A SHORT COURSE IN

INTERMEDIATE MICROECONOMICS

WITH CALCULUS

Roberto Serrano1 and Allan M. Feldman2

email: allan feldman@brown.edu

2010,
c 2011
Roberto Serrano and Allan M. Feldman
All rights reserved

1
Department of Economics, Brown University, Providence, RI 02912, U.S.A. and IMDEA-Social Sciences Insti-
tute, Madrid, Spain
2
Department of Economics, Brown University, Providence, RI 02912, U.S.A.

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 Table of Contents

Preface

(3 pp., 976 words)

Lesson 1. Introduction

(3 pp. 1155 words)

Lesson 2. Preferences and Utility

(23 pp. including 10 figures, 6400 words)

2.1 Introduction

2.2 The preference relation. Assumptions on preferences:

2.2.1. Completeness

2.2.2. Transitivity

2.2.3. Monotonicity

2.2.4. Convexity of indifference curves

2.3 The marginal rate of substitution

2.4 Utility functions

2.5 Utility functions and the marginal rate of substitution

2.6 A solved problem

Exercises (5)

Appendix: Differentiation of functions

Lesson 3. The Budget Constraint and the Consumer’s Optimal Choice

(24 pp. including 8 figures, 6744 words)

3.1 Introduction

3.2 The standard budget constraint, the budget set and the budget line

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 3.3 Shifts of the budget line

3.4 Odd budget constraints

3.4.1. 2-for-1 store coupons

3.4.2. Ration coupons

3.5 Income and consumption over time, with income this year only

3.6 Income and consumption over time, with income this year and next year

3.7 The consumer’s optimal choice: graphical analysis

3.7.1. Special case: M RS not defined

3.7.2. Special case: corner solution

3.8 The consumer’s optimal choice: utility maximization subject to a budget constraint

3.8.1. Brute force method

3.8.2. Use-the-graphs method

3.8.3. Lagrange function method

3.9 Two solved problems

Exercises (6)

Appendix: Maximization subject to a constraint: the Lagrange function method

Lesson 4. Demand Functions

(23 pp. including 14 figures, 6846 words)

4.1 Introduction

4.2 Demand as a function of income

4.3 Demand as a function of price

4.3.1. Inverse demand

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 4.4 Demand as a function of price of the other good

4.5 Substitution and income effects

4.6 The compensated demand curve

4.7 Elasticity

4.8 The market demand curve

4.9 A solved problem

Exercises (6)

Lesson 5. Supply Functions for Labor and Savings

(21 pp. plus 11 figures, 7847 words)

5.1 Introduction to the supply of labor

5.2 Choice between consumption and leisure

5.2.1. The budget constraint

5.2.2. Preferences

5.3 Substitution and income effects in labor supply

5.4 Other types of budget constraints

5.4.1. Non-labor income

5.4.2. Unemployment benefits

5.4.3. Overtime

5.5 Taxing the consumer’s wages

5.6 Saving and borrowing

5.7 Intertemporal choice of consumption

5.7.1. The budget constraint

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 5.8 The supply of savings

5.9 A solved problem

Exercises (6)

Lesson 6. Welfare Economics 1: The One-Person Case

(19 pp. plus 5 figures, 7349 words)

6.1 Introduction

6.2 Welfare comparison of a per unit tax and an equivalent lump sum tax

6.3 Rebating a per unit tax

6.4 Measuring a change in welfare for one person

6.4.1. Measuring one consumer’s welfare change in dollars, when one price rises, for a
simple product utility function

6.5 Measuring welfare change for many people, a preliminary example

6.5.1 Measuring society’s preference for one program over another. Should schools teach
music or art (if they cannot afford both)?

6.6 A solved problem

Exercises (6)

Appendix: Revealed preference

Lesson 7. Welfare Economics 2: The Many-Person Case

(16 pp. plus 5 figures, 6032 words)

7.1 Introduction

7.2 Quasilinear preferences

7.3 Consumer’s surplus

7.4 A consumer’s surplus example with quasilinear preferences

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 7.4.1 A quasilinear utility function, when one price rises; compensating variation, equiva-
lent variation, and the change in consumer’s surplus

7.5 Consumers’ surplus

7.5.1 Build a bridge?

7.6 A last word on the quasilinearity assumption

7.7 A solved problem

Exercises (6)

Lesson 8. Theory of the Firm 1: The Single-Input Model

(21 pp. plus 10 rough figures, 7533 words)

8.1 Introduction

8.2 The competitive firm’s problem, focusing on its output

8.2.1. The production function

8.2.2. Price or market constraints

8.2.3. Profit

8.2.4. Total cost, average cost and marginal cost

8.2.5. Profit maximization with output as the choice variable

8.3 The competitive firm’s problem, focusing on its input

8.3.1 Marginal product and average product

8.3.2. Profit maximization with input as the choice variable

8.4 Multiple outputs

8.5. A solved problem

Exercises (6)

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Lesson 9. Theory of the Firm 2: The Long Run, Multiple-Input, Single-Output Model

(22 pp. plus 10 figures, 8287 words)

9.1 Introduction

9.2 The production function in the long run

9.2.1. Marginal products of inputs, and assumptions about isoquants

9.2.2. Technical rate of substitution

9.2.3. Returns to scale

9.2.4. Marginal products and T RS in the constant returns to scale case

9.3 Cost minimization in the long run

9.3.1. Isocost lines and the condition for cost minimization

9.3.2. The relation between long run cost curves and returns to scale

9.4 Profit maximization in the long run

9.4.1. Returns to scale and long run supply

9.5 A solved problem

Exercises (6)

Lesson 10. Theory of the Firm 3: The Short Run, Multiple-Input, Single-Output Model

(12 pp. plus 5 figures, 4147 words)

10.1 Introduction

10.2 The production function in the short run

10.3 Cost minimization in the short run

10.4 Profit maximization in the short run

10.5 A solved problem

Exercises (2)

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Lesson 11. Perfectly Competitive Markets

(24 pp. plus 11 figures, 9605 words)

11.1 Introduction

11.2 Perfect competition

11.2.1. Price-taking behavior

11.2.3. Homogeneous goods

11.2.3. Perfect information

11.2.4. Free entry and exit in the long run

11.3 Industry supply

11.3.1. Two firms with different cost curves

11.3.2. Large number of identical firms

11.4 Equilibrium in a competitive market

11.5 Competitive equilibrium and social surplus maximization

11.6 The deadweight loss of a per unit tax

11.6.1. Effects of a per unit tax in the short run

11.6.2. Long run effects of per unit tax

11.7 A solved problem

Exercises (6)

Lesson 12. Monopoly and Monopolistic Competition

(24 pp. plus 6 figures, 8968 words)

12.1 Introduction

12.2 The classical solution to monopoly

12.3 Deadweight loss from monopoly: comparing monopoly and competition

12.4 Price discrimination

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 12.4.1. Common or third degree price discrimination

12.4.2. Perfect or first degree price discrimination

12.5 Monopolistic competition

12.6 A solved problem

Exercises (6)

Lesson 13. Duopoly

(23 pp. plus 6 figures, 8070 words)

13.1 Introduction

13.2 Cournot competition

13.2.1. Comparison with monopoly and competition

13.3 More on dynamics

13.4 Collusion

13.5 Stackelberg competition

13.6 Bertrand competition

13.6.1 Homogeneous goods case

13.6.2 Differentiated goods case

13.7 A solved problem

Exercises (6)

Lesson 14. Game Theory

(23 pp. plus 7 figures, 9510 words)

14.1 Introduction

14.2 The prisoners’ dilemma game, and the idea of dominant strategy equilibrium

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 14.3 Prisoners’ dilemma complications: experimental evidence and repeated games

14.4 The battle of the sexes game, and the idea of Nash equilibrium

14.5 Battle of the sexes complications: multiple or no Nash equilibria, and mixed strategies

14.6 The expanded battle of the sexes, when more opportunities make players worse off

14.7 Sequential move games

14.8 Threats

14.9 A solved problem

Exercises (6)

Lesson 15. An Exchange Economy

(24 pp. plus 9 figures, 8798 words)

15.1 Introduction

15.2 An economy with two consumers and two goods

15.3 Pareto efficiency

15.3.1. Feasible allocations and the Edgeworth box

15.3.2. Tangencies of indifference curves and the Edgeworth box

15.4 Competitive or Walrasian equilibrium

15.5 The two fundamental theorems of welfare economics

15.4.1. First fundamental theorem of welfare economics

15.4.2. Second fundamental theorem of welfare economics

15.6 A solved problem

Exercises (6)

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Lesson 16. A Production Economy

(21 pp. plus 8 figures, 7799 words)

16.1 Introduction

16.2 A Robinson Crusoe production economy

16.3 Pareto efficiency

16.4 Walrasian or competitive equilibrium

16.4.1. The firm

16.4.2. The consumer

16.5 When there are two goods, bread and rum

16.6 The two welfare theorems revisited

16.6.1. First fundamental theorem of welfare economics

16.6.2. Second fundamental theorem of welfare economics

16.7 A solved problem

Exercises (6)

Lesson 17. Externalities

(24 pp. plus 2 figures, 8630 words)

17.1 Introduction

17.2 Examples of externalities

17.2.1. Hip-hop music

17.2.2. Flowers in your neighbor’s garden

17.2.3. Motorcycles with aftermarket pipes

17.2.4. Food consumption by people you care about

17.2.5. A steel producer on a river

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 17.2.6. Fossil fuels and global warming

17.3 The steel producer and the fish farm

17.4 Classical solutions to the externality problem: Pigou and Coase

17.4.1 Pigouvian taxes and subsidies

17.4.2 Coasian property rights

17.5 Modern solutions for the externality problem: Markets for pollution rights

17.6 Modern solutions for the externality problem: cap and trade

17.7 A solved problem

Exercises (6)

Lesson 18. Public Goods

(24 pp. plus 3 figures, 9197 words)

18.1 Introduction

18.2 Examples of public goods

18.2.1 National defense

18.2.2 Lighting on a city street

18.2.3 Fire departments

18.2.4. Broadcast television

18.2.5. Public parks, public libraries, public monuments

18.2.6. Public education, public health

18.2.7. Scientific and technical knowledge

18.3 A simple model of an economy with a public good

18.4 The Samuelson optimality condition

18.5 The “free rider” problem and voluntary contribution mechanisms

18.6 How to get efficiency in economies with public goods

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 18.6.1 Command policies

18.6.2 Wicksell/Lindahl taxes and the Lindahl equilibrium

18.6.3 Demand-revealing taxes

18.7 A solved problem

Exercises (6)

Lesson 19. Uncertainty and Expected Utility

(16 pp. plus 2 figures, 5967 words)

19.1 Introduction and examples

19.1.1. Used cars

19.1.2. New cars

19.1.3. Your college

19.1.4. Dangerous activities

19.1.5. Life insurance and annuities

19.1.6. Investments

19.1.7. Gambling

19.2 Von Neumann-Morgenstern expected utility. Preliminaries

19.3 Von Neumann-Morgenstern expected utility. Assumptions and conclusion.

19.3.1. Completeness and transitivity of preferences

19.3.2. Continuity

19.3.3. Independence

19.3.4. Unequal probabilities

19.3.5. Compound lotteries (complexity)

19.3.6. Von Neumann-Morgenstern expected utility theorem

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 19.4 Von Neumann-Morgenstern expected utility. Examples

19.4.1 Example showing von Neumann-Morgenstern utility is not ordinal

19.4.2 A risk averse consumer

19.4.3 A risk loving consumer

19.4.4 A risk neutral consumer

19.5 A solved problem

Exercises (6)

Lesson 20. Uncertainty and Asymmetric Information

(20 pp. plus 0 figures, 7833 words)

20.1 Introduction

20.2 When sellers know more than buyers: the market for “lemons”

20.3 When buyers know more than sellers: a market for health insurance

20.3.1 Health insurance/adverse selection example

20.4 When insurance encourages risk taking: moral hazard

20.4.1 Driving while on cell phone/moral hazard example

20.5 The principal-agent problem

20.5.1 Principal-agent example

20.6 What should be done about market failures caused by asymmetric information?

20.6.1. Signaling devices

20.6.2. Screening contracts

20.6.3. Monitoring

20.6.4. The legal system

20.7 A solved problem

Exercises (6)

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