Microeconomics Lecture 1

Daniel .
Sanchez & upf . edu

30% problem group of 81-hand it in

day before ta session

101 .
Kam

Textbooks
:

Mas-colell
Rubinstein
Jeble and Reny

Sullabus : 1/ Producer theory

2) Consumer theory -
Expected utility
3) General Equ
↓ Ibame Ahead
3) Externalities and Public
goods
 Unit O . Some Useful Maths
Definitions :
A
neighborhood of a
point p
is a set Nr/P/ containing all
points a such that distance /p quer
. (roos

-Nr(p =
2q3dprq = r
all the q that satisfies the distance between pand q or

A point B limt point of set E if every naghborhood of p contains some

paint E
qp
·

is a a in

Ex Let E =
10 1)
. than p=1 is a limit
point of E even through PEE
.
: ~
112
p
=

=
~
3 i r+
p
=

naghboorbood
A point P is an infence point of E If ther exists roo such that Nulp) WE

if E20 .
11--p :
1 is not an interor pant numbers around I will contain numbers - 1

V2 is an intenar paint of E
p=
pro is not an interner point . points around O will contain
neyatres

·
E is a closed set if it contains all its limit points
if every intenor point of E
E
paint in Eis
an
·
is an open set

EC0 1) is not closed Obes not conten 1 which is a limit

.
_ paint
is not it contains & which is not an interror point
open ,
 if and only if
A set XIR is convex iff Exy ex and all It 10 11.

1x +

(1 -

1)4=x
A set XIRN is stuctly convex if x .y and all 1.e 10 1)
ex .

1x +

11 -

14 Interner /) = intenar points . of X

-re-
&
~
example : strictly convex Strictly conver
⑤ 8

~
-
W *
E M S

W E

Let XIRP be a conver set .

Function f : X-R is
strictly quasioncare in x iff FatIR the

Set SX/frab is
strutly conver

"L
~

W
quasiconcave

↑
f(x1 . x2) =
a
 Y
Let X ER be a Convex Set Function F
:

X-> R .

is strictly quasiconvex in X iff Fa ERR .

the
set 2x1f(x) as is strictly convex

+21
X = R2 s
Any concave In is
quasiconcave
- &
d- 8
Any convex th is
quasiconvex
~
~ -
↑↑- M -
~ -
Any positive monotonic transformation of a
quasiconcave
In is quasiconcave
~ /x
If

quasiconver
-
F
"quasi convex

f(x I x 2) =

↓ Producer theory /MCW Chapter 5) the behaver firms Firms

We will start by modelling of
:

that transform inputs behavioural

are
agents into outputs .
We make some a sumptions
2) Firms are price takers and profit maximizens

2) Technology is
given
3) We will ignore the firm's internal
organization

some definitions =

YIR" is the production art .

where
numbers
Ex Suppose prod plan y
=
1-10 . -s - 31
=Y
·

outputs will be denoted with

positie this means that the firm can
produce
3 uml

will be devoted with numbers Of output of commodity by rang 10 mits of

inputs negatio
3
·
.

production plan commodity 1 and sunts of commodity 2 as inputs

-Each ycY is a
 Properties of Production Sets
assumed Some will be
the appropriatness properties largely depends
of these specific settings on in which
they may be .

Implied by others and some are

mutually exclusive
1) Y is non empty
20 Y is closed set /technical assumption
Y includes boundaries this quadrant means
consequence its
~42 - out
=-
puts .

i points allowed here

3) No-free-lunch : R E30} /intersections
y
-
/ I >4
that inputs
cant produce outputs W
s
8 Possibility of inaction :

OCY the Arm can choose not to produc anything .

Shutdown is possible : Nous
~

e) a prod set that does not satisfy is ↳ satisfies 3 but not d.

Iinum-
I B
741

3) Free disposal : Let Prep set

and let y'eR" such that
y'l Eyl re=1 ... then yel
42
yey elminated
meaning extra outputs and inputs be

an
can
·

M
↑↑↑
Ex I can correct 10 -1/zy /
implies /10 -2) =y=-1 10
5
these 34 : the flo
of
/ exams in . . can
grade
bebry yto
N
Kamin 2hrs .
15 - 1/el =
3 kams in one hour

->
Extra inputs outputs can be elminated at no cost

~exclude O

2) Irreversibility : Let
yey1503 then-uzy
foutputs can not be converted back
inputs into

ext I use I tomato Toron to matc sclad Cant use sald .

to produce etamato and onion
 Global Returns to Scale Properties
NIRS) 21 Non returns to scale Let yel Then for all 10 1)
increasing
at
ayey
.

.
.
.

↓ scaling down is
possible
·

·
Y 2-42

implies possibility of inaction 1

Intrition :
suppose y satisfies tree disposal and that For x

-
&
2
⑧ >41
-2 . 2 / EY By Free disposal -2 . . 124
Now let E= max such that 1/ Ey Suppose . .

Lecture 2 Micro Oct G2023 I = -

1 5 .
then f1 .

input
5 . 1/ by
put
then f2 2/ey -

If this is the case the starting from fl .

5 .
11 we can double output

by increasing Input by Conclusion if f1 11 have

33 % .
ey we

sets scale
increasing
to we are

assummy (1) es part ppel

mar es E 1 =-
.
5 smallest # of input

I whit of
necessary to produc output
 Lecture 2 Micro Oct G 2023

2) Nor Decreasing returns to scale let Ye/ then fur all a Pay
Scaling up is possible
1 42
↑
.
4

a -

41

af Constant returns to scale .

Let yty the verall or 10 my ty
down possible
Scaling up or is

↑ 1 42
↑
. CRS implies NIRS +
NDRS
y
a -

41

-
10/ Convexity is and
convex 1-20 1) x4+1-dy'ty
i e
.
.
Fu Y's.
y .

implies unbalanced input combinations ob no better than balanced ones

:

ext hr of labor us Ihr of machine

1
unbalanced --

Similarly Balanced output combinations are not more costly than unbalanced ones
Relationship between Properties
~
Convexity possibility of inaction implies NIRS
+

Proof By inaction O Cy and suppose that Yey prod plan that is posable than by convexity
1) -
xy r x/0tyFx=[0 xyty + x= (0 1) NIRS =
+
-
- -

- Inaction + Free disposal

+

Irreversibility --
No free lunch show proof

Before sets last

characterizing production . We define one concept
* A prod plan yey is equent iff Fy'fy such that yc'= Y(Fl : 1 ... y'ty
1 42
·u Not efficient .
I can produce more outputs with less Input
·y
- - -

a -

41

Section 1 .
Characterization of Production Sets
1) Transformation function
2) Production function maps to real

Transformation Function F R R
:
:
--

for which the th

Properties : y / =

Sy-R) F(y)= 03 Hence the max value max

4 =Y
Fru) =
0 .
The paints
is exactly O are the transformation fronter
A

<y +R (F(y) 03
"In
I ⑦
i =
=

Fru)I x 0
,
y
/ Fru
=
0
 Extransformation ful Fu ye) ,
=

ye+ 42. The transformation

.
is Sy 423 -
4 , +yz
=

241 . 42342 =- ye =
lunit of commodity

·eventury
inbreis i con be used to
produce
In this example we have that for instance H -1/-Y 1 unit of
. com 1
f 11 zy= vice versa
.

Another ex .
Fy -
42 43
.
. 401 =

4 , -Fyz
+

ys+ Zys
Defined fakerer daned
z cont be positie /Not
·
Here commodity is an input while commodities 1. 3 8
. can be input or output
F(y , 2) = - Fy, +

yz
the prod Set is
y :

34. . 423 YE41]

42

v
1
y2
=

j-
"Ta
Observe from this example that only the fronter the facs
- producer tradeoff between
at a

- -/,
/
... .

in
- commodities 1 and 2
a -

41 ,
i .
e .

increasing the net output of one commodity implies decreasing

the of the other
net output one .

Let i =y /onfier)1) implies Fri)= 0 F yu= 0 rat

-
...

by differentiating dus-ddyz-ddy
yields
.
e

d42 dyL
=> Now let Dy : =
0
Dys
except and DK

d) dyx+ dry/du
dryduL 0 dydyL--rdy
-

=-
=
-

dyL du dyk d4 d/E)/dyL

Let dry)/dyw- MR Rate of Transformation
-

?
!
Marginal
df)/duL
 U 4 Y
dry)/dyw- MR of Transformation
- Let
?
!
Marginal Rate

df)/duL
This tell Ceteris paribus and remaining at the transformation frontier and increasing the net output
us of comm .

I by s units implice decrasing the he: output of comme by Y a units MRT .

Remart :

Interpretion of this statement

changes slightly if one
commodity are
outputs or
impuls
The marginal rate of transformation (MRT) is the number of units or amount of a good that must be forgone to
create or attain one unit of another good. It is the number of units of good Y that will be foregone to produce an
extra unit of good X while keeping the factors of production and technology constant.

2 Production Functions assume om output that is produced with -11 inputseffn ... XL-ef EARE'
therefore y (( x 4/14 - f(x, x -120 )
x -x
y1(X ...
- -
-
=
..
... -

where f(t ... x-1/ is the production function which reveals the
largest amount of output that can be
produced with
input bundle ... X-i)

vul-XeIR!
'

Def : the input requirement set viul is dened as If y

level
Def The isoquant Qy=3XeR (f(x)
"
is defined as
43
:

of =

x zv

un F(x
say) : 2) =

4
A
 More defs :
·

Average product of input

: Api /= F put

=Fr
input
·

Marginal product of input : is MP :

Oxi /comparable
Substitution (1))-Of(/0X=
Marginal Rate of Technical /MRTS1. this anabgors to MRT
·
is

ufk)/UX
Def let f be a prod n and lett - 1
·
f exhibits increasing retur to Jack if fitx)- f) double input
.

: twice output
more

frtx) ffx) obuble imput

-

-constant
&
truca output
=

frt) ~t f) double
-

decreasing input less twice output

③
:
.

assume Fro =

0 then Producer behaviour : we will examine 2 classical problems

E concave -
DRS 1) Profit-max complementary
↑ convex = A IRS 2) cost -
minimization
disp
f linear (R) Hereafter assume satisfies non emptiness obsedness and free
y -

1 Profit Max :
Let peet pructor) of strictly positive components
let p be a vector of The
producer's profit
prices .
max
problem is the
Folburg
max py-Pill P2Yz+ PcYL :
 We bot at 2 subcases
1) transformation An : The proft mat
prob-- max py such that Fu =O
the lagrange for this prob is
-Pey +

P2Y2+ ..
PLY -

1/f(y ... 42) Assume non-emptiness -

closedness -

Free disposal
·
FOC k =
PL-10Fy-
= 0 = Pc =
y + 11)
842 WYL UUL
Complementary slackness 1 Fly")
:

·
=

Here this implies that Fru =0 true bu from /PL= 1SF -

1
=
O WIL

From f we have for all commodities E 1 .

:

R =
luEy/OY this imples
Pl OFyY/0Y
at the solution =
MRTe . /ye

Production Function
Assume a prod In
-

is non
decreasing and differentiable The proft .
max
problem is

max Py-wixI-whiXL-1 St14 fran X ) whatever output produced

.. ..
must be

(e) Xe 10 F1= 1 ... -1 achieved with inputs

/ is firm profits by increasing Thus
constraint
binding .
Since otherwise the
follows
can increase
y .

this announces to rewate the problem as

max
pfft ... X ... -wixh-wh A St X10fl
IX ... X-if -
Xl1 O
 Lecture #3 Oct 10 2023 Lagrange Multipliers
the
lagrongion is therefore : -

L Pf(Xs =

..
X-1)- WIX1 ... WaiX +
Mik+ MariX-
FOC
Mr fl POA-we-u Fl
..
E =
P K -
we +
0 -

uxl 5/x1

Complementary slackness M1=0 Fl :

Mo #l
Hence ,
at an interior solution all the
-
Ni=0 F which implies that PUff")- we l
-0 rxl
Hence Uk 1 lat interor solutions
POf/Xk=w- MRTS
e
:

~
PJ fraux
when K 0 M
"

=
= -
5- 0

XL PUf(x) and ver /X

0
Dindny / MRT_
+
WK-ME
W-x W
- =
=
=
i
.
5Xk

Prf/ ) =
wr re =

MRTS . It'Xwk
WXL we
when XE 0 X1
=
=
- 0
.

Intrikon(angancur
suppose x is st /N -0 te-o and suppose that tongancy is not satisfied In particular
.
suppose
MRtSt 11) - wh . .
This means that 1) The firm can increase input A by one unit and reduced Kr*
by MRIS
we units keeping output constant
2) The firm can get one additonal of kby Sacrifing units of
in the market .
Keeping expenditure constant
 Hence .
~marginally
the firm can increase
usage of input k and reduce
usage
of input by a factor we .
This will keep
/

expenditure constant. While it will increase output *** Thus such an x . cannot be a solution to a PMP .

Intuition for MRTS It

·
when X- 0 xls /) =

the Arm could benefit from increasing usage of Land decreasi 5. but it cant o this both = 0 .
Therefore
* can be a solution if 11/ is satisfied

Solution to PMP defines :

y /p profit-max prod plan in the care of trans function
=
=

=(p w unconditional factor demand correspondances For produt

3
x .
=

y fprw)- supply correspondance I output

-

(p) IP) is the proft function /in case of transf function

H =

py*
(pl p(x (p w -wx (p-w)
= +
=
h . w =

In what follows PMP For this let yep be the

*
will analyze of the solution to proft
, we
propertis .

max
prod plan and H"pl be the prot In ~
vector
~
vector

-Properties 1) Law of
supply : For all P .
P't/RI+ and ye Yp) .
y'ey-p ! -

then (p pi((y y )
!
-

= 0
-

Proof (p-p/u-y'l=
PY'+ Pay
:

1
I

Implications Suppose Pare such that PL=PLFRES1

P and L-15 1553 and let PK-PE ...

from the law of supply-p-ply-lo Obsernthat up-ply-y /

pk-pl'lyk-yk10
:

APK 140
Yk1 yk
 set
prod
Therefore if PA 3) if
*
Y y
=
increases .
cant decrease is convex ·
then y
p. is a care set
2) y =
(p) is homogenous of degree zero in P Proof : suppose y .
y'ty (p)
=
let - /0 1) and
.

proof y=(p)- argmax py suppose y is conve .

This implies that x4+1-xy'ty
YEY I :

some positie constant Moreover py = +

=

(p)
=

Xpy =
xi =

(p)
For all y y't R and +- 0
PY=py' tpy if +py' (p) (1 1)py (1 1)π=/p)
=
+
=
py x
-
=
= -
=

. .

argmax tpy
It D
p(xy (1 xy') π p
=

argmax By
=
=
-
=
+

y ty yEY xy ( x)y't y (p)

=
+ -

y (p1
=

y /tp)tso
=
-
=

8) If I is strictly convex ,
then yep) is a
singleton
Propf : Problem set
 Lecture #8 11 Oct 2023
(p)
*

y
-

profit max-prod plan

Hrp) py (p) =
Profit function
=

Property 5 : Arp/ is homogenous degree one of

Proof let to :
tp)-tpp134p
-> p homogenous deyra 0
Trp so : =
th(p)

Property 6)
Hotelling Gemma : When y is a singleton . Tirp/ is diferentiable at
p and
(5) 0k(p1 y
=

Proof by envelope t
theorem
:

Ilustration : Suppose prod set with prod function /x.x2)

a X110 120
↳= p(f/xinxz)- were-wexz dix+ lax belXixa W we +

,
nee -

Fax Prwi we x .2 .
Pi ~ wi. war
. .

Envelope theorem :
- 8

122
(1 we w2 11-1 To how helps the prob has
=

8
+
. = 1 - F + +
see E T .
assume

-P UP UP UR a solution in which x* - >x2= ->

f(x 1
=
Recall that /Pewnwel=
=

x2 +
y Ti
=

- Pf/ .
Wi -
wa -2 * p. Wir war-wir
(pi wiwa-WEX2"irwini
-

Calculate +

*
=

fix. x2e+
p. - wire-war
 ~wi)+ we botto
-

fa +
/Pi
-

1
f(x *
=
= x2 =

y=
positi price vectus
Property 7 *
/p/ is a conver function of p . Namely For all Yp p'e/R++
- and all &620 .
1)
* *

Problem set fr .

/p + (1 -

11p'(xi/p1 +

/ 1)π
-
+
(p)

Property 8
y (p/ only efficient prod plan
*
contains

Proof : Suppose yty

*
/p) for somep
and suppose
y is not efficient just at frontier
this rcons that there exists a
prod plan y'tl st .
eye ol with at feast one
ineif Struct
max x

y= y
PY component
But then py'-py= #
<
1pU which is a antradiction

One last remark on PMP :

we only consider FOC to find the solution to the PMP The FOC are necusa .

but not sufficient conditions to find the solution We need Soc must also be met Abwever If y is cover
. .
.

then FOC are clo suficient .

Quasiconvexity of the transformation function is sufcient 1

concavity of a
prod function is sufficient .

the PMP may not have solution Therefore

3
a X
Increasing alway incti profit
·
.
·

ex Suppoll y f(x) x assume pow there is no solution

=

= .

A -w +
(p wix
=

=py-wx px = -
 cost minimization .

Suppose prod An is
gren f(xi - -1)
·
Let (w Wai . .
ERII deteimput prices We will consider
the .
on arbitrary output level y
and
will obtan the cost inputs that produces y
minimring comb of

cust mir assumes

price-tabing beavor in inputs markets but necesanly on te output must
·
not .

·
Assume f() is strictly
increasing .
The cost min problem is
min

-Er .. z- 1) W - Et ...
WI-IZL-1 St
/E ..
Es-iI4
WIEL +WIEZ
ne
L- 1 z11 D Fl
L =
wz -

128(z)-4] -
[Neze)
l =

1)
=
FOC :
1 =
we-lUf(zY-M =

0 +e
Uzl Izh

1 ((zy-y)
-

camp slactress :
=
0
*

Ul z1 .=0
* *
=
0 1 =

=
0

By strict Increasingness of f( .. f(z) 1 - 0

=

By 1) /E = Ne
*
wr-r *
obseve Ni -0 it zr
=

Izl Nol = 0 if E O

therefore :

WI-x
*
/z=)- 0 if 2
=
1: 0

82 # z 1
-

0 - 0
= =
=
 Observe that whenever Ent ZE0 that
s .
We
get
Uf/E)/JEE to this problem delivers the conditional factor
- MRTSoZ *
=
The solution
rf/z/UZ demand /(FD)

CFD : z (w 4)-argmin[w=/f/z) =43

=

We
-orgery
the minimized function is called the cost function /W 4) .
=

We
=
/w y .

The FOCs are also sufficient if viy) is conve which occurs when frzr concave
is
quasi
beometrically : in the case of 2 inputs
④

12 Isoquant
Wry Wit +
W2x2
=
K -- Ispost line
⑧
⑧8.

Closer means lower cost

origin
to

ry
⑱
k3
In

Propertis
2

of (w y and
(wry) Suppose f)
=

Z . stuutly inc

If viy) is not convex .

We could here situations like this 2/C(word is control in As gbmain

W for 400 Clwry) stacty increasin in price

+E
.
is

3) C/w y) homogenous of degree one in Pric

⑤
A Here A . B .
(satisfy the - is

viwl Fol but only As asdution (Aw y kc(wi) Fo .

=

1) C/w / - is a
concave function of W .
In offer words for all

B F W w' and all Xe [0 13 /Aw+/-1/w'y=(w + 1)

: -

. .
.

·
5) z/w 4) . LED is
homogenous of
degree &
Ctwiy
in W zekw Y /Wiyl -0
=
.
.
=
z .