ECO601E: Advanced
Microeconomics II
Last Updated: August 13
Term / Time:
Spring 2nd ses. / Tuesday
10:35-12:05 and 13:20-14:50
Class room: H
Office hours:
Wednesday 11:00-13:00 (Room C911)
Syllabus: A word file
0. Announcement
(Released
date, “Comments”)
2008/08/13,
“Problem sets 5&6 and the final exam have been graded and returned to your mail-box.” New!
2008/07/11,
“Problem set 6, due on July 22, is available now.”
2008/07/08,
“Problem set 4 has been graded and returned to your mail-box. The solution keys
for problem set 5 are uploaded.”
2008/07/07,
“Solution keys for problem set 4 are uploaded.”
2008/07/01,
“There is a problem set due on July 8.”
2008/06/25,
“We have a final exam on July 22
from 10:35-12:05” Important!
2008/06/25,
“We have make up classes on July 2 and 9
from 13:20 to 14:50.”
2008/06/25,
“There is no class on July 15.”
2008/06/18,
“There is a problem set due on June 25.”
2008/06/18,
“Please take a look at the handout about introduction of game theory before the
next class.” Important!
2008/05/27,
“We have make up classes on June 11, 18
and 25 from 9 to 10:30.”
2008/05/27,
“There is no afternoon class on May 27.
Both morning and afternoon classes will be cancelled on June 3.”
1. Course Description
This is an
advanced course in microeconomics, succeeding to Advanced
Microeconomics I in which we study individual economic decisions and their
aggregate consequences under ideal situations. In this course, we extend our
previous analyses to incorporate less than ideal conditions. More specifically,
we consider imperfectly competitive market structures, missing markets,
uncertainty, and incomplete information.
2. Lecture Schedule and Topics
Lecture 16 (6/10)
7. Uncertainty
7.1 Lottery and prospect
7.1.1 Probability and expected value
7.1.2
7.1.2.1 Class room questionnaire
7.2 Expected utility theory
7.2.1 von Neumann and Morgenstern
foundation
7.2.1.1 How to construct a vN-M utility function
7.2.1.2 Invariant up to linear
transformation
7.2.2 Allais Paradox
7.2.2.1 Class room questionnaire
7.2.2.2 Violation of independence
axiom
7.2.3 Ellsberg Paradox
7.2.3.1 Class room questionnaire
7.2.3.2 Ambiguity vs. risk
Lecture 17 (6/10)
7.3 Risk aversion
7.3.1 Fair games and attitudes to risk
7.3.2 Certainty equivalence and risk
premium
7.3.3 Absolute risk aversion
7.3.4 Relative risk aversion
7.4 Insurance
market
7.4.1 Graphical analysis
7.4.1.1 MRS and 45 degree line
7.4.2 Maximizing expected utility
7.4.2.1 Full
insurance under fair prices
Lecture 18 (6/11)
7.5 Arrow-Debreu security (ADS)
7.5.1 No aggregate risk
7.5.1.1 Efficient allocations = 45
degree line
7.5.1.2 Full insurance in
equilibrium
7.5.1.3
7.5.2 Aggregate risk
7.5.2.1 Efficient allocations =
between 45 degree lines
7.5.2.2 ADS for bad scenario is
more expensive
7.6 Markets for lemon
7.6.1 Asymmetric information between
sellers and buyers
7.6.2 Market failure => adverse
selection
Lecture 19 (6/17)
Handout: Machina
(1987), “Choice Under Uncertainty: Problems Solved and Unsolved” Journal of Economic Perspectives, Summer
1987, pp. 121-132, 147-150.
Review on the
final exam (Advanced Microeconomics I)
8. Monopoly
8.1 Basic model
8.1.1 Monopoly quantity
8.1.2 Monopoly price
8.1.3 Optimal pricing
Lecture 20 (6/17)
8.2 Price discrimination (note)
8.2.1 First degree (perfect)
8.2.2 Second degree (nonlinear pricing)
8.2.3 Third degree
8.2.4 Limitation
Lecture 21 (6/18)
Handout: Varian (1992), Microeconomic Analysis, Chapter 14
(Monopoly), pp. 244-247.
Handout: Gibbons (1997), “An
Introduction to Applicable Game Theory” Journal
of Economic Perspectives, Winter 1997, pp. 127-137. Please
read it before the next lecture!
8.3 Screening (menu pricing)
8.3.1 Asymmetric information
8.3.2 Example: Two type consumers
8.3.2.1 Principal agent model
8.3.2.2 Information rent
8.3.2.3 Consumption distortion for
low type
8.3.2.4 Efficiency at the top
Lecture 22 (6/24)
9. Introduction to game theory
9.1 Motivation
9.2 Nash equilibrium
9.3 Simple 2 x 2 games
9.3.1 Prisoner’s dilemma
9.3.2 Coordination game
9.3.3 Battle of the sexes
9.4 Oligopoly models
9.4.1 Hotelling
model: Location choice
9.4.1.1 Principle of minimum
differentiation
9.4.2 Bertrand model: Price competition
9.4.2.1 Price = marginal cost
Lecture 23 (6/24)
9.4.3 Cournot model: Quantity competition
9.4.3.1 First order conditions
9.4.3.2 Best response function
9.4.3.3 Graphical analysis
9.5 Mixed strategy
9.5.1 Matching penny
9.5.2 Mixed strategy Nash equilibrium
9.5.3 Kakutani’s
fixed point theorem
9.5.4 Existence of Nash equilibrium
Lecture 24 (6/25)
10. Dynamic games
10.1 Entry game
10.1.1 Credible and non-credible equilibria
10.1.2 Backward induction solution
10.2 Subgame
perfect Nash equilibrium (SPE)
10.2.1 Existence of SPE
10.2.2 Example of multiple SPE
10.3 Stackelberg
model
10.3.1 Non-credible NE
10.3.2 Unique SPE
10.3.3 Graphical analysis
Lecture 25 (7/01)
11. Repeated games
11.1 Motivation and basic set-up
11.2 Finitely repeated games
11.2.1 Backward induction and unique SPE
11.2.2 Example of multiple SPE
11.3 Infinitely repeated games
11.3.1 Alternative interpretation
11.3.2 How to check SPE
11.3.3 Collusion
11.3.3.1 Trigger strategy
Lecture 26 (7/01)
11.3.4 Folk theorem
11.3.4.1 Nash-reversion
11.3.4.1.1 Proof
11.3.4.2 Perfect folk theorem
11.3.4.2.1 Mini-max payoffs
11.3.4.2.2 Implication
11.3.4 Application: Reputation
11.3.4.1 Firm as a going concern
Lecture 27 (7/02)
Handout: Kreps (1990), A Course in Microeconomic Theory,
Chapter 15 (Bilateral Bargaining), pp. 556-565.
12. Bargaining
12.1 Motivation and examples
12.1.1 Wage negotiation
12.1.2 Bilateral trade
12.2 Simultaneous offer game
12.2.1 Multiple NE
12.3 Ultimatum game
12.3.1 Take-it-or-leave-it-offer
12.3.2 Multiple NE
12.3.3 (Essentially) Unique SPE
12.3.4 Experimental results
12.4 Alternating offer game (Rubinstein
model)
12.4.1 Stationary SPE
12.4.2 Properties of equilibrium
12.4.2.1 The first proposer gets more
12.4.2.2 Patient player gets more
12.4.2.3 (Almost) Fair division
when little discount
12.4.3 Uniqueness (see handout)
Lecture 28 (7/08)
12.5 Nash
bargaining solution
12.5.1 Introduction to cooperative games
12.5.2 Axiomatic approach
12.5.3 Graphical analysis
12.5.4 Nash’s theorem
Lecture 29 (7/08)
Handout: Osborne and Rubinstein
(1990), Bargaining and Markets,
Chapter 2 (The Axiomatic Approach: Nash’s Solution), pp. 9-15.
12.6 Nash program
12.6.1 Alternating offer game
12.6.2 Role of Nash program
13. Bayesian Games
13.1 Games with incomplete information
13.2 Bayesian games (Harsanyi’s
formulation)
13.3 Bayesian Nash equilibruim
13.4 Sealed bid first price auction
Lecture 30 (7/09)
Handout: Myerson (1991), Game Theory: Analysis of Conflict,
Chapter 2 (Basic Models), pp. 74-83.
Review of problem set 4 and problem
set 5
3. Problem Set
There will be
three problem sets:
First (due on
6/25, pdf, solution)
Second (due
on 7/08, pdf, solution)
Third (due on
7/22, pdf, solution)
4. Grading
Course grade
will be determined by combining grades on problem sets (30%) and a final exam (70%).
Problem sets
will be distributed in class and will be due a week later. Because solutions
are published, late problem sets cannot be accepted. You are encouraged to form
study group, but must write up solutions independently.
Final exam (pdf, comments,
comments on grading)
5. Textbooks
The textbook
for the course is:
Walter Nicholson, Microeconomic Theory: basic principles and
extensions, 10th edition 2007
A highly
readable textbook whose second part contains a lot of intuitive discussion on
the topics of our course is:
David M. Kreps, Microeconomics for Managers, 2004
If you look
for some textbooks for contract theory (principal-agent model) or game theory,
the followings are recommended.
Jean-Jacques Laffont
and David Martimort, The Theory of Incentives: The Principal-Agent Model, 2002
Robert Gibbons, Game Theory for Applied Economics, 1992
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