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FALL 2006 INTERMEDIATE MICROECONOMICS ECON 300a

About the course
Microeconomic theory has developed around the analysis of Adam Smith’s “invisible hand” con-jecture. It looks at the economy as a series of interlocked markets for consumer goods, factors of production, and intermediate goods, and establishes conditions when these markets work well, less well, or not at all. Most of the course is devoted to modeling the behavior of market actors - con¬sum¬ers and produ¬cers. In the process, basic tools and concepts used in the other areas of economics are developed. Many of the topics covered in Introductory Microeconomics Econ 101 are studied more rigorously and at greater depth. New topics, such as behavior under risk, insurance, and im-perfect information, are introduced.
Prerequisites: 2 semesters of college calculus or equivalent.

Organization

1. Classes: Stokes 10, Tuesday and Thursday, 11:30 a.m. – 1:00 p.m.

2. Instructor: Vladimir Kontorovich, Stokes 203c, tel. 1074, e-mail: VKONTORO.

3. Office hours: Tuesday and Thursday, 1:00 - 2:00 p. m. or by appointment. Please feel free to send me e-mails at any time. You may also call me at home (609-371-4826). Tell me the number you are calling from and hang up; I will call you right back.

Course Requirements

1. Classes. I present a somewhat different approach to the material than that in the textbook. Stu-dents are responsi¬ble for the material taught in class, for the assigned portions of the textbook, and for additional assigned readings. Regular attend¬ance is expected.

2. Readings:

Nicholson, W., Microeconomic Theory:Basic Principles and Extensions. 9th Edition. The Dryden Press, 2005. (available from the college bookstore)
Workbook for Nicholson contains additional problems with answers. (available from the col-lege bookstore)
Selected Classics: articles available on line (JSTOR, or Blackboard, or web address provided in the syllabus). Articles will be discussed in class.
Recommended for refreshing mathematics and for reference: Chiang, A., Fundamental Methods of Mathemati¬cal Economics. Third Edition. McGraw-Hill, 1984. If you need it, it can probably be bought cheaply over the Internet. There are many other books in this genre (mathemat-ics for economists).

Course Outline indicates the dates by which readings are due. Com¬plet¬ing your reading on time will allow you to gain more from the class, and to partici¬pate in class discussion.

3. Problem sets will be assigned and collected every week. They will not be graded but check¬ed so as to monitor your progress. Answer sheets will be distributed. Problem sets prepare you for the exams!

Grade composition

Two take-home mid-term exams (30% of the final grade each):
- on Choice and Demand (Chapters 3-6) E-mailed to you 10/12, due 10/24
- on Production and Supply (Chapters 7-9) E-mailed to you 11/16, due 11/21
(Dates are approximate and depend on the speed with which we progress.)

Final take-home exam: exam week in December (40% of the final grade).

How to learn even more microeconomics

At the end of each chapter, Nicholson supplies Extensions. These show interesting applications of the theories explained in the body of the chapter, or alternative approaches to modeling economic behavior. If you want to know what economics does, don’t limit yourself to the main text.

How to prepare for the tests

Exams stress problem solving.

- follow examples in text with pen and paper, you should be able to reproduce them;

- complete homework assignments and review answer sheets;

- solve problems in Nicholson's Workbook (it supplies answers);

- solve odd-numbered problems in the end of the chapters in Nicholson's textbook (answers in the back of the book).

- learn the definitions of the main concepts precisely;

- attend review sessions (scheduled on demand);

- see me in my office with any and all problems you might have.

COURSE OUTLINE
Dates are approximate and depend on the speed with which we progress


I. INTRODUCTION. WHAT ARE WE GOING TO STUDY, AND HOW? 9/5

Nicholson, Ch. 1.

Smith, Adam, An Inquiry Into The Nature And Causes Of The Wealth Of Nations, 1776.
Book 1, CHAPTER I “Of the Division of Labour”,
http://www.adamsmith.org/smith/won-b1-c1.htm, and
CHAPTER II “Of the Principle which gives occasion to the Division of Labour”,
http://www.adamsmith.org/smith/won-b1-c2.htm

For the up-to-date treatment of some of the issues in Adam Smith, as well as the meaning of ration-ality, see the 2002 Nobel Prize lecture:

Smith, Vernon L., “Constructivist and Ecological Rationality in Economics”, American Economic Review, June 2003. (accessible on line through Tripod).

It is a bit hard, because it summarizes a great number of the most recent findings in economics, psychology, and other disciplines. But for the curious and the ambitious, it pays to try reading what-ever parts seem to make sense, skipping the ones which you do not understand.

II. THE MATHEMATICS OF OPTIMIZATION. Please review this material in the very
beginning of the course. There will be a review session scheduled on problems in Nichol¬son
Ch. 2 in the second week of the semester.

Nicholson, Ch. 2, pp. 20-31 (Maximization); pp. 32-3 (Implicit function); pp. 47-50
(Second order conditions of extrema).

Chiang, Chs. 6-9 (through p. 253)

III. CHOICE AND DEMAND

1. Preferences and Utility. Nicholson, Ch. 3. 9/7, 9/12, 9/14
Handout 1. Conditions for diminishing MRS. (Blackboard).

2. Choice 9/19, 9/21, 9/26

Nicholson, Ch. 4; Ch. 2, pp. 38-43 (Constrained Maximization)

Becker, Gary, “The Economic Approach to Human Behavior”, in: Jon Elster, ed., Rational
Choice. Basil Blackwell, 1988. (Blackboard).

Chiang, Ch. 12

3. Individual Demand

3.1 Theoretical Properties of demand function 9/28, 10/3

Nicholson, Ch. 5; skip ‘revealed preferences’ and ‘consumer surplus’ (pp. 145-152).
Ch. 6, pp. 161-166.
Handout 2. Concavity of the expenditure function. (Blackboard).
Nicholson, Ch. 2, pp. 33-37, 44 (The Envelope Theorem).

3.2 Experimental tests of the properties of deman function 10/5

Kagel, John H., et al., “Demand Curves for Animal Consumers”, The Quarterly Journal
of Economics, Feb. 1981 (JSTOR). Battalio, Raymond C., John H. Kagel, and Carl A. Kogut, “Experimental Confirmation of the
Existence of a Giffen Good”, American Economic Review vol. 81, no. 4, Sept. 1991
(JSTOR).

3.3 Demand relationships among goods; Market demand 10/10
Nicholson, Ch. 6, p. 167- ; Ch. 10, pp. 277-281.

IV. PRODUCTION AND SUPPLY
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FIRST MIDTERM EXAM: E-mailed to you 10/12, due back 10/24
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1. Production. Nicholson, Ch. 7. 10/12, 10/24
Nicholson, Ch. 2, pp. 53-57 (Homogeneity and homotheticity).

Handout 3. Homogeneity and homotheticity. (Blackboard).
Handout 4. Elasticity of substitution. (Blackboard).

2. Cost 10/26, 10/31, 11/2
Nicholson, Ch. 8 (skip input substitution, p. 228)

Alchian, Armen, pp. 301-308 of “Cost” in his Economic Forces at Work, Indianapolis:
Liberty Press, 1977 (Blackboard).

3. Profit maximization and supply 11/7
Nicholson, Ch. 9 (skip pp. 261-4, 267-9).

Alchian, Armen, “Uncertainty, Evolution and Economic Theory”, The Journal of
Political Economy, vol. 58, no. 3, June 1950 (JSTOR).


V. PERFECT COMPETITION
1. Partial Equilibrium.
Nicholson, Ch. 10 11/9, 11/14

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SECOND MIDTERM EXAM: e-mailed to you 11/16, due back 11/21
*******************************************************************************

2. General Equilibrium 11/16, 11/21

Nicholson, Chs. 12

Hayek, Friedrich A., “The Use of Knowledge in Society”, American Economic
Review, vol. 35, no. 4, Sept. 1945 (JSTOR).


VI. CHOICE UNDER UNCERTAINTY, INSURANCE, AND IMPERFECT INFORMATION

1. Expected utility and insurance 11/28, 11/30
Nicholson, Ch. 18 (skip measures of risk aversion, pp. 541-44)

Coase, R. H., “The Nature of the Firm”, Economica New Series, Vol. 4, No. 16 (Nov., 1937), pp. 386-405. (JSTOR)

2. Moral hazard, adverse selection, and signaling 12/5, 12/7
Nicholson, Ch. 19 through p. 573


VII. PUBLIC GOODS AND EXTERNALITIES 12/12, 12/14
Nicholson, Ch. 20.

Alchian, Armen, pp. 324-332 of “Cost” in his Economic Forces at Work, Indianapolis:
Liberty Press, 1977. (Blackboard).