1. L18
Review

2. Three parts Applications of buying and selling Labor Supply
Intertemporal Choice (T=2,T>2)
Uncertainty
Markets and Exchange
Pareto (In) efficiency
Competitive equilibrium
Producers
Production function
Profit Maximization (labor demand)
Cost Minimization
Supply of the firm

3. Budget set
Buying and selling BS LM IC U

4. Intertemporal Choice T=2
BS derivation, the slope
PV and FV: relation to BS
Find optimal choice of C1 and C2
(with 1+r as a parameter!)
Cobb-Douglass magic formula
Borrowing and lending (saving)
Consumption Smoothing

5. Intertemporal Choice T>2
Constant payments: annuity (perpetuity)
PV formulas
Applications: leasing, loans, bonds, Life cycle models

6. Pension plan How much to save to get $100 annually? Cashflow
How much you get if you save $100 annually?

7. Uncertainty: Theory States of the world (two) Risky and Safe Lottery
Expected value
Bernoulli and von Neumann Morgernstern f.
Risk Aversion and Bernouli U.
Certainty Equivalent

8. Uncertainty: Insurance
Insurance contract
BS derivation, the slope
Choice with fair insurance
Choice with no fair insurance

9. Markets and Exchange Edgeworth Box (apple-orange, IC, U)
Pareto Efficiency
Give a definition
Find all Pareto efficient allocations
Competitive Equilibrium
Definition
Find it (p2=1, 1 market)
Competitive Equilibrium Pareto efficient?
Application: apple-orange, IC, U

10. Markets and Exchange: Example

11. Producers Producers: have a technology
Technology given by production function
Two inputs: Capital and Labor
3 examples
MPL and MPK (decreasing)
Short and Long run (fixed K or not)
Constant Returns to Scale

12. Goal Profit Maximization (Short and Long Run) Find optimal L,K
Secrets of happiness (derive, interpret)
Solve!
Long Run Optimization and Returns to Scale

13. Labor Market Labor demand (short run) and real wage rate
Given labor supply find “equilibrium”
How equilibrium (real) wage rate is affected by
Increased capital
Increased willingness to work
Implications of minimal wage rate

14. Cost Minimization How to efficiently produce Find cost minimizing L,K
Secrets of happiness (derive, interpret)
Solve!
Shapes of C(y) and AC, profit!

15. Cost Minimization
Returns to Scale and Cost functions