Beruflich Dokumente
Kultur Dokumente
Intermediate
Microeconomics
Fall 2011
Instructor: Ginger Z. Jin
http://kuafu.umd.edu/~ginger
TA: Aaron Szott
Lecture 1
Course
introduction
Syllabus
Teaching
Textbook
Chapter 1, 2.1-2.3
Derive
We
demand
Firm
production
Production technology
Firm choice of input and output
Cost and profit
How
Exchange economy
Market structure
Market failures: monopoly, asymmetric info, externality
Policy interventions
definition:
and incentives
outcomes:
Monthly rent
supply
equilibriu
m
demand
Units
available
Monthly rent
supply
equilibriu
m
demand
Units
available
demand
Units
available
Market scenario 2:
impose $50/month tax on landlord
supply
Monthly rent
demand
Units
available
No change in demand and supply thus no change in
price
ONLY TRUE with fixed supply
Market scenario 3:
non-discriminating monopoly
supply
Monthly rent
demand
Units
available
The monopolist may want to restrict the supply so that he
can charge higher price not efficient from the society
point of view
Market scenario 4:
rent control
supply
Monthly rent
demand
Units
available
Syllabus
on
my personal website
http://kuafu.umd.edu/~ginger/
click on Econ326
Also
available on elms.umd.edu
Syllabus
Textbook:
Pindyck and Rubenfeld, Microeconomics,
Edition 7
Evaluation
Three problem sets, 10 points each
Two midterms, 20 points each
One cumulative final, 30 points
Five random in-class quizzes, 2 bonus points
each
Total 110 points
Important dates
Sept. 8: Handout problem set 1
Sept. 22 Problem set 1 due
Oct. 4 Midterm 1
Oct. 11
Handout problem set 2
Oct. 28 Problem set 2 due
Nov. 8 Midterm 2
Nov. 15Handout problem set 3
Dec. 8 Problem set 3 due
????
Final exam
There will be 5 in-class quizzes at
unannounced dates.
Exam policies
If you miss exams for reasons in
line with university policy, you
can take makeup exams or roll
over your missed points to final
For other reasons to miss the
exam, you are allowed to skip at
most one midterm (with points
rolled over to final) upon onemonth written notice to the
Problem sets
Hard
Hours
Phone
301-305-9259
Teaching Style
Power
Expectation on You
Attend
the class
Lecture 2
Utility
Theory
Consumer preferences
Constructing Indifference
curves
Properties of Indifference
curves
Textbook
chapter 3.1-3.2
Examples:
Axioms of preferences
Completeness
Utility
Definition
of Utility
what unit?
Marginal Utility
the
Total utility
(TU)
Marginal
Utility (MU)
5-0=5
9-5=4
12
12-9=3
14
14-12=2
15
15-14=1
One common property:
Diminishing marginal
Show MU in graph
Total
Utility U
Units of
apples (X)
Exercise:
compute MU, diminishing MU?
U=5(X+1)
U=5ln(X+1)
U=X0.3
U=100-X2
U=X0.4Y0.6
Ordinal vs Cardinal
Ordinal
Utility
Function
Exercise:
monotonic transformation of U
function?
Note:
1. monotonic
transformatio
U=5(X+1) vs U=5ln(X+1)
n does not
change the
U=5X+5Y vs. U=5lnX+5lnY
order of
preference,
U=X0.5Y0.5 vs U=XY
2. it may change
the property
of MU
U=XY vs U=lnX+lnY
3. It does NOT
change the
U=X+Y2 vs U=X+Y
relative
tradeoff
U=5X
vs U=5(X+1)
U(X,Y)
Y
0
Indifference curves
Definition
of Indifference Curve:
indifference curve
corresponds to a specific utility
level
Indifference curves never cross
each other
Axioms of preferences
Completeness
Examples of indifference
curves
U(X,
Y)=X * Y
poin X
t
16
Examples of indifference
curves
U(X,
Y)=X + Y
poin X
t
5
7
4
8
2
1
Perfect substitutes
Violate balance because avg is not better
than extremes
Examples of indifference
curves
U(X,
Y)=min(X, Y)
poin X
t
Perfect complements
Violate non-satiation sometimes
U is not always differentiable, MU is not well
Lecture 3
Marginal
rate of substitution
Properties of indifference curves
Shape of indifference curves
Special examples
Textbook
Slope = - MRS at
point A
X
Diminishing MRS
(MRS of X for Y diminishes with X)
Mathematical derivation
of MRS
U=U(X,Y)
Total differentiation:
dU = MUx * dX + MUy * dY =0
MRS:
U=XY
U=lnX + lnY
U=X+Y
U=X+Y2
U=(X+1)(Y+2)
U=X2 Y2
Which
sloping
Violate non-satiation if upward
sloping
Indifference
apples
Like apples up to a
satiation level
bananas
U
apples
apples
apples
Locus line
apples
apples
Cobb-Douglas Utility
Typical functional form:
U=Xc Yd
Transformations:
U=c*lnX + d*lnY
or
U= Xa Y1-a where a=c/(c+d)
Calculate MRS at point (X,Y)
Lecture 4:
Budget
constraints
definition
Shocks to consumer budget
Kinked consumer budget
Textbook
Budget constraints
Definition:
Px * X + Py * Y = I
Rearrange:
Y = I/ Py + (- Px / Py )
*X
interce
pt
slope
I/Px
Exercise
My
I/Py
Does the
intercept on Y
change?
Does the
intercept on X
change?
Does the slope
of the budget
line change?
Slope = - Px / Py
I/Px
increases
I/Py
Does the
intercept on Y
change?
Does the
intercept on X
change?
Does the slope
of the budget
line change?
Slope = - Px / Py
I/Px
income = $2000
Two goods: X=food, Y=health
care
Prices:
Px= $2,
Py = $1 if Y<=500 (deductible $500)
Py = $0.2 if Y> $500 (coinsurance
20%)
Y (health care)
8000
Slope = -Px /Py = -2/0.2=-10
500
750
1000
X (food)
I=2000
Two goods: food (X), other (Y)
Px =1, Py = 1
A household is granted $200 food
stamp
But the food stamp can only be
used for food
other
2000
2000
2200
food
#1: no financial
market
Y (tomorrow)
2*I
2*I
X
(today)
#2: a financial
market allows
saving and
borrowing at
interest rate r
Y (tomorrow)
X
(today)
Y (tomorrow)
X
(today)
Recap so far
Indifference curves describe
consumer preference
Budget constraints describe what
consumers can afford
Put the two together to determine
the best bundle one can afford
Graphical presentation
Y
MRS > Px/Py
I/Py
A
Slope = - Px / Py
C
B
I/Px
Mathematical derivation
Max
Mathematical derivation
We
Lecture 5
Consumers
optimal choice
utility
Price and consumer choice
Income and consumer choice
Normal, inferior and giffen goods
Textbook
4.1-4.4
Chapter 4 appendix,
I/Py
At the optimal
choice:
MRS = Px/Py
I=Px * X + Py * Y
I/Px
I/Px
10
0
10
0
U=X+2Y
Px=10
Py=10
Income=1000
U=min(X,2Y)
Px=10
Py=10
Income=1000
10
0
10
0
Demand
Optimal
choice
Special example:
Cobb-Douglas Utility
Two
equation
s
Solve for
two
unknow
ns (X
and Y)
Demand only
depends on own
price, not price
of other goods
Homothetic
preferences:
MRS only
depends on the
ratio of X and Y
Fixed share of
income for each
good
changes
Income changes
Two goods:
food, clothing
Price of food
drops
Two goods:
food, clothing
Income increases
Note that
incomeconsumption
curve is not
necessarily linear
Normal
goods
goods
Engel curve
Giffen goods
Normal
Lecture 6
Decompose
income and
substitution effects in response to
price change
Slusky Equation
Textbook chapter: 4.3-4.4
Handout #1: an example
Food
price falls
Initial choice A new choice B
Imaginary D: same utility as A, but face new price
Slusky Equation
Total
effects
Substitutio Income
n effects
effects
Example 1:
Example 2: Introduction of
health insurance
X=food,
1000
0
Y (health care)
A: choice with no
insurance
C: choice with
insurance
B
A
Slope = -Px /Py =
-2
1000
X (food)
Y (health care)
8000
Slope = -Px /Py = -2/0.2=-10
Scenario #2:
insurers pay 80%
after $500
deductible
500
750
1000
X (food)
Lectures 7-8
Application
to labor supply
Individual and market demand
Demand elasticity and cross
elasticity
Textbook chapter: 4.3-4.4
Individual demand
A
Example
Two goods
Income
(24w+y)/
Pc
C*
L*
24
24+y/w
1
0.
5
4.
8
24
Pc
1
0.
5
19.2
42.7
More generally:
Market demand Q(P)= sum of individual demand Qi(P)
Meaning of demand
elasticity
producer, why
do you want to
know demand
elasticity?
50
Example:
Q=100-2P
100
What is demand elasticity at p=10,20,30?
At what price is the demand isoelastic?
Special cases
P
Completely
inelastic demand
Infinitely elastic
demand
Other elasticities
Example
Consumer surplus
Individual consumer
surplus = difference
between what a
consumer is willing to
pay for a good and the
amount actually paid
Total consumer surplus
= sum of individual
consumer surplus
Calculate the
demand
elasticity of total
demand and
total consumer
surplus at p=18.
To summarize
Consumer
Lecture 11
Risk and Consumer behavior
Describe
risk
Preferences towards risk
Demand for risky assets
Uncertainty:
Today
Describe risk
Outcome:
a random event is
associated with multiple
outcomes, for instance:
head/tail when we flip a coin
gain/loss when we invest in a risky
asset
Healthy or sick in the future
Probability:
likelihood that a
given outcome will occur
Payoff: value associated with a
Describe risk
Expected
value: probability-weighted
average of the payoffs associated with
all possible outcomes
E(X)=Prob1*X1+ Prob2*X2 ++ Probn*Xn
Variance:
-E(X))2
Standard
Example
Job1:
expected values,
variance, standard deviation
Job1 is riskier
Risk
Example
Eric
Choice
Exercise: Chapter 5,
Question 7
Prob (investment
A)
Prob (investment
B)
$300
0.10
0.30
$250
0.80
0.40
$200
0.10
0.30
Lectures 12, 13
Technology
of production
Production function
Average product, marginal product
Law of diminishing marginal return
Malthus and the food crisis
Production
Isoquant curve
Marginal rate of technical
substitution
Returns to scale
Technology of Production
Production
Short-run:
time in which
quantities of one or more inputs
cannot be changed
Long-run: time needed to make
Single-input production
q=F(L)
Average
product: q /L
Marginal product: dq /dL
0
1
2
3
4
5
0
10
30
60
80
95
Avg product
q/L
Marginal product
dq/dL
Graphically:
Example
Plot
Diminishing MRTS
Cardinal vs Ordinal
Consumer
Production
function is cardinal
because the absolute scale matters
Cobb-Douglas
production:
technological factor
return to scale
Returns to scale
Rate
Simple
Increasing return to
Cobb-Douglas production
Why does represent returns to scale?
decision
Cost
w
= wage rate
r = capital rental cost
Both could be opportunity cost
Cost
= wage rate
r = capital rental cost
In the long run when every input
is variable
In
fixed cost
Example:
More generally
Total production
function
Define
Lagrangian function
Graphically:
Isoquant curve at q
Isocost curves
In
In
Exercise
Production
function q=10KL
Wage w=10, rental cost of capital
r=20
Total, average and marginal cost
of producing q units in the short
run when K is fixed at 5?
Total, average and marginal cost
of producing q units in the long
run?
What happens if wage rate
Lectures 16 & 17
Profit Maximization of competitive firms
So
Demand curve
faced by the
industry
Profit-maximizing firms
We
Total
cost
The
Algebraically:
Choose
First
At
q in order to maximize
order condition:
For
In
Graphic example
Exercise
Output
price p=10
Total cost = 100 + q + 0.5 * q2
Write down FC, VC, AC and MC.
How much should the firm
choose to produce in the short
run (after it incurs FC)?
Should the firm shut down in the
long run?
At what price will the firm enter
the market?
Producer surplus
Sum
Exercise
Suppose
Lecture 18
Competitive market equilibrium
Demand
equal to supply
Consumer surplus
Producer surplus
Dead weight loss
Consequence of price regulations
Competitive market
equilibrium
Every
consumer is a price-taker
and a utility-maximizer
Every firm is a price-taker and a
profit- maximizer
Free entry and exit
Demand equal to supply
Consumer
Exercise:
Demand:
P=100-Q
Supply: P=1+2Q
Calculate market price, quantity
sold, consumer surplus, producer
surplus and total welfare
Suppose the government
imposes a price ceiling of $50.
How would market price, quantity
sold, consumer surplus, producer
surplus and total welfare change?
Example:
the market of kidney and the
National Organ Transplantation
Act
Market clearing price is 20,000. The law makes the price zero.
At market price, total welfare=(D+B+)+(A+C)
At regulated price, total welfare=(D+.A+..)+0
taxi licenses
Trade barriers
Lecture 19 Exchange
economy
Edgeworth
box
Determination of trade price and
trade amount
Contract curve
Textbook: Chapter 16
Edgeworth box
2
individuals
No production, exchange only
Every one is price taker
Contract curve
Competitive equilibrium
Example: Handout
Two
individuals: A and B
Two goods: X and Y
Endowment: each one has 5
unites of X and 5 units of Y
Utility: UA=XA*YA, UB=XB2*YB.
Question:
Lecture 20
First
welfare theorem
Reasons for market failure
Monopoly: Marginal revenue =
MC
Monoposony: Marginal
expenditure = MC
equilibrium is the
best!
More formally, textbook Page
597:
If everyone trades in the competitive
marketplace, all mutually beneficial
trades will be completed and the
resulting equilibrium allocation of
resources will be economically
efficient.
Asymmetric
Externality
information
Monopoly
Keep
Total cost
MC
Rewrite
it, we get
Mark up
This implies:
The
Monopolist
Example
Demand:
P=100-Q
Total cost: TC = 20+4Q
Competitive P and Q?
Monopoly P and Q? Demand
elasticity at this point? Confirm
the Lerner rule.
Loss of CS due to monopoly?
Change of PS due to monopoly?
Total welfare changes?
Exercise:
Drug
Lecture 21 Price
discrimination
Price
When
Types of Price
discrimination
1st degree
2nd degree
dont know who is willing to pay more,
offer a menu of deals to sort out
consumers
types of demand:
Monopolists
Profit
profit:
Profit
Which
Who
Who
loses?
Sals
Cost
Price
of production:
equilibrium:
Lecture 22 Monoposony
Monopoly
Mathematically
Monopsony
First
tries to maximize
order condition:
if MC is upward sloping
Graphically
-> marginal
expenditure >MC
-> supply
curve MC
-> demand
curve
Monopoly
pushes price to
demand curve
Monopsony
pushes price to
supply curve
Monopoly is
more powerful
if demand is
inelastic
Monopsony is
more powerful
if supply is
inelastic
Exercise:
Walmart
is a monopsony of apparel in
China. There are many sellers of apparel in
China.
Based on US demand for apparel, Walmart
is willing to pay P=500-0.1Q for Q units of
apparel.
The supply of apparel is P=80+0.2Q
Calculate P and Q in competitive
equilibrium
Calculate P and Q in monopsony
equilibrium
Welfare consequence of monopsony
Lectures 23 and 24
Imperfect competition
Recall
We
Monopolistic competition
large
Monopolistic competition in
short-run and long-run
Short run
Long run
Inefficiency in monopolistic
competition
sloping demand
market power to set price above
MC dead weight loss
Downward
P>MC
Oligopoly
a
case
Nash Equilibrium
Each
curves:
demand: P=30-Q
MC=0 for both firms
How much to produce in Cournot
equilibrium? What is the market
price?
What if the two firms collude so
they together act like a
monopolist?
Compare these two cases with
competitive equilibrium
30-2Q=0 Q=15
The two firms together produce
15, so each produce 7.5.
P=30-Q=15.
MR=MC
Compare to perfect
competition
P=MC
Graphically
model:
firms
Firm 1 chooses Q1 first, firm 2
chooses Q2 next
Firm 2s best choice of Q2 given
Q1 firm 2s reaction curve
Firm 1 anticipates firm 2s
reaction curve
- First order condition: =0
firms
As long as the other firm charges
above MC, this firm has incentive
to undercut
At the end, each charges MC and
earns zero profit!
This is called Bertrand
competition!
What if the two firms have
-15, -5
-6, -6
Examples of prisons
dilemma
Pure
Inspection game
Detect
Not Detect
Comply
-5,-5
-5,0
Not comply
-10, 5
0, 0
No
Lecture 25 Asymmetric
Information
Adverse
Selection
Problem
solution
Moral
Hazard
Problem
Solution
Adverse
Hazard
competition
information
0.25
0.5
Adverse selection
Cause:
Products of different
qualities are sold at a single price
because sellers observe product
quality but buyers do not
Consequence: too much of the
low quality product (so called
lemons) and too little of the
high quality product (so called
peaches) are sold.
Other examples?
Solutions to adverse
selection
Return
and warranty
party certification
Moral hazard
One
Solutions to principal-agent
problem
Close
monitoring
Incentive contract
Textbook example: revenue from
making watches
Bad Luck
(50%)
Good Luck
(50%)
Low effort
(a=0)
$10,000
$20,000
High effort
(a=1)
$20,000
$40,000
Incentive contract
Any
are different
can co-exist
externality
Positive externality
Solutions
Externality
Definition:
externality
Examples?
Positive
externality
Examples?
Inefficiency of negative
externality
MC:
Solution
Restrict
production in light of
negative externality
Emission standard
How can EPA know the optimal
standard?
Enforcement cost is high
Charge
emission fee
Tradeable emissions permits
Example: Chapter 18
Exercise #6
Demand
2000P
Supply for paper:
Qs=40,000+2000P
Marginal external cost of effluent
dumpting: MEC=0.0006Qs
Calculate P and Q assumption no
regulation on the dumping of
effluent.
Determine the socially efficient P
Inefficiency of positive
externality
Consider
Public goods
Definition:
A comprehensive example
Stephen
Course overview
Three
main blocks
Consumers problem
Producers problem
Market equilibrium
Extras
Consumers problem
Utility
function
Budget constraint
Write out and solve consumers utility
maximization problem
How does consumer choice change in
response to changes in price or income?
Derive individual demand and market
demand
Calculate demand elasticity
Special cases: perfect substitutes and
perfect complements
Producers problem
Production
concepts
Solve firms cost minimization
problem
How does firms choice change in
light of production change or
input price change?
Cost function and related
concepts
Derive individual and market
Market equilibrium
Perfect
competition (demand =
supply, price=MR=MC)
2-person exchange economy
(Edgeworth box)
Monopoly (MR=MC<price)
uniform pricing, price discrimination
Monoposony
(ME=WTP>Price)
Duopoly (Cournot, Bertrand,
Stackelberg)
Monopolistic competition
Extras
Uncertainty
Thank you!