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Advanced Microeconomics

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Advanced Microeconomics

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  1. Advanced Microeconomics ECH-51806 Part1: Consumer Theory and Theory of the Firm Dušan Drabik de Leeuwenborch 2105 Dusan.Drabik@wur.nl The material contained in these slides draws heavily on: Geoffrey A. Jehle and Philip J. Reny (2011). Advanced Microeconomic Theory (3rd Edition). Prentice Hall, 672 p.

  2. These slides are not meant to be your sole study material. They are just a (incomplete) summary of what will be covered in Part 1 of the course. Disclaimer

  3. “You've got to be very careful if you don't know where you are going, because you might not get there.”“I'm not going to buy my kids an encyclopedia. Let them walk to school like I did.” - Yogi Berra Quotes to live by

  4. General Information • Advance level course (abstraction, mathematically oriented, but fun) • All relevant information (e.g., problem sets, home assignments, tests) here: http://home.deds.nl/~pvmouche/advmicro.html Recommended supplemental reading Textbook

  5. General Information • Exercises to be solved at home and discussed in class (not graded) • Home assignment for Part 1 due on or before September 18, 2017 in room 2105 (hand-written is fine) (graded) • No official office hours for Part 1. Write me an e-mail or stop by

  6. Consumer Theory

  7. Primitive notions • Four building blocks: • Consumption (choice) set • Consumption bundle (plan) • Preference relation • Behavioral assumption

  8. Preferences and utility Axioms of consumer choice

  9. Preferences and utility

  10. Preferences and utility

  11. Preferences and utility

  12. Preferences and utility

  13. The utility function

  14. Consumer’s problem Find Consumption bundle Feasible set Utility maximization problem  Solution to the UMP is Marshallian demand functions

  15. Consumer’s problem and consumer demand behavior

  16. The indirect utility function Indirect utility function is a maximum value function:

  17. The expenditure function Hicksian (compensated) demand functions

  18. Properties of the expenditure function Advanced Microeconomic Theory – Consumer Theory

  19. Relations between IUF and EF Advanced Microeconomic Theory – Consumer Theory

  20. Duality between Marshallian and Hicksian demand functions Advanced Microeconomic Theory – Consumer Theory

  21. Income and substitution effects

  22. The Slutsky equation

  23. Utility maximisation Expenditure minimisation Slutsky equation (for derivatives) x(p, y) xh(p, u) xh(p, u) = pe(p, u) xh(p, u) = x(p, e(p, u)) x(p, y) = xh(p, v(p, y)) e(p, u) = v(p, e(p, u)) e(p, u) v(p, y) v(p, y) = e(p, v(p, y)) Relationships between UMP and EMP Roy’s identity Adapted from Mas-Collel, Whinston and Green (1995); p. 75

  24. Theory of the Firm

  25. Production • Production possibility set • Production plan • Production function

  26. Production

  27. Cost Conditional input demand

  28. Properties of the cost function

  29. The competitive firm Profit maximization ...or Cost function

  30. The profit function