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Frank C
owell:
Frank C
owell: E
C202 M
icroeconomics
EC
202 Microeconom
ics
Revision Lecture 1
EC202: Microeconomic Principles IIEC202: Microeconomic Principles IIFrank Cowell Frank Cowell
May 2008May 2008
Frank C
owell:
Frank C
owell: E
C202 M
icroeconomics
EC
202 Microeconom
ics
Objectives of the lecture
A look back at Term 1A look back at Term 1 Introduction to exam preparationIntroduction to exam preparation Reference materials used (1)Reference materials used (1)
exam papers (and outline answers)exam papers (and outline answers) 2003 1(c)2003 1(c) 2004 1(c)2004 1(c) 2005 1(a)2005 1(a) 2006 1(a)2006 1(a) 2007 1(a)2007 1(a)
Reference materials used (2) Reference materials used (2) CfD presentations 2.9CfD presentations 2.9 related to past exam questionrelated to past exam question (...more to follow next week)(...more to follow next week)
Frank C
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Frank C
owell: E
C202 M
icroeconomics
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202 Microeconom
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Principles
Scope of exam materialScope of exam material what’s covered in the lectures…what’s covered in the lectures… … … is definitive for the examis definitive for the exam
ResitResit syllabus for 2007/8 is same as 2006/7syllabus for 2007/8 is same as 2006/7 so resit candidates from last year get so resit candidates from last year get the same paperthe same paper as new candidates as new candidates
Structure and format of paperStructure and format of paper follows that of last three yearsfollows that of last three years check out the rubric from, say, 2007 papercheck out the rubric from, say, 2007 paper
Mark schemeMark scheme 40 marks for question 1 (8 marks for each of the five parts)40 marks for question 1 (8 marks for each of the five parts) 20 marks for each of the other three questions20 marks for each of the other three questions multipart questions: except where it’s obvious, roughly equal marks across parts multipart questions: except where it’s obvious, roughly equal marks across parts
Frank C
owell:
Frank C
owell: E
C202 M
icroeconomics
EC
202 Microeconom
ics
Question Style – three types
1 Principles1 Principles reason on standard results and argumentsreason on standard results and arguments can use verbal and/or mathematical reasoningcan use verbal and/or mathematical reasoning
2 Model solving2 Model solving a standard frameworka standard framework you just turn the wheelsyou just turn the wheels
3 Model building3 Model building usually get guidance in the questionusually get guidance in the question longer question sometimes easier?longer question sometimes easier?
One type not necessarily “easier” or “harder” than another One type not necessarily “easier” or “harder” than another get you to display different skillsget you to display different skills part A (question 1) usually gets you to do both types 1 and 2part A (question 1) usually gets you to do both types 1 and 2 type 3 usually only in parts B and C of papertype 3 usually only in parts B and C of paper
Examples from past question 1
Examples from past question 1
Frank C
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Frank C
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C202 M
icroeconomics
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202 Microeconom
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2004 1(c) Straightforward Straightforward
“principles” question“principles” question Just say what you need Just say what you need
to sayto say
Frank C
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Frank C
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C202 M
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202 Microeconom
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2005 1(a) Straight “principles”Straight “principles” Note contrast between Note contrast between
firm and consumerfirm and consumer Be sure to Be sure to give your give your
reasonsreasons
Frank C
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Frank C
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C202 M
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202 Microeconom
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2006 1(a) Principles againPrinciples again But format of question But format of question
gives you a hint…gives you a hint… ……write out write out
decomposition formuladecomposition formula Then read off resultsThen read off results
Frank C
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Frank C
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C202 M
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202 Microeconom
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2003 1(c) A model-solving A model-solving
questionquestion (i) just set (i) just set EE(() = 0 and ) = 0 and
twiddletwiddle (ii) check what (ii) check what
happens to happens to EE if you if you change change
(iii) draw diagram and (iii) draw diagram and reasonreason
Frank C
owell:
Frank C
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C202 M
icroeconomics
EC
202 Microeconom
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2007 1(a) – question and approach
A “hybrid” A “hybrid” questionquestion
Mainly model-Mainly model-solvingsolving
But there’s an But there’s an important important principleprinciple
will a solution even exist?
What’s the solution to the monopolist’s problem?What’s the solution to the monopolist’s problem? Approach:Approach:
Find the expression for profitsFind the expression for profits Then try to maximise…Then try to maximise…
Frank C
owell:
Frank C
owell: E
C202 M
icroeconomics
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202 Microeconom
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2007 1(a) – main answer To get profits we To get profits we
need demand need demand functionfunction
You could just You could just jump to last linejump to last line
Now write down Now write down profit expressionprofit expression
Note wording in Note wording in last linelast line
Frank C
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Frank C
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C202 M
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202 Microeconom
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2007 1(a) – finishing off answer
Use knowledge of Use knowledge of basic principlesbasic principles
Effectively the Effectively the competitive casecompetitive case
No solution!No solution! (we covered this in (we covered this in
lectures)lectures)
Frank C
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Frank C
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C202 M
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202 Microeconom
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Long questions Let’s look at an exampleLet’s look at an example
taken from exercise in the booktaken from exercise in the book but of “exam type” difficultybut of “exam type” difficulty covered in CfDcovered in CfD
Illustrates type 2 questionIllustrates type 2 question Ex 2.9 is mainly model solvingEx 2.9 is mainly model solving next week: look at model buildingnext week: look at model building
Look out for tipsLook out for tips Use simple principles to give you a shortcut to the answerUse simple principles to give you a shortcut to the answer Use pictures where they helpUse pictures where they help
Frank C
owell:
Frank C
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C202 M
icroeconomics
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202 Microeconom
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Ex 2.9(1): Question
purposepurpose: demonstrate relationship between short and long run: demonstrate relationship between short and long run methodmethod: Lagrangean approach to cost minimisation. First part can be solved : Lagrangean approach to cost minimisation. First part can be solved
by a “trick”by a “trick”
Frank C
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Frank C
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C202 M
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202 Microeconom
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Ex 2.9(1): Long-run costs
Production function is homogeneous of degree 1Production function is homogeneous of degree 1 increase all inputs by a factor increase all inputs by a factor tt > 0 (i.e. > 0 (i.e. zz →→ ttzz)…)… ……and output increases by the same factor (i.e. and output increases by the same factor (i.e. qq →→ tqtq)) constant returns to scale in the long runconstant returns to scale in the long run
CRTS implies constant average costCRTS implies constant average cost CC((ww, , qq) / ) / qq = = AA (a constant) (a constant) so so CC((ww, , qq) = ) = AqAq differentiating: differentiating: CCqq((ww, , qq) = ) = AA
So LRMC = LRAC = constantSo LRMC = LRAC = constant Their graphs will be an identical straight lineTheir graphs will be an identical straight line
Frank C
owell:
Frank C
owell: E
C202 M
icroeconomics
EC
202 Microeconom
ics
Ex 2.9(2): Question
methodmethod: : Standard Lagrangean approachStandard Lagrangean approach
Frank C
owell:
Frank C
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C202 M
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EC
202 Microeconom
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Ex 2.9(2): short-run Lagrangean In the short run amount of good 3 is fixedIn the short run amount of good 3 is fixed
zz33 = = zz33
Could write the Lagrangean asCould write the Lagrangean as
But it is more convenient to transform the problem thusBut it is more convenient to transform the problem thus
wherewhere
Frank C
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z2
z1
Ex 2.9(2): Isoquants Sketch the isoquant mapSketch the isoquant map
Isoquants do not touch the axesIsoquants do not touch the axes So maximum problem must have an interior solutionSo maximum problem must have an interior solution
Frank C
owell:
Frank C
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C202 M
icroeconomics
EC
202 Microeconom
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Ex 2.9(2): short-run FOCs
Differentiating Lagrangean, the FOCS areDifferentiating Lagrangean, the FOCS are
This impliesThis implies
To find conditional demand function must solve for To find conditional demand function must solve for use the above equations… use the above equations… ……and the production functionand the production function
Frank C
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Frank C
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C202 M
icroeconomics
EC
202 Microeconom
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Ex 2.9(2): short-run FOCs (more) Using FOCs and the production function:Using FOCs and the production function:
This impliesThis implies
wherewhere
This will give us the short-run cost functionThis will give us the short-run cost function
Frank C
owell:
Frank C
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C202 M
icroeconomics
EC
202 Microeconom
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Ex 2.9(2): short-run costs By definition, short-run By definition, short-run
costs are:costs are:
This becomesThis becomes
Substituting for Substituting for kk::
From this we getFrom this we get
SRAC:SRAC:
SRMC:SRMC:
Frank C
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Frank C
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C202 M
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q
Ex 2.9(2): short-run MC and AC
marginalcost
averagecost
Frank C
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Frank C
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C202 M
icroeconomics
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202 Microeconom
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Ex 2.9(3): Question
methodmethod: : Draw the standard supply-curve diagramDraw the standard supply-curve diagram Manipulate the relationship Manipulate the relationship pp = MC = MC
Frank C
owell:
Frank C
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C202 M
icroeconomics
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202 Microeconom
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Ex 2.9(3): short-run supply curveaverage cost curvemarginal cost curve
supply curve
q
p
q
p
minimum average cost
Frank C
owell:
Frank C
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C202 M
icroeconomics
EC
202 Microeconom
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Use the expression for marginal cost:Use the expression for marginal cost: Set Set p p = MC for = MC for pp ≥≥ pp Rearrange to get supply curveRearrange to get supply curve
Differentiate last line to get supply elasticityDifferentiate last line to get supply elasticity
Ex 2.9(3): short-run supply elasticity
Frank C
owell:
Frank C
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C202 M
icroeconomics
EC
202 Microeconom
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Ex 2.9: Points to remember
Exploit CRTS to give you easy resultsExploit CRTS to give you easy results Try transforming the Lagrangean to make it easier to Try transforming the Lagrangean to make it easier to
manipulatemanipulate Use MC curve to derive supply curveUse MC curve to derive supply curve
Frank C
owell:
Frank C
owell: E
C202 M
icroeconomics
EC
202 Microeconom
ics
Next time
Think more about method for long questionsThink more about method for long questions Look at a few CfDLook at a few CfD
4.12, 4.134.12, 4.13 5.15.1 7.87.8 9.69.6
See how they illustrate methodSee how they illustrate method Connect these to past exam questionsConnect these to past exam questions