitfall 229

Cognitive Illusions and Public Policy 230

Summary 231 ∙ Key Term 232 ∙ Review Questions 233 ∙

Problems 233 ∙ Answers to Self-Tests 234

PART 3 The Theory of Firm and Market

Structure

Chapter 8 Production 235

Chapter Preview 235

The Input-Output Relationship, or Production

Function 236

Intermediate Products 237

Fixed and Variable Inputs 237

Production in the Short Run 238

ECONOMIC NATURALIST 8.1 239

Total, Marginal, and Average Products 241

The Relationships among Total, Marginal, and Average

Product Curves 242

The Practical Significance of the Average-Marginal

Distinction 244

Production in the Long Run 247

The Marginal Rate of Technical Substitution 248

Returns to Scale 250

ECONOMIC NATURALIST 8.2 251

Showing Returns to Scale on the Isoquant Map 251

The Distinction between Diminishing Returns

and Decreasing Returns to Scale 252

The Logical Puzzle of Decreasing Returns to Scale 252

Summary 253 ∙ Key Terms 253 ∙ Review

Questions 254 ∙ Problems 254 ∙ Answers to Self-

Tests 255 ∙ APPENDIX: Mathematical Extensions of

Production Theory 257

Application: The Average-Marginal Distinction 257

Isoquant Maps and the Production Mountain 260

Some Examples of Production Functions 261

The Cobb-Douglas Production Function 261

The Leontief, or Fixed-Proportions, Production

Function 262

A Mathematical Definition of Returns to Scale 263

Problems 264 ∙ Answers to Appendix Self-Tests 264

Chapter 9 Costs 265

Chapter Preview 265

Costs in the Short Run 266

Graphing the Total, Variable, and Fixed Cost Curves 268

Other Short-Run Costs 270

Graphing the Short-Run Average and Marginal Cost

Curves 271

Allocating Production Between Two Processes 275

The Relationship Among MP, AP, MC, and AVC 276

Costs in the Long Run 278

Choosing the Optimal Input Combination 278

ECONOMIC NATURALIST 9.1 280

ECONOMIC NATURALIST 9.2 282

ECONOMIC NATURALIST 9.3 283

The Relationship between Optimal Input Choice and Long-

Run Costs 283

Long-Run Costs and the Structure of Industry 286

The Relationship between Long-Run and Short-Run Cost

Curves 287

Summary 288 ∙ Key Terms 289 ∙ Review Questions 289 ∙

Problems 290 ∙ Answers to Self-Tests 291 ∙

APPENDIX: Mathematical Extensions of the Theory of

Costs 293

The Relationship Between Long-Run and Short-Run Cost

Curves 293

The Calculus Approach to Cost Minimization 296

Problems 297 ∙ Answers to Appendix Self-Test 298

Chapter 10 Perfect Competition 299

Chapter Preview 299

The Goal of Profit Maximization 300

The Four Conditions for Perfect Competition 303

The Short-Run Condition for Profit Maximization 305

The Shutdown Condition 307

The Short-Run Competitive Industry Supply 308

Short-Run Competitive Equilibrium 310

The Efficiency of Short-Run Competitive Equilibrium 312

Producer Surplus 312

Adjustments in the Long Run 316

The Invisible Hand 318

Application: The Cost of Extraordinary Inputs 319

The Long-Run Competitive Industry Supply Curve 321

Long-Run Supply Curve with U-Shaped LAC Curves 321

Industry Supply when Each LAC Curve is Horizontal 322

How Changing Input Prices Affect Long-Run Supply 322

ECONOMIC NATURALIST 10.1 324

The Elasticity of Supply 325

Applying the Competitive Model 326

Price Supports as a Device for Saving Family Farms 326

The Illusory Attraction of Taxing Business 328

The Adoption of Cost-Saving Innovations 329

ECONOMIC NATURALIST 10.2 330

Summary 330 ∙ Key Terms 331 ∙ Review Questions 331 ∙

Problems 332 ∙ Answers to Self-Tests 333

Chapter 11 Monopoly 335

Chapter Preview 335

Defining Monopoly 336

Five Sources of Monopoly 337

Information as a Growing Source of Economies

of Scale 340

The Profit-Maximizing Monopolist 341

The Monopolist’s Total Revenue Curve 341

Marginal Revenue 343

Marginal Revenue and Elasticity 345

Graphing Marginal Revenue 346

Graphical Interpretation of the Short-Run Profit

Maximization Condition 347

A Profit-Maximizing Monopolist Will Never Produce on the

Inelastic Portion of the Demand Curve 349

The Profit-Maximizing Markup 349

The Monopolist’s Shutdown Condition 349

A Monopolist has No Supply Curve 351

Adjustments in the Long Run 351

Price Discrimination 352

Sale in Different Markets 352

ECONOMIC NATURALIST 11.1 354

ECONOMIC NATURALIST 11.2 355

The Perfectly Discriminating Monopolist 355

Second-Degree Price Discrimination 357

The Hurdle Model of Price Discrimination 357

The Efficiency Loss From Monopoly 359

Public Policy Toward Natural Monopoly 360

  1. State Ownership and Management 361
  2. State Regulation of Private Monopolies 362
  3. Exclusive Contracting for Natural Monopoly 364
  4. Vigorous Enforcement of Antitrust Laws 364
  5. A Laissez-Faire Policy toward Natural Monopoly 365

Does Monopoly Suppress Innovation? 368

Summary 369 ∙ Key Terms 369 ∙ Review

Questions 369 ∙ Problems 370 ∙ Answers to Self-

Tests 371

Chapter 12 A Game-Theoretic Approach to

Strategic Behavior 373

Chapter Preview 373

The Prisoner’s Dilemma: An Introduction to the Theory

of Games 374

ECONOMIC NATURALIST 12.1 376

The Nash Equilibrium Concept 378

The Maximin Strategy 379

Strategies for Repeated Play in Prisoner’s Dilemmas 380

Sequential Games 382

ECONOMIC NATURALIST 12.2 384

ECONOMIC NATURALIST 12.3 386

The Evolution of Strategic Preferences 386

A Parable of Hawks and Doves 386

The Commitment Problem 389

Illustration: The Cheating Problem 390

Summary 395 ∙ Key Terms 396 ∙ Review Questions 396 ∙

Problems 396 ∙ Answers to Self-Tests 398

Chapter 13 Oligopoly and Monopolistic

Competition 401

Chapter Preview 402

Some Specific Oligopoly Models 402

The Cournot Model 402

The Bertrand Model 405

The Stackelberg Model 406

Comparison of Outcomes 408

Competition When There are Increasing Returns to

Scale 409

Monopolistic Competition 411

The Chamberlin Model 411

Chamberlinian Equilibrium in the Short Run 412

Chamberlinian Equilibrium in the Long Run 413

Perfect Competition versus Chamberlinian Monopolistic

Competition 414

Criticisms of the Chamberlin Model 415

A Spatial Interpretation of Monopolistic Competition 415

The Optimal Number of Locations 417

ECONOMIC NATURALIST 13.1 420

The Analogy to Product Characteristics 421

Paying for Variety 421

Historical Note: Hotelling’s Hot Dog Vendors 424

Which Model Applies? 425

Consumer Preferences and Advertising 425

Summary 426 ∙ Key Terms 427 ∙ Review Questions 427 ∙

Problems 427 ∙ Answers to Self-Tests 428

PART 4 Factor Markets

Chapter 14 Labor 431

Chapter Preview 432

The Perfectly Competitive Firm’s Demand for Labor 432

Short-Run Demand 432

Long-Run Demand for Labor 433

The Market Demand Curve for Labor 434

An Imperfect Competitor’s Demand for Labor 435

The Supply of Labor 436

ECONOMIC NATURALIST 14.1 439

Is Leisure a Giffen Good? 441

The Noneconomist’s Reaction to the Labor Supply

Model 442

The Market Supply Curve 442

Monopsony 444

Minimum Wage Laws 448

Labor Unions 450

Discrimination in the Labor Market 452

Statistical Discrimination 454

The Internal Wage Structure 457

Winner-Take-All Markets 460

Summary 461 ∙ Key Terms 461 ∙ Review

Questions 462 ∙ Problems 462 ∙ Answers to Self-

Tests 464 ∙ APPENDIX: The Economics of Workplace

Safety 467

Compensating Wage Differentials: The Case

of Safety 467

Safety Choices and Relative Income 471

Problem 472

Chapter 15 Capital 473

Chapter Preview 473

Financial Capital and Real Capital 474

The Demand for Real Capital 474

The Relationship Between the Rental Rate and the

Interest Rate 475

The Criterion for Buying a Capital Good 475

Interest Rate Determination 476

Real Versus Nominal Interest Rates 477

The Market for Stocks and Bonds 478

The Efficient Markets Hypothesis 480

ECONOMIC NATURALIST 15.1 482

The Anomaly of the Investment Newsletter 482

Tax Policy and the Capital Market 484

Economic Rent 485

Peak-Load Pricing 486

Exhaustible Resources as Inputs in Production 487

Summary 489 ∙ Key Terms 489 ∙ Review

Questions 490 ∙ Problems 490 ∙ Answers to Self-

Tests 490 ∙ APPENDIX: A More Detailed Look at

Exhaustible Resource Allocation 491

Natural Resources as Inputs in Production 491

Renewable Resources 491

More on Exhaustible Resources 493

Summary 496 ∙ Review Question 496 ∙ Problems 496 ∙

Answer to Appendix Self-Test 497

PART 5 General Equilibrium and Welfare

Chapter 16 Externalities, Property Rights,

and the Coase Theorem 499

Chapter Preview 499

The Reciprocal Nature of Externalities 500

Application: External Effects from Nuclear Power

Plants 506

Property Rights 507

Private Property Laws and Their Exceptions 507

ECONOMIC NATURALIST 16.1 507

ECONOMIC NATURALIST 16.2 508

ECONOMIC NATURALIST 16.3 509

ECONOMIC NATURALIST 16.4 510

The Tragedy of the Commons 512

Externalities, Efficiency, and Free Speech 514

Positive Externalities 515

Positional Externalities 516

Limiting the Workweek 517

Savings 518

Workplace Safety 518

Taxing Externalities 519

Carbon Tax or Direct Restrictions on Emissions? 520

Taxing Positional Externalities 522

Summary 523 ∙ Review

Questions 524 ∙ Problems 524 ∙ Answers to Self-

Tests 528

Chapter 17 General Equilibrium and Market

Efficiency 529

Chapter Preview 529

A Simple Exchange Economy 530

Only Relative Prices Are Determined 536

The Invisible Hand Theorem 536

Efficiency in Production 537

Efficiency in Product Mix 539

Gains From International Trade 542

Taxes in General Equilibrium 544

Other Sources of Inefficiency 545

Monopoly 545

Externalities 546

Taxes as a Solution to Externalities and Monopoly 546

Public Goods 546

Summary 547 ∙ Key Terms 547 ∙ Review

Questions 548 ∙ Problems 548 ∙ Answers to Self-Tests 549

Chapter 18 Government 551

Chapter Preview 552

Public Goods 552

Optimal Quantity of Public Good 553

Paying for Q* 554

Private Provision of Public Goods 555

Funding by Donation 555

Sale of By-Products 556

Development of New Means to Exclude Nonpayers 557

Private Contracts 557

The Economics of Clubs 557

Public Choice 559

Majority Voting 559

Cost-Benefit Analysis 561

Rent Seeking 563

Income Distribution 564

The Rawlsian Critique 565

Reasons for Redistribution 566

Fairness and Efficiency 567

Methods of Redistribution 568

Reprise: Thinking Like an Economist 575

Summary 576 ∙ Key Terms 577 ∙ Review

Questions 577 ∙ Problems 577 ∙ Answers to Self-Tests 579

Index 581

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