Microeconomics Spring 2020

Microeconomics, 212.201, Spring 2020

[Updated 9 March 2020]

Course web page

https://sites.google.com/site/oyvindthomassen/micro20

Important message:

As decided by the university, the start of the term has been postponed to Monday 16 March, and the last week of term is the week starting Monday 15 June.

Because the semester is one week shorter, we will skip the mid-term exam. Therefore, there will only be one exam, held 08:15~10:45 on Monday 15 June.

For as long as the university maintains a 'no face-to-face instruction' policy --- currently the period 16 ~ 29 March, but this may be extended --- there will be no lectures. Instead we will do the following:

• • Each week, by Monday 7 a.m. at the latest, I will post lecture notes in pdf format covering the material of the week on this web page, under the relevant week in the Lecture Plan below. (When I taught this course last semester, I taught exclusively using the whiteboard, so I need to write new notes in pdf in response to the new 'no face-to-face instruction' policy.)

  • Carefully study both the lecture notes and the relevant readings in the textbook (see the Lecture Plan below). Use the lecture notes (as well as page numbers for the textbook) as guidance on which things you need to learn and which things you can ignore (the textbook has more detail than we need in some places). Also see the study tips below.

  • On the Sunday of every other week, you should hand in an essay (in English) of 2-5 pages, preferably typewritten, that summarizes the material covered in the two-week period ending on that Sunday (see the Lecture Plan below).  The essay should be submitted through ETL and each student will receive feedback on the essay. The first essay is due by midnight Sunday 29 March. Some further information about how to submit the essay on ETL will be provided once the practical details have been sorted out.

  • The essay will be graded simply pass/fail. In the essay you should explain, with your own words, the material of the two-week period, as if you were explaining it to a fellow student. You have a lot of freedom in deciding exactly what to include and how to explain it, but to pass, you should show some evidence that you have engaged seriously with the material. Therefore you may fail if you simply copy text word-by-word from a textbook, from my lecture notes, or from another student. Deciding what is important and finding a way to explain it will be useful for your own understanding of the material. It is compulsory to hand in the essay. Failure to do so may result in a grade F in the course. 

  • I will answer questions on the material via the following email address: <oyvind.thomassen@gmail.com>. 

Some general guidance of how to study:

• • All students who take this course have already successfully passed many difficult exams. Therefore you probably already know what works for you. But here are some suggestions, in case any of it is useful for you.

  • You do not need to know everything that is in the textbook or to be able to solve every problem in the book. In this course we cover a lot of material/concepts, and to do well on the exam, it is enough to be able to use a concept in a simple, standard setting. You don't need to know all kinds of subtle details. Some of the problems in the book are tricky because they look at special cases etc. For instance, there is a lot of different utility functions, but the most important thing is that you are able to apply the different concepts (e.g. MRS, utility maximization, indirect utility function etc.) for a simple utility function like Cobb-Douglas.

  • If you get stuck and cannot understand a paragraph in the notes or the textbook, do the following, and remember that learning only happens through your own work, and not by having someone else give you the answer: (1) Read the paragraph multiple times, trying to find out exactly which statement you do not understand. (2) Write down the explanation in your own words and see how far you get before things stop making sense to you. (3) Usually the paragraph uses concepts or statements that have been explained earlier in the text. Go back to these earlier places in the text and make sure you understand, preferably by writing out the definitions and/or explanations on a piece of paper. In this process you may realize that there were things you thought you understood, but you didn't. (4) See if you can find a better explanation in the lecture notes if you were reading the textbook, or the other way around. (5) If you are still stuck, move on and try again after a day or two. (6) If you are still stuck, email me, and I will try to help.

  • Most people learn by somehow struggling with the material. You need to challenge yourself, for instance by solving a utility maximization problem or writing down an explanation of some argument, without looking at the textbook. Simply reading or memorizing is not enough, even if you do it 100 times. It is simply too easy to trick yourself into thinking that you understand.

  • You need to learn things better than you think. Once you think you know something, practice writing down the explanation or derivation another time. If you are going to compete in a 100m swim, you are not content to be able to swim 100m. Instead you keep practicing, perfecting your technique. When studying you need to do the same.

  • To help learn and remember things, the "Feynman Technique", as explained in steps 1-4 here https://mattyford.com/blog/2014/1/23/the-feynman-technique-model may be useful.

Time and place for lectures (once 'no face-to-face instruction' policy ends)

Mon. (09:30~10:45)

Wed. (09:30~10:45),

Building 16, room 237

Exam date

Final exam Monday 15 June 08:15~10:45

Content

This course is intended as a somewhat technical introduction to some core topics of microeconomics: such as consumer theory, producer theory, competitive markets, imperfect competition, game theory and asymmetric information.

Prerequisites

It is useful to know the basics of constrained optimization (Lagrangian function etc.), for instance from the course Mathematics for Economists (212.214). Differentiation / partial derivatives and integration will be used in the course. It is also useful, but not necessary, to have some previous knowledge of microeconomics.

Grading

Course grade = final exam score, provided that you pass all essays during 'no face-to-face instruction' period.

Attendance

You are expected and encouraged to come to all lectures, once  'no face-to-face instruction' policy ends, but there will be no attendance check.

Reading

The lectures will be based on

Nicholson and Snyder: Microeconomic Theory. Basic Principles and Extensions. 12th / 11th / 10th edition. (You can use any of these editions, but page numbers in the reading list refer to the 11th edition, since it is the most recent edition freely available online.) You should be able to find pdf of the 11th or 10th edition on the internet by googling the title.

(Note that there is different textbook by the same authors called Intermediate Microeconomics. Make sure you do not buy that book by mistake.)

Lecture Plan

Chapter and page numbers refer to Nicholson and Snyder: Microeconomic Theory. Basic Principles and Extensions. 11th edition. In the 12th and 10th editions, chapter numbers are the same, but page numbers slightly different.

Week 1 (16 - 22 March)

Lecture notes: notes1_consumer_theory

Pages 12-15 of the notes contain solutions to problems, so print only p. 1-11 if you do not wish to print the solutions.

The notes and the relevant pages in the textbook (see below) both contain everything you need to know, but with slightly different expositions. I would recommend that you study both, perhaps starting with the lecture notes. The lecture notes have some problems incorporated in the text. I would recommend that you try to solve each problem when you encounter it in the text, rather than reading everything first and then do the problems. Also, make sure you work seriously on each problem before checking the solution.

Chapters / topics:

Ch. 3 and 4. Preferences, utility maximization.

Pages to read:

• • 89 - 106 (all of ch. 3)

  • 117 - 128 (from ch. 4)

Covered in the lecture:

• preferences

• utility function

• indifference curve

• marginal rate of substitution (MRS)

• interpretation of diminishing MRS

• utility maximization using Lagrangian implies that MRS = ratio of prices

• graphically, slope of indifference curve equals slope of budget line

• some intuition for why (x1,x2) where MRS > price ratio or MRS < price ratio cannot be optimal

• exceptions: if MRS is not diminishing everywhere, or if it is optimal to choose a zero quantity of one good

• solve utility maximization problem for simple Cobb-Douglas utility function

Week 2 (23 - 29 March)

Lecture notes: notes2_consumer_theory2

Pages 14-18 contain solutions to the problems.

Note about maths: this week's material contains some calculations using very basic integration. If you have not learned integration before, I just want to point out that we will not use it a lot, and you can do very well in the course without even learning it. In any case, all you really need to know is in this short note: integration_primer.docx

Chapters / topics: Demand functions, consumer surplus.

Ch. 4, 5 and 6.

Pages to read:

• • 128 - 135 (the rest of ch. 4)

  • 145 - 157 (until 'Shepard's lemma')

  • 158 - 159

  • 163 - 164 (from 'Demand elasticities')

  • 169 - 174 (from 'Consumer surplus'; skip 'Using the compensated demand curve to show CV'; until 'Revealed preference ...' )

  • 190 (only 'Gross (Marshallian) substitutes and complements')

Covered in the lecture:

• a bit more on why MRS = price ratio

• indirect utility function

• solving the expenditure minimization problem using Lagrangian

• expenditure function

• (Marshallian) demand function and demand curve

• compensated (Hicksian) demand function

• substitution effect and income effect

• compensating variation

• consumer surplus

• gross substitutes and complements

Week 3 (30 March - 5 April)

Lecture notes: notes3_producer_theory

Pages 9-13 contain solutions to problems.

Chapters / topics:

Ch. 9, 10, 11: Production, cost minimization, profit

Pages to read:

• • 303 - 308 (only first paragraph of 'Reasons for a diminishing RTS')

  • 310 (definition only)

  • 316  - 319

  • 333 - 342 (first paragraph only on p. 342)

  • 345 - 347 (Example 10.2)

  • 355 (from 'Short-run, long-run distinction') - 362

  • 371 - 377

Covered in the lecture:

• production function

• isoquant

• marginal rate of technical substitution (RTS)

• returns to scale

• (economic) cost

• cost minimization (for a given level of output)

• total, average and marginal cost functions

• MC = AC if and only if AC'(q)=0

• short-run cost minimization (capital input fixed)

• (economic) profit

• MR = MC at profit maximizing choice of output

Week 4 (6 - 12 April)

Lecture notes: notes4_market_demand_supply

Solutions to problems are on p. 12-16.

Chapters / topics:

Ch. 11 and 12: Market demand and supply, equilibrium, producer surplus

Pages to read:

• • 380 - 389 (only until 'Profit maximization and input demand')

  • 409 - 421

  • 425 - 430

  • 435 - 437

Covered in the lecture:

• market supply function

• market demand function

• perfect competition

• short-run equilibrium

• long-run equilibrium

• producer surplus

Week 5 (13 - 19 April)

Lecture notes: notes5_monopoly

Solutions to problems are on p. 14-17.

Chapters / topics:

Ch. 11, 14 :  Lerner index, monopoly

Pages to read:

• • 377 - 380

  • 501 - 509

  • 513 - 517

Covered in the lecture:

• elasticity of demand

• MR = p(1 + 1/e)

• Lerner index: (p-mc)/p = 1/|e|

• monopoly

• perfect price discrimination

• third-degree price discrimination

Week 6 (20 - 26 April)

Lecture notes: notes6_game_theory_I

Solutions to problems  are on p. 11-14.

Chapters / topics:

Ch. 8: Game Theory

Pages to read: 

• • 251 - 260

  • 265 - 268 (Continuum of actions)

Covered in the lecture:

• basics of a game: players, strategies, payoffs, normal form

• prisoners' dilemma

• best response

• Nash equilibrium

• underlining best-response payoffs 

• dominant strategy and dominant strategy equilibrium

• tragedy of the commons / sheep grazing game (continuous actions)

• ballet/boxing game (no dominant strategy)

• rock/paper/scissors game (no Nash equilibrium)

Week 7 (27 April - 3 May)

Lecture notes: notes7_game_theory_II

Solutions to problems are on p. 13-16

Chapters / topics:

Ch. 8: Game Theory

Pages to read: 

• • 260 - 265

  • 268 - 274

  • 277 - 282

Covered in the lecture:

• mixed strategies

• sequential ballet/boxing game

• normal form of sequential game

• extensive form

• subgame perfect equlibrium

• backward induction

• simultaneous game with incomplete information

• Bayesian Nash equilibrium

Week 8 (4 - 10 May)

Lecture notes: notes8_imperfect_competition_I

Solutions to problems are on p. 11-14.

Chapters / topics:

Ch. 15: Imperfect Competition

Pages to read:

• • 531 - 540 (until 'Capacity Constraints')

  • 541 - 547 (from 'Product Differentiation' until 'Tacit Collusion')

Covered in the lecture:

• Bertrand (two firms with identical products choose prices)

• Cournot (two firms with identical products choose output quantities)

• Bertrand with differentiated products

• Hotelling (ice cream sellers on a beach) price game with fixed locations

Week 9 (11 - 17 May)

Lecture notes: notes9_imperfect_competition_II

Solutions to problems are on p. 8-9.

Chapters / topics:

Ch. 15: Imperfect Competition

Pages to read:

• • 551 - 559 (until 'Signaling')

Covered in the lecture:

• Hotelling two-stage game (stage 1: location; stage 2: prices)

• Stackelberg model (sequential quantity game)

• Price leadership model (sequential price game)

• Stackelberg game with entry deterrence (when follower incurs sunk cost at entry)

Week 10 (18 - 24 May)

Lecture notes: notes10_asymmetric_information_I

Solutions to problems are on p. 8-9.

Chapters / topics:

Ch. 18: Asymmetric Information

Pages to read: 

• • 641 - 650

Covered in the lecture:

• Hidden action (or moral hazard) model: owner-manager

Week 11 (25 - 31 May)

Lecture notes: notes11_asymmetric_information_II

Solutions to problems are on p. 7-9.

Chapters / topics:

Ch. 18: Asymmetric Information

Pages to read:

• 655 - 663

Covered in the lecture: 

• Hidden type (or adverse selection) model: nonlinear pricing

Week 12 (1 - 7 June)

Lecture notes: notes12_signalling

Chapters / topics:

Ch. 8: Signalling games

Pages to read:

• • 282 - 288

Covered in the lecture: 

• Bayes' rule for updating beliefs in signalling game

• General definition of separating, pooling and hybrid equilibrium

• Signalling model: job market signalling (applicant has private information about skill level)

Week 13 (8 - 14 June)

Lecture notes: notes13_capital_time

Chapters / topics:

Ch. 17: Capital and Time

Pages to read:

• • 631 - 635 (Appendix 'Mathematics of Compound Interest', not including 'Duration')

  • 607 - 612 (particularly example 17.1)

Week 14 (15 June - end of semester) - Final exam Monday 15 June 08:15~10:45