ECO200 - Microeconomic Theory

We lied! The lie: Better off by Only true if IIG (Income Independent Good) Like dental care. Something you need regardless of income. Not many things are IIG. For normal goods, you over-estimate and for inferior goods underestimate. We need to look only at the substitution effect, not the income effect. We use the Hicksian demand curve to measure actual change. Given: What is the max WTP (willing to pay)? H.A.I.C= highest, affordable, indifference curv

Perfect Substitutes Given → Bundle A → Bundle B → Bundle C → Bundle D → Demand → When you shift the budget line parallel, there is no income effect- Quas linear utility. Perfect Substitutes a. so buy . b. buy all . c. so all . d. Approx

Elasticity Substitution Elasticity How substituable goods are (Perf subs- , Perf comp-

Slutsky SE We take away enough to make just affordable. Since P changed, we can get to a higher utility for . is , is Figure cost with the new conditions. Adjust to get comp . Than may utility for this .Net b-base year & + equal some other year. How did consumption change from year b to year a If we use price at time b, we get the Laspeyres index. If we use price at time, we get the Paasche index. Paasche index If its Consumer is better at time If its Just means u

Labour Supply B- Leisure per day H- Hours of work /day F- Dollars on food/day T- 24 hours per day W- Wage per hour A- Asset income per day ( means work 24 hours) How much willing to give up? Time value of A, How much is worth in hours of leisure (In kind transfer) -Convex , caused by diminishing . If Derive Labour Supply Curve Suppose- to - Employee Surplus Approx goes but need Bundle B (Hicksian)

More Budget Lines: 1) Mean-Variance Utility (Financial Economics) Return Risk (Quasi-Linear) Weight Budget Line: Find to Slope: Rise Over Run "Price of Risk" O-Cost of Risk is return on your portfolio Return on portfolio Variance on Portfolio Risk O-Cost Portfolio with risk of Hold in stock & 40 in bond Return What if... : a) Find bundle b) Financi

Product Curves in short run If so ISO Profit Analysis Short run theory of and and and and TAN: (intercept) (slope) What if ? 3 Predictions What is ? 3 Predictions Cubic Example from Worksheet How much output/Labour/Profit? Cost Curve Analysis To derive cost curve: 1) Get from curve 2) 3) from Shutdown if Because if

Firms minimize costs and are important. Firms seek - lowest sufficient ISO-cost (cheapest). The HAIC of firms enough to produce . so better at so better at Optimal & Technique What happens if to ? Short run costs than long run costs With Numbers: A: suff TAN: B: suff C: suff First concept of cost curve analysis: Isocost comes from Isoquants At because fixed cost is optimal  at - Derive costs T: S:

is from 20.3 Two skills for isoquants - long run and short run and effects , , , , a) ,, , AND , , , , c) , , , , , , , b) , (from bundle c) , ,

Market Structure Techniques - Isoprofit, short run, isoquant, long run Functions - Codd-Douglas, quadratic & cubic, perfect sub & comp, hybrid Markets - Perfect comp, monopoly, Oligopoly, monopolistic structures Monopoly a. definition Monopoly is a price maker One firm in industry There are no close subs (U of T Business degree) B. Types of Monopoly Natural-Large MES Franchise- created artificially government gives exclusion, geographic and time (patent) C. Marginal Revenues Marginal Revenue

1) Base Case - Oligopoly is about business strategy 2) Bertrand S.P.S. - Strategic Price Setting a) 3 Scenarios A: split the marker B: so Twice at C: so b) Strategy for firm 1 if Under cut if Negative Blackout Double losses 3) Cournot SQS - Strategic quantity setting a) Duoplay Firm 1: Intercept, depends on output BRF, best response function

Four Cases - Because labour is derived from what you need to reproduce Aggregate of labour demand OWO: Aggregate of labour supply International trades Labour is a DDD: Four Cases W - Taker - Doesn't affect W W - Maker - Must to hire more Example Supply production demand Case 1 Taker Taker Labour Demand Case 2 Monopoly Taker: Eloss2 in labour market because L2 is lower Why ? To sell output produced by last worker, so that ou

Market Failure In general when Q + Q^n and thee is an e loss 1) Public Goods - Non excludable, non rival (don't get used up), tend to be expensive (library). No one has incentive to pay due to non-excludability - . Markets fail. Non-rival-vertical sums of demand-add Up prices willing to pay: 4 is reservation quantity - Don't buy more than 4 at any price. Kinck out the reservation of person with lowest . cuts 0 left to 4. Plug 4 into . At demand is: is whic

Two players with two strategies. You & him 3 Types of Equilibrium - Downward Strategy (DS) always best Prisoners Dilemma - Thera is built in thereat if there are 2 periods. Thereat won't work because there is no period 3. Only when you don't know when the game ends, pacts work. A repeated game work only if there are infinite number of times. ("Long term cheating") Example 1: Tree Diagram Start at bottom of tree and work up. Player 2 will always confess so better for player 1 to confess so too