1. RL3
Review

2. Exam Date: May 13th, 5:05 -7:05 p.m. Room: (A-K) SS 6210,
(L-Z) Humanities 2650
Cumulative
2 hours (120 min)
Closed book (calculators not needed)
Format: Problems as in PS (no true false q)
Course Grade: , Curve!
Preparation
Master all PS and past exams
Read slides
Read book

3. Consumer’s Theory Fix (parameter) Budget set (plot, interpret slope)
4 types of preferences (plot, find interpret MRS, MT)
Optimal choice
(SoH, find analytically and geometrically)
Magic formula for Cobb-Douglass! (derive it)
Changes in p and m
Substitution and Income effect
Ordinary and Giffen, Inferior and Normal goods
Real endowments (choice)
Geometric representation
Choice – buying and selling

4. 3 applications Labor market - labor supply: w given
Budget set, Choice, Labor Supply, Elasticity
Intertemporal Choice: r given
2 periods: Budget set, Choice, PV, FV, CS Consumption smoothing
2) T periods: Annuity and perpetuity: PV formula
Lease or buy, loan, pension plan, value of the bond
Uncertainty: gamma given
1) Lottery, Bernoulli and VNM utility
2) Risk aversion and certainty equivalent
3) Insurance (fair insurance)

5. Markets and Equilibrium
Many (2) agents
Edgeworth Box

6. Markets: Competitive Equilibrium
1) Choices optimal given prices
2) Markets clear (supply=demand)
Find CE analytically and geometrically. Tricks:
1) one price =1,
2) market clearing for only one good
3) magic formula!
FWT: Competitive equilibrium is Pareto efficient!

7. Competitive Equilibrium

8. Competitive Equilibrium (Geometry)

9. Are Markets Efficient?

10. Pareto Efficiency

11. Are Markets Efficient?

12. Competitive Producers
Producers have technology and maximize profit
Properties of F( , ): RS, MPK, MPL
Geometric representation: Isoquants
SoH for Profit Maximization, Cost Minimization
Profit maximization= cost minimization + choice of y
Derive cost functions, shapes for IRS, CRS and DRS
Supply function (also with fixed costs)
Equilibrium with N producers
Equilibrium with free entry (determine N)

13. Market failure 1. Market Power
One producer (Monopoly) = it has market power
Demand Cost function
Optimal choice, elasticity and markup (uniform price)
TS, CS, PS, DWL
Price discrimination (three types)

14. Market failure 1. Market Power
N firms
Demand Cost function

15. DWL

16. Market failure 2. Externality
Our utility/profit depends on action of others
Positive and negative externality
Problem strategic interdependence = Nash equilibrium
Equilibrium : mutual best responses
Special case of positive externality: Public good
Pareto efficiency: Too little or too much? Free riding

17. Market failure 3. Asymmetric Information
Adverse selection (hidden information)
Example: Buyers of cars know less then sellers
1) Separating equilibrium: good cars not traded
2) Pooling equilibrium: both cars traded
Incentives for good types to send credible signals
Credibility: for bad types too costly to pretend good ones
Moral hazard (hidden action)
Insurance contracts change incentives!
Insurers should take it into account