**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, gCommentsh)

2008/08/13,
gProblem sets 5&6 and the final exam have been graded and returned to your mail-box.h *New!*

2008/07/11,
gProblem set 6, due on July 22, is available now.h

2008/07/08,
gProblem set 4 has been graded and returned to your mail-box. The solution keys
for problem set 5 are uploaded.h

2008/07/07,
gSolution keys for problem set 4 are uploaded.h

2008/07/01,
gThere is a problem set due on July 8.h

2008/06/25,
gWe have a final exam on **July 22**
from **10:35-12:05**h *Important!*

2008/06/25,
gWe have make up classes on **July 2 and 9**
from **13:20 to 14:50**.h

2008/06/25,
gThere is no class on **July 15**.h

2008/06/18,
gThere is a problem set due on June 25.h

2008/06/18,
gPlease take a look at the handout about introduction of game theory before the
next class.h *Important!*

2008/05/27,
gWe have make up classes on **June 11, 18
and 25** from **9 to 10:30**.h

2008/05/27,
gThere is no afternoon class on **May 27**.
Both morning and afternoon classes will be cancelled on **June 3**.h

**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), gChoice Under Uncertainty: Problems Solved and Unsolvedh *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), gAn
Introduction to Applicable Game Theoryh *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 Prisonerfs 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 Kakutanifs
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 Nashfs theorem

__Lecture 29 (7/08)__

**Handout:** Osborne and Rubinstein
(1990), *Bargaining and Markets*,
Chapter 2 (The Axiomatic Approach: Nashfs 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 (Harsanyifs
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*, 10^{th} 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

*Go back to the front page.*