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Modern Microeconomics Sanjay Rode Modern Microeconomics 2 Download free eBooks at bookboon.com Modern Microeconomics 1st edition © 2013 Sanjay Rode & bookboon.com ISBN 978-87-403-0419-0 3 Download free eBooks at bookboon.com Modern Microeconomics Contents Contents Preface 9 Acknowledgement 11 1 Consumer preference and utility 13 1.1 Introduction 13 1.2 Preference relations 13 1.3 Utility function 16 360° 1.4 Lexicographic ordering 18 1.5 Demand function 20 1.6 Revealed Preference Theory 22 thinking 1.7 The Weak Axiom of Revealed Preference360° (WARP) 23 . 1.8 Indirect utility function 27 1.9 Expenditure function thinking 32 1.10 The expenditure minimization problem . 37 1.11 The Hicksian demand function 39 360° thinking . 360° thinking. Discover the truth at www.deloitte.ca/careers Discover the truth at www.deloitte.ca/careers © Deloitte & Touche LLP and affiliated entities. Discover the truth at www.deloitte.ca/careers © Deloitte & Touche LLP and affiliated entities. © Deloitte & Touche LLP and affiliated entities. Discover the truth4 at www.deloitte.ca/careersClick on the ad to read more Download free eBooks at bookboon.com © Deloitte & Touche LLP and affiliated entities. Modern Microeconomics Contents 1.12 The Von Neumann-Morganstern utility function 43 1.13 Measures of Risk Aversion 50 Questions 53 2 The Production Function 55 2.1 Inputs to output function 55 2.2 Technology specification 55 2.3 Input requirement set 56 2.4 The transformation function 58 2.5 Monotonic technologies 59 2.6 Convex technology 61 2.7 Regular technology 62 2.8TMP PRODUCTIONCobb-Douglas technology NY026057B 4 12/13/201364 6 x2.9 4 Leontief technology PSTANKIE 65 ACCCTR0005 2.10 The technical rate of substitution 68 gl/rv/rv/baf Bookboon Ad Creative 2.11 Elasticity of substitution 71 2.12 Variation in scale 73 2.13 Revised technical rate of substitution 74 2.14 Homogenous and heterogeneous production function 76 2.15 The Envelope theorem for constrained optimization 79 © All rights reserved. 2013 Accenture. Accenture. 2013 Bring your talent and passion to a global organization at the forefront of business, technology and innovation. Discover how great you can be. Visit accenture.com/bookboon 5 Click on the ad to read more Download free eBooks at bookboon.com Modern Microeconomics Contents 2.16 Duality of cost and the production function 82 2.17 Michael Kalechi’s theory 85 2.18 Neo-Keynesian model of distribution (Kaldor Model) 89 Questions 93 3 Game Theory 94 3.1 Introduction 94 3.2 The rules of the Game 94 3.3 The prisoner’s dilemma: A dominant strategy 97 3.4 Equilibrium strategies 104 3.5 The Cournot model 115 3.6 Solution to the Cournot model by the Stackelberg equilibrium 122 3.7 The Bertrand paradox 123 3.8. Intertemporal dimensions 126 3.9 The folk theorem 131 3.10 Conclusion 134 Questions 134 4 Information Economics 135 4.1 Introduction 135 Unlock your potential eLibrary solutions from bookboon is the key eLibrary Interested in how we can help you? email [email protected] 6 Click on the ad to read more Download free eBooks at bookboon.com Modern Microeconomics Contents 4.2 The asymmetric information model 136 4.3 The principal-agent model: The production game 139 4.4 Optimal contracts: The Broadway game 143 4.5 Moral hazard: Hidden information 145 4.6 Pooling and separating equilibrium: the salesman game 147 4.7 Efficiency wage hypothesis 150 4.8 Adverse selection 151 4.9 Lemon models 152 4.10 Adverse selection under uncertainty: Insurance game III 159 4.11 Signalling 163 4.12 Screening 169 Questions 172 5 General equilibrium and welfare economics 173 5.1 Introduction 173 5.2 The Walrasian equilibrium of a competitive economy 173 5.3 Stability proposition 186 5.4 Edgeworth’s exchange theory 189 5.5 Welfare economics 194 5.6 Pareto efficiency conditions 197 . 7 Click on the ad to read more Download free eBooks at bookboon.com Modern Microeconomics Contents 5.7 The Edgeworth box diagram 200 5.8 Welfare functions and the Pareto criterion 204 5.9 First theorem of welfare economics 209 5.10 The second theorem of welfare economics: (STWE) 214 5.10 Market failure and second best 218 5.12 Instances of market failure 221 5.13 The Coase theorem 224 Questions 227 6 Bibliography 228 AXA Global Graduate Program Find out more and apply 8 Click on the ad to read more Download free eBooks at bookboon.com Modern Microeconomics Preface Preface This book aims at fulfilling the curriculum requirement of the master’s degree students of Microeconomics, a most practical subject with its many applications. This book will be very useful for microeconomic policy making from the local to the global level. It is mainly an attempt to explain an individual’s behavior and a firm’s production function. It elucidates issues like individual utility, saving, income, consumption, information economics, and game theory. General equilibrium, Pareto efficiency, and social welfare are some of the significant topics covered. The various dimensions of the production function, the economics of games, information and logic, and market failure comprise the core of this book. This book will help students to think, analyze and apply microeconomic issues practically. Various industry-related examples such as prices, output, employment and games are used to make understanding the microeconomic issues in detail easier. By providing insights to students, teachers, policy makers, planners and academicians to think about various current microeconomic issues at different levels, this book will ultimately help to solve some of these issues. The consumer choices, preferences, and risks operate at much more complicated levels in microeconomic analysis. Each individual has a unique utility function, making it difficult to study each individual’s behavior. Similarly, each firm always tries to produce more commodities to sell in markets in order to obtain the highest possible profits. Therefore, general conclusions are derived from different case studies in this book. This advanced microeconomics book provides fundamentals of the basic microeconomic identities. It will also assist students from other educational streams to understand microeconomic issues. This subject of microeconomics will be easy to understand by the book’s use of examples dealing with issues relevant today. This book is divided into three parts. The first part explains the topics related to consumer behavior. The second part deals with the industry where production function and game theory are explained. Both these parts are equally important because the first part provides the basis for understanding the second part. The second part needs a slightly more comprehensive knowledge of microeconomics. The third part of the book gives an explanation of Walrasian equilibrium, Pareto efficiency, social welfare and market failure. Besides these, some current issues such as game theory, the Cournot model, the Lemon theory and signalling are also explained. 9 Download free eBooks at bookboon.com Modern Microeconomics Preface The basic concepts of microeconomics are covered in the first chapter. The concepts of consumer preference with revealed preference, rational choice and utility maximization are introduced here. The demand function and indirect utility function are also explained in detail. The expenditure function and the Hicksian demand function are also covered in this chapter. The Von Neumann-Morganstern utility function explains the lottery framework of the consumers. The best and worst lotteries with different probabilities are compared. Lastly, the risk aversion of consumers as a part of their utility function is discussed. The second chapter covers the production function. The specifications of technology, input requirement set, convex technology and technical rate of substitution are discussed in this chapter. Homogeneous and homothetic production functions, and the duality of cost are also covered. The last part of this chapter explains what factor share is and the contribution of Kalecki and Kaldor in the study of the production function. The third chapter elucidates what information economics is, and explains the economics of game theory. Every game has few players but each game is played with certain rules. A Nash equilibrium is an outcome of the various types of games. This chapter explains the various types of games such as co-operative and non-cooperative game, welfare game and the principal agent model. Firms’ production- related games are explained along with the Bertrand and the Cournot models in the second part of this chapter. The game of entry deterrence forms the last part. The fourth chapter describes game theory and its applications. The moral hazard and principal agent problem is explained in detail. Lastly, the Lemon theory, pooling and separating equilibrium, signalling and screening are also explained. These topics are part of advanced microeconomics and are important from a policy point of view. The fifth chapter covers general equilibrium and social welfare. The Walrasian equilibrium with exchange and production is explained. The second section deals with the existence, uniqueness and stability of equilibrium, and explains the welfare properties of a general equilibrium. The last section deals with the measurement of welfare, where market failure and externality are explained with different examples. 10 Download free eBooks at bookboon.com Modern Microeconomics Acknowledgement Acknowledgement Many researchers and academicians have made their unique contributions to the field of Advanced Microeconomics. This book of mine is but a tiny contribution to the vast knowledge available out there. But sincere efforts have been made to study the consumer and the firm and the factors affecting them. My words fall short to express my deep sense of appreciation to my research guide, Professor Dr. Neeraj Hatekar of the Department of Economics at the University of Mumbai. During my postgraduate study, he gave me insight into the economics of game theory – the theory as well as its applications.
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