06e104 Study Guide

06E:104 Microeconomic Theory
Tippie College of Business/College of Liberal Arts and Sciences Economics
Course Prepared by
Thomas Pogue, Ph.D.
3 Semester Hours 11 Written Assignments 2 Examinations Prerequisite: 06E:001 and 22M:017 or consent of instructor
06E:104
Microeconomic Theory
Copyright 2007 The University of Iowa. All rights reserved. No part of this publication may be reproduced in any form by any means without permission in writing from the publisher. n 3/87 r 10/93 r 1/98 r 05/07 r 7/07 r 5/09 r 8/10 r1/11 r1/12
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If you are a person with a disability who requires reasonable accommodations in order to participate in this program, please contact the Center for Credit Programs to discuss your needs.
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The University of Iowa
06E:104 Microeconomic Theory Tippie College of Business/College of Liberal Arts and Sciences Economics
Course Contents Section A: Course Lessons

About the Coursewriter ....................................................................................................... 6 Introduction ......................................................................................................................... 7 About This Course .................................................................................................. 7 Course Organization ............................................................................................... 7 Examinations........................................................................................................... 8 Cheating .................................................................................................................. 9 Required Course Materials ..................................................................................... 9 Web and E-mail Options ....................................................................................... 10 Evaluation and Course Grade ............................................................................... 12 Unit 1 Introduction ............................................................................................................ 13 Lesson 1 Introduction to the Study of Microeconomics .................................................. 14 What You Should Know ....................................................................................... 14 Reading and Study Assignment ............................................................................ 14 Graded Assignment ............................................................................................... 14 Unit 2 Demand, Supply, and Market Equilibrium ............................................................ 15 Lesson 2 Demand and Supply.......................................................................................... 16 What You Should Know ....................................................................................... 16 Reading and Study Assignment ............................................................................ 17 Graded Assignment ............................................................................................... 17 Lesson 3 Market Equilibrium .......................................................................................... 18 What You Should Know ....................................................................................... 18 Reading and Study Assignment ............................................................................ 18 Graded Assignment #1 .......................................................................................... 18 Lesson 4 Using Supply-Demand Analysis ...................................................................... 20 What You Should Know ....................................................................................... 20 Reading and Study Assignment ............................................................................ 21 Graded Assignment #2 .......................................................................................... 21 Unit 3 Explaining Consumer Behavior ............................................................................ 22 Lesson 5 How Consumers Choose .................................................................................. 23 What You Should Know ....................................................................................... 23 Reading and Study Assignment ............................................................................ 23 Written Assignment .............................................................................................. 24 Lesson 6 Consumers' Demand Curves............................................................................. 25 What You Should Know ....................................................................................... 25 Reading and Study Assignment ............................................................................ 25 Graded Assignment #3 .......................................................................................... 26
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Unit 4 Explaining Firm Behavior .................................................................................... 27 Lesson 7 Short Run Production and Costs....................................................................... 28 What You Should Know ....................................................................................... 28 Reading and Study Assignment ............................................................................ 29 Graded Assignment #4 .......................................................................................... 29 Lesson 8 Long Run Production and Costs ....................................................................... 30 What You Should Know ....................................................................................... 30 Reading and Study Assignment ............................................................................ 31 Graded Assignment #5 .......................................................................................... 31 Midcourse Examination ........................................................................................ 31 Unit 5 Economic Outcomes with Perfect Competition.................................................... 32 Lesson 9 Markets with Competitive Firms ...................................................................... 33 What You Should Know ....................................................................................... 33 Reading and Study Assignment ............................................................................ 34 Graded Assignment #6 .......................................................................................... 34 Lesson 10 Welfare and Policy Analysis with Competition ............................................. 35 What You Should Know ....................................................................................... 35 Reading and Study Assignment ............................................................................ 36 Written Assignment .............................................................................................. 36 Lesson 11 General Equilibrium with Competition .......................................................... 37 What You Should Know ....................................................................................... 37 Reading and Study Assignment ............................................................................ 37 Graded Assignment #7 .......................................................................................... 38 Unit 6 Economic Outcomes with Monopoly and Oligopoly .......................................... 39 Lesson 12 Monopoly........................................................................................................ 40 What You Should Know ....................................................................................... 40 Reading and Study Assignment ............................................................................ 41 Written Assignment .............................................................................................. 41 Lesson 13 Non-uniform Pricing....................................................................................... 42 What You Should Know ....................................................................................... 42 Reading and Study Assignment ............................................................................ 42 Graded Assignment #8 .......................................................................................... 43 Lesson 14 Oligopoly and Monopolistic Competition ...................................................... 44 What You Should Know ....................................................................................... 44 Reading and Study Assignment ............................................................................ 45 Graded Assignment #9 .......................................................................................... 45 Unit 7 How Markets Fail ................................................................................................. 46 Lesson 15 Externalities, Commons, and Public Goods ................................................... 47 What You Should Know ....................................................................................... 47 Reading and Study Assignment ............................................................................ 48 Graded Assignment #10 ........................................................................................ 48 Unit 8 Risk, Uncertainty and Investment ......................................................................... 50 Lesson 16 Risk and Uncertainty ...................................................................................... 51 What You Should Know ....................................................................................... 51
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Reading and Study Assignment ............................................................................ 51 Written Assignment .............................................................................................. 51 Lesson 17 Interest Rates, Investments and Capital Markets............................................ 52 What You Should Know ....................................................................................... 52 Reading and Study Assignment ............................................................................ 53 Graded Assignment #11 ........................................................................................ 53 Final Examination ................................................................................................. 53 Transcript .............................................................................................................. 53
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About the Coursewriter

Thomas F. Pogue, is Professor Emeritus of Economics, Tippie College of Business, The University of Iowa. His research, specializing in state and local government tax and expenditure policy, is widely published in academic and professional journals and books. In addition to his academic research, Professor Pogue has worked closely with political and business leaders on a number of economic policy studies. He has prepared research reports for studies of taxation in Arizona, Minnesota, and Iowa. He has directed Iowa-based studies of economic development policy, labor supply, school finance, and welfare reform. He has been director or co-director of projects funded by the U.S. Department of Housing and Urban Development, the U.S. Department of Transportation, the National Institute of Justice, the Northwest Area Foundation, and the Iowa Business Council. Professor Pogue has presented expert witness testimony in cases involving valuation of waste disposal sites, state regulation of interstate highway transport, and economic development effects of tax increment financing of public and private infrastructure. He has prepared economic analyses for law suits dealing with taxation of multi-state corporations and state recovery of damages attributable to tobacco use. Professor Pogue received a Ph.D degree in economics from Yale University in 1968, a M.S. degree in agricultural economics from Oklahoma State University in 1962, and a B.S. degree in agricultural economics from New Mexico State University in 1957. He served as a commissioned officer in the United States Air Force 1957-1960.
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Introduction
About This Course
Course Description In this course, we study contemporary microeconomic theory. We study theories of consumer and producer behavior; the role of markets in coordinating economic activity; market structures and market imperfections; the conditions under which markets can be depended on to allocate resources efficiently; and how government policies, e.g. taxes, alter market outcomes. The course is designed to give you the economic tools for the applied economics courses that follow it.
Course Organization
The course consists of seventeen lessons grouped into eight units of study. Each lesson has a WHAT YOU SHOULD KNOW component that lists questions you should be able to answer, and concepts, terms and relationships you should understand. It also includes a
READING ASSIGNMENT
drawn from the required to be submitted via
textbook, and often a graded, MyEconLab.
WRITTEN ASSIGNMENT
As part of your study for each lesson, you should login to

http://www.coursecompass.com/ and go to your course: Microeconomic Theory.
There you will find a list of assignments and due dates. Details about accessing CourseCompass are provided on the ICON course site. Each graded assignment will be listed as Quizzes and Tests. You will also be able to access a number of study aids, listed below:
Study Plan, where you can work through exercises for each chapter. After you think you understand the content of a lesson, you should take the sample test. If you do not do well on this sample test, review again the reading and multimedia materials.
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Textbook Resources, where you will find additional study aids and supplemental materials, including Lecture Notes, Practice Quizzes, Solved Problems, and Applications. To reinforce what you have read, you should view animations and slide shows in the multimedia library.
Economic news, where you can apply what you have learned in each lesson to real world situations reported in the New York Times, eThemes of the Times.
Student Center, where you can go to the tutor center for one-on-one help.
Results, which gives you an up-to-date record of your scores on each test or quiz you have taken.
If you have questions about an assignment, send a detailed question to the instructor by e-mail. Please be as specific as you can, as it is not possible for your instructor to provide a helpful response to unfocused general questions. You need to make every effort to understand the problem yourself, using the course materials available to you, before asking the instructor for assistance. Deadlines for submitting assignments and taking exams are noted in the course syllabus. Practice assignments are available in CourseCompass. You should complete the practice assignment prior to completing the graded assignment.
Examinations
There are two supervised examinations, a 90 minute midcourse exam and a two-hour final (comprehensive). Each exam consists of multiple-choice questions (50 for the midterm and 75 for the final exam) that are similar to the questions in the graded assignments. Books, notes, and computers cannot be referred to during these exams. A standard non-programmable calculator is allowed.
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Information regarding exam scheduling and policies is posted on the course Web site in ICON. You are responsible for registering for their exam by the posted deadlines.
Cheating
You are spending a lot of time, effort, and money to take this course. Most students recognize they are only hurting themselves by cheating. For the small minority of students who don't, I include the following warnings. Any of the following will result in an F in the course:
plagiarism, use of another person's work without permission or attribution;
collaboration on any of the exams; completing a homework assignment with another student.
Required Course Materials

The following items may be downloaded from the course Web site.

Course Study Guide Distance Education Policies and Instructions Textbook/Course Materials to Purchase Independently
The following text is listed on the Textbook and Materials Order Form for this course, along with vendor information where it made be purchased. If you purchase books from an alternate bookseller, it is imperative that you obtain the correct edition.
Required Text: Perloff, Jeffrey. Microeconomics, sixth edition, Pearson Education, 2011 (ISBN: 9780132744928)
Registration for MyEconLab via MyLab/Mastering Assignments are submitted online on MyEconLab via MyLab/Mastering (former CoursecCompass). To access your instructor's MyEconLab course site,
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you will need to complete a one-time registration and enrollment process, after which you'll be able to access your course for the rest of the semester. If you do not complete the course during the first semester of your enrollment, you will need to purchase a second registration for continued access to MyEconLab. If you purchased a new textbook, it may have come with a Student Access Kit that contains a code you can use to register. If you do not have a Student Access Kit, you can purchase access online with a major credit card. Detailed instructions for registering and logging in to MyLab/Mastering are provided on the ICON course site under CONTENT>SUBMIT
ASSIGNMENTS.
Web and E-mail Options

This course is delivered on the World Wide Web via ICON (Iowa Courses Online). To access the course online, you will need the following information: 1. Go to: http://icon.uiowa.edu/ 2. Login to ICON using the fields provided for Hawk ID and Password.
Hawk ID Help
http://hawkid.uiowa.edu/
If you cannot locate the letter that was sent with your Hawk ID password or if you need to start at once, you may call the ITS Help Desk at The University and ask them to reset your password. Please feel free to call our toll-free number (800.272.6430) and select the phone routing option that connects you with the ITS Help Desk. Online Tutorials
http://www.uiowa.edu/~online/tutorials/tutorial.html
View the online tutorials, which are provided in Flash format: topics include instruction on using ICON, WebMail, Hawk ID Tools, Security, and
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more. Please be aware that Distance Education courses do not use all of the components explained in the ICON tutorial. Technical Support for Online Students Technical assistance, including FAQs, software demos and downloads, and contact information are provided on our Technical Support pages at
http://continuetolearn.uiowa.edu/ccp/sos/.
Electronic Submission of Assignments Instructions for submitting assignments electronically in the ICON Drop Box are posted on the ICON course site under "Submit Assignments." E-mail Alias
http://continuetolearn.uiowa.edu/ccp/sos/email.htm
A University of Iowa e-mail alias was created for you when you enrolled in this course, if you didn't already have one. All subsequent e-mail contact from our office will go to your UI alias and be routed to the e-mail routing address you specify. Please keep your routing address current; make updates in ISIS
http://isis.uiowa.edu/ by going to My UIowa/My Email/Update Email Routing
Address. E-mail is an official method of communication at The University of Iowa; you are responsible for all information sent to your e-mail address of record at The UI and you may carry on official transactions with The University by sending e-mail from your e-mail address of record.
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Evaluation and Course Grade

Grades will be based on the following:
Graded Item Points 11 graded assignments, 10 points each, lowest grade dropped 100 1 midcourse exam 75 1 final exam 125
Using these points, letter grades will be assigned as follows:

A+ A AB+ B BC+ C CD+ D DF = 290-300 points = 280-289 points = 270-279 points = 260-269 points = 250-259 points = 240-249 points = 230-239 points = 220-229 points = 210-219 points = 200-209 points = 190-199 points = 180-189 points < 180 points
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Unit 1 Introduction
Lesson 1 Introduction to the Study of Microeconomics
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Lesson 1 Introduction to the Study of Microeconomics

What You Should Know
1. 2. 3. 4.
What are the basic economic decisions? Why does scarcity of economic resources force tradeoffs? Who makes economic decisions? Are all economic decisions made by individuals as they buy and sell in the market place?
5. 6. 7. 8. 9. 10. 11.
Does government make some economic decisions in our society? How are prices used in economic decision making? Why do economists use models? How do economists "test" the predictions of their models? Who uses economic analyses and models? How do you use economics in your personal decisions? What is a "positive" economic statement? What is a "normative" statement?
Reading and Study Assignment

Read Perloff: Chapter 1. View animations and slide shows in the multimedia library. Take the sample test.
Graded Assignment
The graded assignment part for this lesson is encompassed in Graded Assignment #1 that follows after Lesson 3. Go on to Lesson 2.
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Unit 2 Demand, Supply, and Market Equilibrium
Lesson 2 Demand and Supply Lesson 3 Market Equilibrium Graded Assignment #1 Lesson 4 Using Supply-Demand Analysis Graded Assignment #2
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Lesson 2 Demand and Supply

1. What variables may affect a person's demand for a productthe quantity of a product that a person wants to buy? 2. What is a demand curve? What does it show? 3. What does the Law of Demand tell us about demand curves? 4. Does a change in the price of a product shift its demand curve? Does it cause movement along the demand curve? 5. Which variables affect quantity demanded but are not shown on the graph of a demand curve? 6. Which variables shift the demand curve? 7. Explain how each of the variables in this demand function affect Q, the quantity demanded. See equation 2.1 in text.
Q = D( p, pb , pc , Y)
8. Based on this demand function, how much does quantity demanded change when price increases by 1? See equation 2.2 in text.
Q = 171 20p + 20 pb + 3pc + 2Y

9. Be sure you understand solved problem 2.1 on p. 16. 10. How are individual demand curves added up to get a market demand curve? Be sure you understand the application on p. 17. 11. What is a supply curve? What does it show? 12. What does the Law of Supply tell us about supply curves? 13. Does a change in the price of a product shift its supply curve? Does it cause movement along the supply curve? 14. What variables shift the supply curve? 15. Explain how each of the variables in this supply function affect the quantity supplied.
Q = S(p, ph)
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16. Based on this supply function, how much does quantity supplied change when price increases by 1? See equation 2.6 in text.
Q = 178 + 40p 60ph

17. What would this equation be if ph = 2? 18. How are individual supply curves summed to get the market supply curve? See Figure 2.5. 19. Government policy and supply. Be sure you understand solved problem 2.2.

Graded Assignment
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Lesson 3 Market Equilibrium

1. 2. 3.
What is market equilibrium (Fig. 2.6)? Explain the forces that push a market to equilibrium. Understand how market equilibrium changes when the
a. b. c.
demand curve shifts; supply curve shifts; price of an input changes (solved problem 2.3).
4. 5.
How do import bans and quotas affect market equilibrium? How are market outcomes (price and quantity) affected by price ceilings? By price floors?
6. 7.
Does a minimum wage make all workers better off? Explain. Will people be able to buy all of the gasoline they want if there is a price ceiling on gasoline? Explain.
8.
Does demand always equal supply? Explain when such may not be the case.
9.
Characteristics of perfectly competitive markets.

Graded Assignment #1
Instructions Review the section on graded assignments in the Introduction before completing this assignment. Instructions for submitting assignments electronically
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are posted on the ICON course site under "Submit Assignments"; additional details on assignment submission are provided in your syllabus. Description
Complete graded assignment #1, located under Quizzes and Tests in MyEconLab.
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Lesson 4 Using Supply-Demand Analysis

1. How does a shift in the supply curve affect price and quantity when the demand curve is vertical? When it is horizontal? 2. What does the price elasticity of demand measure? 3. What is the formula for price elasticity of demand? 4. How is the price elasticity of demand related to the slope of a demand curve? (Fig. 3.1) 5. How does demand elasticity change along a downward sloping linear demand curve? (Fig. 3.2) 6. Why would a demand curve be horizontal? vertical? 7. What does the income elasticity of demand measure? 8. What is the formula for income elasticity of demand? 9. What is a normal good? An inferior good? 10. What does cross-price elasticity of demand measure? What is the formula for cross-price elasticity of demand? 11. How is cross-price elasticity related to whether a good is a complement or a substitute? 12. What does supply elasticity measure? What is the formula for supply elasticity? 13. What is supply elasticity when the supply curve is vertical? When it is horizontal? 14. Why would a supply curve be vertical? Horizontal? 15. Why might the long-run elasticity of demand for a product differ from the short-run elasticity? 16. Why might the long-run elasticity of supply of a product differ from the short-run elasticity? 17. What is a specific sales tax? How does levying such a tax affect equilibrium price and quantity?
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a. Do the effects of the tax on equilibrium price and quantity depend on whether it is collected from seller or buyer? b. How do these effects depend on demand elasticity? On the supply elasticity? 18. How do demand and supply elasticities affect revenue from a specific sales tax? 19. Does the incidence of specific sales tax depend on whether tax is collected from buyers or sellers? When do buyers bear the entire burden of the tax? When do sellers bear the entire burden?

Instructions Review the section on Written Assignments in the Introduction before completing this assignment. Instructions for submitting assignments electronically are posted on the ICON course site under "Submit Assignments"; additional details on assignment submission are provided in your syllabus. Description
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Unit 3 Explaining Consumer Behavior
Lesson 5 How Consumers Choose Lesson 6 Consumers' Demand Curves Graded Assignment #3
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Lesson 5 How Consumers Choose

1.
What do consumers try to do as they decide how much of each good to buy?
2. 3.
What is a preference map? An indifference curve? What is the marginal rate of substitution between two goods? How is it related to the slope of indifference curves?
4.
What is meant by the term diminishing marginal rate of substitution? How is it related to the shape of indifference curves?
5.
How are indifference curves shaped if goods are perfect substitutes? perfect complements? imperfect substitutes?
6.
What is the consumer's budget constraint? What variables determine the budget constraint?
7.
What is the marginal rate of transformation? How is it related to the slope of the budget constraint?
8.
How is a consumer's budget constraint affected by a. an increase in the price of a product? b. an increase in income? c. imposition of a government limit (quota) on the amount consumed? (solved problem 4.3)
9. 10.
What is the consumers optimal bundle and how to find it How do food stamps differ from cash in their effect on the budget constraint?

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Written Assignment
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Lesson 6 Consumers' Demand Curves

1.
Explain how changes in price change the budget line and the quantity demanded. Understand Fig. 5.1.
2.
Explain how changes in income shift the budget line and demand curve. Understand Fig. 5.2.
3. 4. 5. 6. 7.
What does the price-consumption line show? What does the income-consumption line show? What does the Engel curve show? Understand how normal and inferior goods differ. What are the income and substitution effects of a decrease in the price of a normal good? How do those effects differ if the good is inferior?
8. 9.
What is a Giffin good? Explain how a person's labor supply curve is determined as she allocates time between working and leisure.
10.
Understand the income and substitution effects of a wage increase. Fig 5.10.
11.
How is labor supply affected by a giftan increase in unearned income? See solved problem 5.5.
12.
Explain how the labor supply curve could become "backward bending."
13.
What are the income and substitution effects of decreasing the tax income tax rate?
14.
Will an increase in income tax rates always cause workers to supply less labor?

Read Perloff: Chapter 5. View animations and slide shows in the multimedia library.
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Take the sample test.
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Unit 4 Explaining Firm Behavior
Lesson 7 Short Run Production and Costs Graded Assignment #4 Lesson 8 Long Run Production and Costs Graded Assignment #4 Midcourse Examination
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Lesson 7 Short Run Production and Costs

1. Terms and concepts that you should know: a. corporations b. limited liability c. technological efficiency d. profits = revenue costs e. production function: q = f (K, L) f. short run g. fixed input h. variable input i. long run 2. Understand how to calculate marginal and average product from a table such as 6.1. 3. Understand graphing of average and marginal product as in Figure 6.1. 4. What does the law of diminishing marginal returns tell us? 5. How do explicit and implicit costs differ? What does each include? 6. What does opportunity cost measure? 7. Is time spent waiting for a service is part of its cost? 8. How does historical cost differ from opportunity cost? Which should be used in calculating the cost of production? 9. What is the opportunity cost of using each of the following inputs: a. labor? b. raw materials? c. a durable input such as machine or truck? d. land or buildings? 10. What do businesses do when they amortize and expense?
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11. Understand how each of these measures of cost are derived and used: variable cost, fixed cost, total cost, marginal cost, average cost average fixed cost. Refer to Table 7.1. 12. Understand the graphing of cost curves as in Figure 7.1. 13. How does a specific tax on output, say $10 per unit of output, affect costs? Table 7.2 and Figure 7.3. 14. How does a lump-sum tax affect marginal and average costs? See solved problem 7.2.

Read Perloff: Chapter 6, pp. 151-163; Chapter 7, pp. 184-198. View animations and slide shows in the multimedia library. Take the sample test.
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Lesson 8 Long Run Production and Costs

1. In the long run, which inputs are variable? 2. What is an isoquant? 3. How are isoquants shaped if inputs are perfect substitutes? If substitution is not possible? If inputs are imperfect substitutes? 4. What does the marginal rate of technical substitution (MRTS) measure? How is it related to the slope of the isoquant? 5. What causes a diminishing marginal rate of technical substitution? 6. What is meant by constant returns to scale? Decreasing returns to scale? Increasing returns to scale? 7. What is an isocost line? 8. What does the slope of the isocost line measure? 9. Understand how the cost-minimizing combination of inputs is determined using the isoquant and the isocost lines. 10. What is the last-dollar rule? 11. How do changes in relative factor prices affect the cost-minimizing input mix? See Figure 7.6. 12. What does the expansion path show? 13. What does the long run cost curve show? 14. Understand how the shape of the long-run total cost curve depends on returns to scale. What is the shape of long run cost curve with constant returns to scale? 15. How are short-run average cost curves and long-run average cost curves related? 16. Explain how long-run average cost changes as output increases if there are constant returns to scale in production. If there are increasing returns to scale in production. Application on p. 213. 17. How does learning by doing reduce average cost?
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Read Perloff: Chapter 6, pp. 163-175 (omit section 6.6); Chapter 7, pp. 199-218 (omit section 7.5).
View animations and slide shows in the multimedia library. Take the sample test.
Midcourse Examination
A supervised, 90-minute exam follows Lesson 8. The exam consists of fifty multiple-choice questions that are similar to the questions in the graded assignments and sample tests. The examination is closed book and closed notes. You may use a standard, non-programmable calculator, but not a computer or other calculating or data storage device. Information regarding exam scheduling and policies is posted on the course Web site in ICON under the exam registration widget. Each student is responsible for reading the examination information and registering for each exam (if it is not taken at the Iowa City DCE testing center) by the posted deadlines.
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Unit 5 Economic Outcomes with Perfect Competition
Lesson 9 Markets with Competitive Firms Graded Assignment #6 Lesson 10 Welfare and Policy Analysis with Competition Lesson 11 General Equilibrium with Competition Graded Assignment #7
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Lesson 9 Markets with Competitive Firms

1.
Why are firms that sell in perfectly competitive markets said to be price takers?
2.
Why is the demand curve for a product sold by a competitive firm horizontal?
3. 4.
How does economic profit differ from business profit? What conditions must be met for profits of a competitive firm to be maximized in the short run? In the long run?
5.
Understand how to determine the profit maximizing output graphically. See Figure 8.2.
6.
How does a specific tax on the output of a competitive firm change its marginal cost? Its average cost? Its profit maximizing output?
7. 8.
At what price will a firm decide to shut down in the short run? Under what condition will a firm continue to produce in the short run even if it is losing money?
9.
How is a firm's short-run marginal cost curve related to its short-run supply curve?
10.
Refer to Figure 8.4. Is the firm making a profit at all points on the supply curve? Is it covering all variable costs at all points on supply curve?
11. 12.
How do changes in input (factor) prices affect supply curve? Understand how individual firm supply curves are added to get a market supply curve when firms are identical and when firms differ.
13.
Understand how market supply and demand curves determine short run market equilibrium.
14.
How does a specific tax on output of all firms affect market equilibrium price and quantity?
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15.
Explain how the long run market supply curve is determined when there is free entry and exit of identical firms. How is this supply curve different if the number of firms in the industry is fixed?
16.
How do changes in input prices affect market supply curves?

Read Perloff Chapter 8. View animations and slide shows in the multimedia library. Take the sample test.
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Lesson 10 Welfare and Policy Analysis with Competition

1.
Under what conditions are economic profits zero in long run? Under what conditions are economic profits positive in the long run?
2. 3.
What is rent? How is the welfare of consumers and producers affected by buying and selling in the market place?
4. 5.
What is consumer (buyer) surplus? How is it measured? What is marginal willingness to pay? How is it related to the demand curve?
6.
Can we accurately estimate marginal willingness to pay and consumer surplus by just asking them how much a good is worth to them? Explain.
7.
How do price increases and decreases affect consumer surplus? How is the resulting change in consumer surplus related to price elasticity of demand?
8. 9.
What is producer (seller) surplus? How is it measured? How do we get information about producer surplus from the marginal cost curve?
10. 11.
How are the marginal cost and supply curves related? Can we use the supply curve to tell how much the firms within an industry gain (lose) when the price of their product increases (decreases)? How is this done?
12.
Explain how competitive markets can maximize the combined welfare of producers and consumers.
13.
Explain how producing either more or less than the competitive market output can decrease the combined welfare of producers and consumers?
14.
What does dead weight loss measure?

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15.
Explain how each of the following policies or conditions causes output to differ from the competitive equilibrium quantity, and in doing so generates deadweight loss: a. limiting the number of firms in an industry b. Imposing barriers to entry into or exit from an industry c. per-unit sales tax d. price floor e. price ceiling f. ban on imports g. tariff or quota on imports
16. 17.
What are some examples of barriers to entry? Exit? What is rent seeking? How does it affect welfare?

Written Assignment
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Lesson 11 General Equilibrium with Competition

1.
The objective of this lesson is to understand how equilibrium is determined in related marketshow actions in one market affect demand and supply in other markets.
2.
Understand the example of minimum wage with incomplete coverage (Fig. 10.2). a. How does the minimum wage affect the distribution of employment between covered and uncovered sectors? b. How does the minimum wage affect the wage in the uncovered sector? c. Do some workers lose when a minimum wage is imposed on only some sectors of the economy? Explain.
3.
Understand the effects of taxing wages in one sector while leaving wages in other sectors untaxed (solved problem 10.1). a. What happens to the before-tax wage in the covered (taxed) sector? b. What happens to the after-tax wage (take-home pay) in each sector? c. Does the after-tax wage of workers in the covered sector fall by the full amount of the tax? d. After full adjustment, does the tax place a heavier burden on workers in the covered sector than in the uncovered sector?
4.
Do all workers gain from a "living wage law" that covers only some workerse.g., government employees or employees of firms that contract with government? Explain.

Read Perloff: Chapter 10, only pp. 316-324. View animations and slide shows in the multimedia library.
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Take the sample test.
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Unit 6 Economic Outcomes with Monopoly and Oligopoly
Lesson 12 Monopoly Lesson 13 Non-uniform Pricing Graded Assignment #8 Lesson 14 Oligopoly and Monopolistic Competition Graded Assignment #9
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Lesson 12 Monopoly
1.
How do monopolists decide on the amount to produce given the demand and costs they face?
2.
How is price related to marginal revenue for competitive firms? For monopolists?
3. 4.
Are monopolists "price takers"? Can a monopolist set both the quantity it sells and the price at which that output is sold? Explain.
5.
Will a profit maximizing monopolist operate in the inelastic portion of its demand curve? Explain.
6. 7.
How is market power measured? How is market power related to demand elasticity? How is it related to the availability of substitutes?
8. 9.
How does monopoly affect producer surplus? Consumer surplus? How does monopoly affect welfare, defined as the sum of producer and consumer surplus?
10. 11.
Does monopoly generate a deadweight loss? Understand the welfare loss of a specific tax on a monopolist (solved problem 11.4). Does the monopolist increase price enough to "passon" the full amount of the tax to consumers?
12. 13. 14. 15. 16. 17.
What is a natural monopoly? How do patents help to maintain monopoly? How can governments create or maintain monopolies? How can governments reduce market power? What is optimal price regulation? What are the main problems that government faces in regulating monopoly?
18.
What are network externalities? How can they give rise to monopoly?
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Read Perloff: Chapter 11 View animations and slide shows in the multimedia library. Take the sample test.
Written Assignment
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Lesson 13 Non-uniform Pricing

1. 2. 3. 4. 5. 6. 7.
What is price discrimination? Can competitive firms price discriminate? Why do firms price discriminate? What conditions are necessary for price discrimination to be possible? What is perfect (first degree) price discrimination? With perfect price discrimination, how much is each buyer charged? Does a monopoly generate a dead weight loss if it can perfectly price discriminate?
8.
Are consumers better off if a monopolist perfectly price discriminates that if it sets a single price?
9.
Explain how costs of having multiple prices (transactions costs) limit the extent to which firms price discriminate.
10. 11.
What is quantity discrimination? Explain. What is multi-market price discrimination? Under what conditions is it possible and profitable?
12. 13. 14.
What is a two-part tariff? What are tie-in sales? What is bundling?

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Lesson 14 Oligopoly and Monopolistic Competition

1. 2. 3. 4. 5.
How does oligopoly differ from monopoly? How does monopolistic competition differ from competition? Are oligopolistic firms price takers? Are monopolistic competition firms price takers? Understand the summary of characteristics of alternative market structures (Table 13.1).
6. 7.
What is game theory? Understand the following concepts used in game theory: a. profit or payoff matrix b. noncooperative game c. dominant strategy d. prisoners' dilemma e. repeated games f. Nash equilibrium
8.
Will two oligopolistic firms always choose strategies that maximize their combined profits? Explain.
9. 10. 11. 12.
What is a cartel? How do cartels increase profits? Will a cartel produce more or less than the competitive output? Will the price with a cartel be higher or lower than the competitive price? Explain.
13. 14. 15.
Do cartels generate dead-weight losses? Explain the factors that may cause a cartel to fail/break up. What does the Cournot model of oligopoly assume about firms' behavior? Do they collude? Is the resulting output more or less than output under competition? Explain.
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Read Perloff: Chapter 13 and 14, omit sections 13.5, 13.6, 13.7, 14.3, and 14.4
View animations and slide shows in the multimedia library. Take the sample test.
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Unit 7 How Markets Fail
Lesson 15 Externalities, Commons, and Public Goods Graded Assignment #10
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Lesson 15 Externalities, Commons, and Public Goods

1. 2. 3.
What are externalities? What is a negative externality? A positive externality? Are externalities taken into account by buyers and sellers as they make their market decisions?
4.
Explain how externalities cause inefficiency in competitive markets. First consider a negative externality, then a positive externality.
5. 6.
Do negative externalities cause too much or too little to be produced? Explain how each of the following can be used to reduce the external costs associated with pollution: a. emission standards b. emission fees c. taxes on the output of products that generate pollutants d. taxes on the output of pollutants
7. 8.
Would it be economically efficient to eliminate all pollution? Explain. Explain how cost-benefit analysis can be used to maximize benefits from reducing pollution.
9. 10.
What is the economically efficient level of pollution? Explain why a tax equal to marginal external cost does not achieve the social optimum when the external cost is generated by a monopolist.
11. 12. 13.
What is the Coase Theorem? What are pollution rights? Explain how creating and trading pollution rights can reduce external costs.
14.
Explain why a resource (or property) will be used inefficiently (over used) if no one owns the propertyif no one has right to restrict or allocate its use.
15.
What approaches have governments taken to prevent over use?

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06E:104
16. 17.
How do public goods differ from private goods? What is a nonexclusive public good? Will such a good be produced privately and sold in the market place? Explain.
18.
Will competitive markets produce the social optimum (efficient level) of a public good? Explain.
19. 20.
What is free riding? How does it deter provision of public goods? Suppose the amount of a public good is chosen by majority voting, on a yes/no vote. Will the chosen amount be the socially optimum (efficient) amount? Explain.
21.
Is it possible that majority voting will result in too much (more than the efficient amount) of a public good? Too little? Explain.
22.
If we were to take a poll of voters asking whether they are satisfied with the amount of a public good chosen by majority vote, is it possible that a majority of voters would say that they would prefer a different amount? Explain.


Instructions Review the section on Written Assignments in the Introduction before completing this assignment. Instructions for submitting assignments electronically are posted on the ICON course site under "Submit Assignments"; additional details on assignment submission are provided in your syllabus.
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Description
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06E:104
Unit 8 Risk, Uncertainty and Investment
Lesson 16 Risk and Uncertainty Lesson 17 Interest Rates, Investments and Capital Markets Graded Assignment #11
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Lesson 16 Risk and Uncertainty

1. Understand the definition and use of the following terms: a. probability b. observed frequency c. subjective probability d. probability distribution e. expected value f. variance g. standard deviation h. expected utility i. risk aversion j. fair bet risk neutrality k. risk premium 2. Will a risk-averse person take a fair bet? Explain. 3. Are lotteries fair bets? Explain. 4. What is diversification (risk pooling)? 5. Under what conditions will diversification reduce risk? 6. How does insurance reduce risk? Explain. 7. Are insurance policies fair bets? Explain.

Read Perloff: Chapter 17, omit sections 17.4 and 17.5 View animations and slide shows in the multimedia library. Take the sample test.
Written Assignment
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06E:104
Lesson 17 Interest Rates, Investments and Capital Markets

1. 2. 3.
What are interest rates? What measures the return you get from forgoing expenditure? What does the discount rate measure? What is the marginal rate of time preference?
4.
Explain how one values future income/consumption relative to current income/consumption.
5.
At what interest rate will a person be willing to lend? At what interest rate will she be willing to borrow?
6. 7. 8.
What is compounding? What is APR (annual percentage rate)? What is the future value (FV), after t periods, of PV dollars invested today?
9. 10. 11. 12.
What is the present value of FV dollars received t periods in future? What is the present value of a flow, f, of payments over t periods? What is the future value of a flow, f, of investments over t periods? Explain the effect of inflation on real (inflation adjusted) values of future dollar values.
13.
What is the formula for the real value of a dollar received one year from now if the rate of inflation is ?
14.
When the inflation rate is , what is the formula for the real present value of a dollar received one year from now?
15. 16. 17. 18.
What is the nominal interest rate? The real interest rate? What is the net present value (NPV) of an investment? Should an investment be made if has a negative NPV? Explain. What is the internal rate of return (irr) on an investment?
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Read Perloff: Chapter 16, omit section 16.3. View animations and slide shows in the multimedia library. Take the sample test.

Final Examination
A supervised, 2-hour exam follows Lesson 17. The exam is comprehensive and consists of seventy five multiple-choice questions that are similar to the questions in the graded assignments and sample tests. The examination is closed book and closed notes. You may use a standard, nonprogrammable calculator, but not a computer or other calculating or data storage device. Information regarding exam scheduling and policies is posted on the course Web site in ICON. You are responsible for registering for the exam by the posted deadlines.
Transcript
http://registrar.uiowa.edu/transcripts/
Upon completion of this course, your final grade will be entered on your permanent student record at The University of Iowa. Official transcripts of your
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06E:104
permanent record can be obtained from the Office of the Registrar, The University of Iowa, 1 Jessup Hall, Iowa City IA 52242-1316. For information on the current transcript fee or to order your transcript by phone, call 319.335.0230. A transcript request form, which can be printed from the Web and mailed or faxed to the Office of the Registrar, is available online (address above). Final course grades can also be viewed and transcripts ordered electronically through ISIS:
http://isis.uiowa.edu/ .
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06e104 Study Guide

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06E:104 Microeconomic Theory

Tippie College of Business/College of Liberal Arts and Sciences Economics

Thomas Pogue, Ph.D.

The University of Iowa

Course Contents Section A: Course Lessons

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About the Coursewriter

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Evaluation and Course Grade

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Lesson 1 Introduction to the Study of Microeconomics

Lesson 1 Introduction to the Study of Microeconomics

Reading and Study Assignment

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Unit 2 Demand, Supply, and Market Equilibrium

Lesson 2 Demand and Supply

Q = 171 20p + 20 pb + 3pc + 2Y

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Q = 178 + 40p 60ph

Reading and Study Assignment

Lesson 3 Market Equilibrium

Characteristics of perfectly competitive markets.

Reading and Study Assignment

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Lesson 4 Using Supply-Demand Analysis

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Reading and Study Assignment

Unit 3 Explaining Consumer Behavior

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Lesson 5 How Consumers Choose

Reading and Study Assignment

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Lesson 6 Consumers' Demand Curves

Reading and Study Assignment

Take the sample test.

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Unit 4 Explaining Firm Behavior

Lesson 7 Short Run Production and Costs

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Reading and Study Assignment

Lesson 8 Long Run Production and Costs

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Reading and Study Assignment

Unit 5 Economic Outcomes with Perfect Competition

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Lesson 9 Markets with Competitive Firms

How do changes in input prices affect market supply curves?

Reading and Study Assignment

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Lesson 10 Welfare and Policy Analysis with Competition

What does dead weight loss measure?

Reading and Study Assignment

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