# Microeconomics 2

WELCOME TO MICROECONOMICS 2 - THE CORE COURSE

Welcome to the Course in October 2003.

STOP PRESS!! ANSWERS TO 2003 EXAMINATION PAPER

Several students have asked me to post the answers to last year's examination paper. I do so with a health warning. Reading the answers without having attempted the paper is a complete waste. You will only benefit from having the answers if you have tried to do the paper yourself. You should use the answers as a check on what you have done. Remember, this year's paper will be different.

ERRATA.

Juan Yang and others have noticed that there is a typo in Tutorial 6. Part (10) should read: "We note something interesting: for each measure of the loss in welfare - the compensating variation, the change in surplus, and the equivalent variation - the measure is always greater for Individual A than for Individual B. Why?" I am sorry about this. Note that this is not a general result.

There are typos on page 74, in the fourth paragraph (that starting "It will be useful..."). The sentence starting "If we look at any curve in Fig 5.1..." should continue "...it is apparent that the sum of q1 plus q2 is constant along any one of these curves: along the top one the sum is 180; along the next to the top the sum is 160;...; along the bottom curve the sum is 20."

KiDae Kim has noticed a mistake on page 58 of the course text. In the sixth line of the first paragraph m - r1 should read M - r1, and in the ninth line of the first paragraph (Q+1, Q-p) should read (Q+1, M-p).

Lu Zhang has noticed a mistake on page 100 of the course text. In the eighth line from the bottom, where the slope of the indifference curves is written, it should be

dq2/dq1=-aq2/[(1-a)q1]

Abi Marshall has noticed a mistake on page 101. The final complete sentence on that page should read:

"So the budget constraint goes from (m/p1,0) to (0, m/p2)."

There is some misleading English on page 122, where the impression is given that money exists in this simple economy. That, of course, is not the case.

Jinkwon Lee has noticed that there are mistakes on pages 157 and 172.
On page 157, in equation 11.5 the bottom line should read:

q1=0 and q2=a y1/s

On page 172 in discussing Type 1 Technology (Perfect Substitutes 1 to a) the production function is incorrectly stated two times. It should be

y = (q1 + q2/a)s.

Lynn Willis has notice a typo in line 11 of page 187. This should read
"a=0.49 and b=0.21 for firm 1 and a=0.42 and b=0.28 for firm 2 (notice that the ratio of"

There is a typo on page 190. In line 22, it says that there are 100 units of both inputs available. It should say that there are 12 units of both inputs available.

There is a typo in the line immediately below fig 14.14. "(0,6)" should read "(6,0)".

Alex Sykes has noticed that there is a typo on page 195. In line 5 of section 15.4 it should read "Table 15.1."

Yaxin Duan has noticed two typos on page 299. The first when talking about someone whose relative risk aversion is constant and therefore has a utility function
u(c) = c1-r
If r is negative, we have someone who is risk-loving. If r is 1 we have someone risk-neutral. If r is between 0 and 1 we have someone risk-averse and it should read:
"Furthermore the closer is r to 1 the more concave is the function and the more risk-averse is the individual. "
Also, when defing the risk premium for a risk-lover I should have written:
"is the maximum amount that he or she would pay to keep the risky prospect rather than have it replaced by the certainty of its expected value."

My thanks to all of these people for noticing these mistakes and my apologies to all of you for the existence of these mistakes. Please keep sending me news about any further mistakes.

In the light of comments made by you, I have put on the site some handout files. These are smaller than the lecture files and contain the more important graphs. I hope that these are helfpul to you.
You are recommended to download and print the lecture file before each lecture. You will find the file indispensable for taking accurate notes.
I should note that this Web Site supplements but does not replace the Module Outline and Tutorial Programme document which states the objectives, aims and methods of the module and provides details of the tutorial programme, and which will be distributed in the first lecture of the course.
I am delighted to announce that my text Intermediate Microeconomics: People are Different, which I have been writing over the last 10 years, with the help of the students taking micro 2 over these 10 years, has been published this year by McGraw-Hill and is the module text. The bad news is that, because of copyright laws, I can now no longer make the book available on the micro 2 web site. But all the lecture handouts are still there. I would advise you (completely impartially) to buy the module text, and to print out the lectures from this site.
You should find all the information that you need on the module of Micro 2, except for the module text, here on this site. In particular, there are all the lecture handouts. You may initially feel that there is not much value added to what you aready know about micro in this module - but if you continue to think that way as the module proceeds then the module or you has failed. There is a lot of new material in the module but it is taught in such a way as to be relatively painfree and enjoyable. The lectures try to avoid the use of mathematics - using the mathematical software Maple to do the mathematics for us. You should not need mathematics in the examinations. More importantly the module tries to teach you how economics is used in practice and to teach you the methodology used by economists. In many ways this is similar to the methodology used by any scientist: first, observe some 'stylised facts' about the real world; second, use these stylised facts to construct a theory to explain the behaviour that has been observed; third, test that theory using other information about the real world; four, use that theory to make predictions of behaviour or of the effects of policy; five, change the theory if it does not appear to be a good explanation of what actually happens. Because of the fact that not all of you do the necessary statistics (econometrics) to test the theories, I shall concentrate more on the construction and use of the theories. Nevertheless there is one chapter in the book, and one lecture in the module, which looks at the issue of empirically exploring the theory.
The main innovation this year is that the text is now published.
Please note that the exam is at the beginning of the SUMMER term. Note also that the examination structure will be the same as in the examination paper in 2000 and the examination paper in 2003 when there were 6 questions and candidates were required to answer 4. In contrast, in the 1999 examination paper, in the 2001 examination paper, and in the 2002 examination paper, there were four questions on the paper and candidates were required to answer all four questions. I should note, however, that the style of the questions is the same in all the exam papers mentioned here.
While the files used in the lectures were produced using Maple, they have all been exported in html format - which makes it easier for you to access (though less flexible for the minority of students who like to have access to the raw Maple files). To look at the lecture material, all you need to do is to click on the appropriate lecture. You should note that many of the graphs are animated and in the html format the speed of the animation can not be controlled (though the speed can be controlled in the original Maple version). You are advise to print out the lectures in advance of the lecture itself and bring the printout to the lecture. You will find it invaluable for the purpose of note-taking.

The chapters are as follows:

Preface

Chapter 1: Introduction lecture, handout

Part 1: Economies without Production

Chapter 2: Gains from Exchange lecture, handout
Chapter 3: Discrete Goods: Demand and Supply and Surpluses lecture, handout
Chapter 4: Continuous Goods: Demand and Supply and Surpluses lecture, handout
Chapter 5: Preferences lecture, handout
Chapter 6: Demand and Supply with income in the form of endowments lecture, handout
Chapter 7: Demand and Supply with income in the form of money lecture, handout
Chapter 8: Exchange lecture, handout
Chapter 9: Welfare lecture, handout

Part 2: Economies with Production

Chapter 10: Firms lecture, handout
Chapter 11: Cost Minimisation and the Demand for Factors lecture, handout
Chapter 12: Cost Curves lecture, handout
Chapter 13: Firm Supply and Producer Surplus lecture, handout
Chapter 14: Production Possibilities lecture, handout
Chapter 15: Production and Exchange lecture, handout

Interlude

Chapter 16: Empirical Evidence of Demand, Supply and Surpluses lecture, handout

Part 3: Applications and Implications of the Basic Tools

Chapter 17: Aggregation lecture, handout
Chapter 18: Revealed Preference and Revealed Profitability lecture, handout
Chapter 19: Compensating and Equivalent Variations lecture, handout
Chapter 20: Intertemporal Choice lecture, handout
Chapter 21: The Discounted Utility Model lecture, handout
Chapter 22: Asset Markets lecture, handout
Chapter 23: Risky Choice lecture, handout
Chapter 24: Expected Utility Model lecture, handout
Chapter 25: Insurance Markets lecture, handout>

Part 4: Market Inefficiencies of Various Types

Chapter 26: Labour Markets lecture, handout
Chapter 27: Taxation lecture, handout
Chapter 28: Monopoly and Monopsony lecture, handout
Chapter 29: Natural Monopoly and Discrimination (note: not part of the syllabus in 2003-4) lecture, handout
Chapter 30: Game Theory lecture, handout
Chapter 31: Duopoly lecture, handout
Chapter 32: Externalities lecture, handout
Chapter 33: Public Goods lecture, handout
Chapter 34: Asymmetric Information lecture, handout

Examination Questions
For those students who would find the raw Maple files useful, you should send John Hey an e-mail message requesting them. You should send a message to jdh1@york.ac.uk. John Hey will then send you 3 zipped files which you should unzip and put into an appropriate directory structure on your computer.

This is the setup. After unzipping you will get a directory c:\new micro in which there will be sub-directories:

• c:\new micro\english
• c:\new micro\english\text files
• c:\new micro\programs
The files wills be put in the various sub-directories as follows:
• e.zip will go into c:\new micro\english
• p_txt.zip will go into c:\new micro\programs
• e_txt.zip will go into c:\new micro\english\text files

The basic maple files are the ones in c:\new micro\english and are called exy.mws where xy is the lecture number. These files read two other files: exy.txt which is in c:\new micro\english\text files and pxy.txt which is in c:\new micro\programs. If you set things up in this way then you should be able to simply go to exy.mws and open it using Maple. You will see that the output has been removed before doing the zipping - because otherwise the files are too big. To get the output you should go into Maple, open the file, and then click on Edit, then click on Execute and then click on Worksheet. Some of these files take quite a while to execute - the time of course depending on how fast your computer is. (If you want a different file structure you will have to make certain changes to the programs - so you are advised against that.)

Hope this is all clear.

You should note that all this material is copyright - we presume you understand what that means and what the implications are if you violate the copyright. (Basically John Hey will do nasty things to you.)

Let me know if you have any problems.

Please note that if you find MAPLE useful and would like your own personal copy, you can buy one from the Computer Service - I understand that the price is an amazingly-reasonable £25 (the normal price is around £500!). You should rush to buy one now!!
We trust that you find the tutorial programme exciting and stimulating. If you do not, we suspect that either you have a problem or your tutor has a problem. Our prejudices would suggest the former as the tutors and the teachers meet every week and have a very intense briefing and de-briefing session. We know that the tutors put a lot of work into their preparation for the tutorials. However if you are experiencing problems, either talk to them or talk to John Hey, or e-mail him at jdh1@york.ac.uk
Last year, the most frequent comment in the end-of-course questionnaire completed by the students was that many wished they had visited the web site earlier, and wished that they had been made to visit it earlier. Do learn from the comments from last year's students.
You can download the Course Outline and Tutorial Programme by clicking here. (This is a Word document, which will be distributed in Lecture 1)

REGISTER with EXEC, the Centre for Experimental Economics, by clicking here

EXEC carries out economics experiments and participants in these experiments have the possibility of earning considerable amounts of cash.

We hope you enjoy the course. If you spot any mistakes or have any comments please get in touch with John Hey.

Author: John Hey
Date: March 2004