ASHORTCOURSEIN INTERMEDIATE MICROECONOMICS WITH CALCULUS. allan

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1 ASHORTCOURSEIN INTERMEDIATE MICROECONOMICS WITH CALCULUS Roberto Serrano 1 and Allan M. Feldman 2 allan feldman@brown.edu c 2010, 2011 Roberto Serrano and Allan M. Feldman All rights reserved 1 Department of Economics, Brown University, Providence, RI 02912, U.S.A. and IMDEA-Social Sciences Institute, Madrid, Spain 2 Department of Economics, Brown University, Providence, RI 02912, U.S.A. 1

2 Table of Contents Preface (3 pp., 976 words) Lesson 1. Introduction (3 pp words) Lesson 2. Preferences and Utility (23 pp. including 10 figures, 6400 words) 2.1 Introduction 2.2 The preference relation. Assumptions on preferences: Completeness Transitivity Monotonicity Convexity of indifference curves 2.3 The marginal rate of substitution 2.4 Utility functions 2.5 Utility functions and the marginal rate of substitution 2.6 A solved problem Exercises (5) Appendix: Differentiation of functions Lesson 3. The Budget Constraint and the Consumer s Optimal Choice (24 pp. including 8 figures, 6744 words) 3.1 Introduction 3.2 The standard budget constraint, the budget set and the budget line 1

3 3.3 Shifts of the budget line 3.4 Odd budget constraints for-1 store coupons Ration coupons 3.5 Income and consumption over time, with income this year only 3.6 Income and consumption over time, with income this year and next year 3.7 The consumer s optimal choice: graphical analysis Special case: MRS not defined Special case: corner solution 3.8 The consumer s optimal choice: utility maximization subject to a budget constraint Brute force method Use-the-graphs method Lagrange function method 3.9 Two solved problems Appendix: Maximization subject to a constraint: the Lagrange function method Lesson4.DemandFunctions (23 pp. including 14 figures, 6846 words) 4.1 Introduction 4.2 Demand as a function of income 4.3 Demand as a function of price Inverse demand 2

4 4.4 Demand as a function of price of the other good 4.5 Substitution and income effects 4.6 The compensated demand curve 4.7 Elasticity 4.8 The market demand curve 4.9 A solved problem Lesson 5. Supply Functions for Labor and Savings (21 pp. plus 11 figures, 7847 words) 5.1 Introduction to the supply of labor 5.2 Choice between consumption and leisure The budget constraint Preferences 5.3 Substitution and income effects in labor supply 5.4 Other types of budget constraints Non-labor income Unemployment benefits Overtime 5.5 Taxing the consumer s wages 5.6Savingandborrowing 5.7 Intertemporal choice of consumption The budget constraint 3

5 5.8 The supply of savings 5.9 A solved problem Lesson 6. Welfare Economics 1: The One-Person Case (19 pp. plus 5 figures, 7349 words) 6.1 Introduction 6.2 Welfare comparison of a per unit tax and an equivalent lump sum tax 6.3 Rebating a per unit tax 6.4 Measuring a change in welfare for one person Measuring one consumer s welfare change in dollars, when one price rises, for a simple product utility function 6.5 Measuring welfare change for many people, a preliminary example Measuring society s preference for one program over another. Should schools teach music or art (if they cannot afford both)? 6.6 A solved problem Appendix: Revealed preference Lesson 7. Welfare Economics 2: The Many-Person Case (16 pp. plus 5 figures, 6032 words) 7.1 Introduction 7.2 Quasilinear preferences 7.3 Consumer s surplus 7.4 A consumer s surplus example with quasilinear preferences 4

6 7.4.1 A quasilinear utility function, when one price rises; compensating variation, equivalent variation, and the change in consumer s surplus 7.5 Consumers surplus Build a bridge? 7.6 A last word on the quasilinearity assumption 7.7 A solved problem Lesson 8. Theory of the Firm 1: The Single-Input Model (21 pp. plus 10 rough figures, 7533 words) 8.1 Introduction 8.2 The competitive firm s problem, focusing on its output The production function Price or market constraints Profit Total cost, average cost and marginal cost Profit maximization with output as the choice variable 8.3 The competitive firm s problem, focusing on its input Marginal product and average product Profit maximization with input as the choice variable 8.4 Multiple outputs 8.5. A solved problem 5

7 Lesson 9. Theory of the Firm 2: The Long Run, Multiple-Input, Single-Output Model (22 pp. plus 10 figures, 8287 words) 9.1 Introduction 9.2 The production function in the long run Marginal products of inputs, and assumptions about isoquants Technical rate of substitution Returns to scale Marginal products and TRS in the constant returns to scale case 9.3 Cost minimization in the long run Isocost lines and the condition for cost minimization The relation between long run cost curves and returns to scale 9.4 Profit maximization in the long run Returns to scale and long run supply 9.5 A solved problem Lesson 10. Theory of the Firm 3: The Short Run, Multiple-Input, Single-Output Model (12 pp. plus 5 figures, 4147 words) 10.1 Introduction 10.2 The production function in the short run 10.3 Cost minimization in the short run 10.4 Profit maximization in the short run 10.5 A solved problem Exercises (2) 6

8 Lesson 11. Perfectly Competitive Markets (24 pp. plus 11 figures, 9605 words) 11.1 Introduction 11.2 Perfect competition Price-taking behavior Homogeneous goods Perfect information Free entry and exit in the long run 11.3 Industry supply Two firms with different cost curves Large number of identical firms 11.4 Equilibrium in a competitive market 11.5 Competitive equilibrium and social surplus maximization 11.6 The deadweight loss of a per unit tax Effects of a per unit tax in the short run Long run effects of per unit tax 11.7 A solved problem Lesson 12. Monopoly and Monopolistic Competition (24 pp. plus 6 figures, 8968 words) 12.1 Introduction 12.2 The classical solution to monopoly 12.3 Deadweight loss from monopoly: comparing monopoly and competition 12.4 Price discrimination 7

9 Common or third degree price discrimination Perfect or first degree price discrimination 12.5 Monopolistic competition 12.6 A solved problem Lesson 13. Duopoly (23 pp. plus 6 figures, 8070 words) 13.1 Introduction 13.2 Cournot competition Comparison with monopoly and competition 13.3 More on dynamics 13.4 Collusion 13.5 Stackelberg competition 13.6 Bertrand competition Homogeneous goods case Differentiated goods case 13.7 A solved problem Lesson 14. Game Theory (23 pp. plus 7 figures, 9510 words) 14.1 Introduction 14.2 The prisoners dilemma game, and the idea of dominant strategy equilibrium 8

10 14.3 Prisoners dilemma complications: experimental evidence and repeated games 14.4 The battle of the sexes game, and the idea of Nash equilibrium 14.5 Battle of the sexes complications: multiple or no Nash equilibria, and mixed strategies 14.6 The expanded battle of the sexes, when more opportunities make players worse off 14.7 Sequential move games 14.8 Threats 14.9 A solved problem Lesson 15. An Exchange Economy (24 pp. plus 9 figures, 8798 words) 15.1 Introduction 15.2 An economy with two consumers and two goods 15.3 Pareto efficiency Feasible allocations and the Edgeworth box Tangencies of indifference curves and the Edgeworth box 15.4 Competitive or Walrasian equilibrium 15.5 The two fundamental theorems of welfare economics First fundamental theorem of welfare economics Second fundamental theorem of welfare economics 15.6 A solved problem 9

11 Lesson 16. A Production Economy (21 pp. plus 8 figures, 7799 words) 16.1 Introduction 16.2 A Robinson Crusoe production economy 16.3 Pareto efficiency 16.4 Walrasian or competitive equilibrium The firm The consumer 16.5 When there are two goods, bread and rum 16.6 The two welfare theorems revisited First fundamental theorem of welfare economics Second fundamental theorem of welfare economics 16.7 A solved problem Lesson 17. Externalities (24 pp. plus 2 figures, 8630 words) 17.1 Introduction 17.2 Examples of externalities Hip-hop music Flowers in your neighbor s garden Motorcycles with aftermarket pipes Food consumption by people you care about A steel producer on a river 10

12 Fossil fuels and global warming 17.3 The steel producer and the fish farm 17.4 Classical solutions to the externality problem: Pigou and Coase Pigouvian taxes and subsidies Coasian property rights 17.5 Modern solutions for the externality problem: Markets for pollution rights 17.6 Modern solutions for the externality problem: cap and trade 17.7 A solved problem Lesson 18. Public Goods (24 pp. plus 3 figures, 9197 words) 18.1 Introduction 18.2 Examples of public goods National defense Lighting on a city street Fire departments Broadcast television Public parks, public libraries, public monuments Public education, public health Scientific and technical knowledge 18.3 A simple model of an economy with a public good 18.4 The Samuelson optimality condition 18.5 The free rider problem and voluntary contribution mechanisms 18.6 How to get efficiency in economies with public goods 11

13 Command policies Wicksell/Lindahl taxes and the Lindahl equilibrium Demand-revealing taxes 18.7 A solved problem Lesson 19. Uncertainty and Expected Utility (16 pp. plus 2 figures, 5967 words) 19.1 Introduction and examples Used cars New cars Your college Dangerous activities Life insurance and annuities Investments Gambling 19.2 Von Neumann-Morgenstern expected utility. Preliminaries 19.3 Von Neumann-Morgenstern expected utility. Assumptions and conclusion Completeness and transitivity of preferences Continuity Independence Unequal probabilities Compound lotteries (complexity) Von Neumann-Morgenstern expected utility theorem 12

14 19.4 Von Neumann-Morgenstern expected utility. Examples Example showing von Neumann-Morgenstern utility is not ordinal A risk averse consumer A risk loving consumer A risk neutral consumer 19.5 A solved problem Lesson 20. Uncertainty and Asymmetric Information (20 pp. plus 0 figures, 7833 words) 20.1 Introduction 20.2 When sellers know more than buyers: the market for lemons 20.3 When buyers know more than sellers: a market for health insurance Health insurance/adverse selection example 20.4 When insurance encourages risk taking: moral hazard Driving while on cell phone/moral hazard example 20.5 The principal-agent problem Principal-agent example 20.6 What should be done about market failures caused by asymmetric information? Signaling devices Screening contracts Monitoring The legal system 20.7 A solved problem 13