Econ 301
Intermediate Microeconomics
Prof. Marek Weretka
Problem set 1
(due Thursday, February 2nd, before the class)
January 27
Problem 1. (Chapter 1)
Question 4 from Chapter 1, Varian (our textbook), pp. 19.
Note: I did not cover Chapter 1 in class. You
Econ 301
Intermediate Microeconomics
Prof. Marek Weretka
Midterm 1 (Group B)
You have 70 minutes to complete the exam. The midterm consists of 4 questions (50+20+15+15=100
points) + bonus (10 extra "e" points). Make sure you answer the rst four questions
Econ 301
Intermediate Microeconomics
Prof. Marek Weretka
Solutions to problem set 6
Problem 1 (Insurance)
a)
b) Given the insurance level x; the consumption in the two states of the world is
CN F
=
CF
=
1
x
10
9
1
x = $50:000 + x
$50:000 + x
10
10
$500:00
Econ 301
Intermediate Microeconomics
Prof. Marek Weretka
Problem set 2
(due Thursday, February 3rd, before class)
Problem 1 (Marginal Rate of Substitution)
In this problem we review your knowledge of calculus.
a) Fill out the following table
U (x1 , x2 )
Econ 301
Intermediate Microeconomics
Prof. Marek Weretka
Midterm 1 (Group B)
You have 70 minutes to complete the exam. The midterm consists of 3 questions (60+25+15=100 points)
+ bonus (10 points). Make sure you answer the rst three questions before worki
RL1
Review
Review
A decisionmaker chooses its most
preferred alternative from the
affordable ones.
Budget set
Preferences (Utility)
Choice (Demand)
Budget set
a)
b)
c)
d)
e)
Budget set: given p1 , p2 , m
Write down budget constraint
Illustrate it geometri
Problem Set 8: Solutions
ECON 301: Intermediate Microeconomics
Prof. Marek Weretka
Problem 1 (CobbDouglas)
(a) To determine the returns to scale, we compare f (K, L) to f (K, L) with > 1.
For f (K, L) = K 2 L2 :
f (K, L) = (K)2 (L)2 = 4 K 2 L2 = 4 f (K,
Problem Set 6: Solutions
ECON 301: Intermediate Microeconomics
Prof. Marek Weretka
Problem 1 (Insurance)
(a) Bens aordable bundle if there is no insurance market is his endowment:
(cF , cN F ) = (50,000, 500,000).
cN F
500, 000
cF
50, 000
(b) Letting $x b
Problem Set 9: Solutions
ECON 301: Intermediate Microeconomics
Prof. Marek Weretka
Problem 1 (Equilibrium with N Firms)
(a) First note that marginal cost is M C(y) = c (y) = 8y. Using the condition that p =
1
M C(y), we have p = 8y = y = 8 p. For prices e
Prof.
Marek Weretka's
Econ 301 Intermediate Microeconomics
Problem Set 9
Problem 1 (Equilibrium with N Firms)
The GMC company is considering building a new car factory in China. The total (xed) cost of the
investment is F = 4 (in billions of dollars). Whe
Prof.
Marek Weretka's
Econ 301 Intermediate Microeconomics
Problem Set 8
Problem 1 (Cost Functions)
Consider the following production functions:
F (K, L) = K 2 L2
F (K, L) = K (1/3) L(2/3)
F (K, L) = K (1/4) L(1/4)
a) What is the returns to scale for each
L18
Supply function,
Entry and market structure
Today:
Partial
equilibrium model (one industry)
D( p ) 12 p
Producers
with cost functions
Questions
 Equilibrium with N firms
 Free entry: How many firms (N)?
Producer: Cost curves
C ( y) y 2
F $1
TC
A
L16
Cost Functions
Producers
Producers:
have technology
y f ( K , L)
Assumptions:
They maximize profit
They are price takers p, wK , wL
p pF ( K , L)  wK K  wL L
Profit Maximization
DRS:
CRS
secrets of happiness
wK
wL
MPK , MPL
p
p
problem: problem
Lecture 20
Monopolistic behavior
Uniform pricing
y ( p) 10 p
TC ( y ) 1 2 y
p
y
Elasticity and markup
y
y
p
p
Elasticity and Markup
With MR=0, elasticity=
Elastic part relevant
Markup
TS, CS, PS and DWL
y ( p) 10 p
TC ( y ) 1 2 y
p
y
How Should a Monopoly
L17
Supply of a firm
Producers
Producers:
Maximize
y = f ( K , L)
profit
 cost minimization (engineers)
(IRS, CRS, DRS)
C ( y)
 Today: level of production (managers)
Today and Next Lecture
Technology
for free? Typically fixed costs F
F does not depe
L13
General Equilibrium
(cont)
Edgeworth Box
A
B
(6,1) (4, 4) (10,5)
OA
A
OB
Desirable Allocation: Pareto Efficient
Allocation x Pareto efficient, if there
does not exist allocation y that is
A) at least as good as x for all
B) is strictly better for at
Problem Set 7: Solutions
ECON 301: Intermediate Microeconomics
Prof. Marek Weretka
Problem 1 (Production Functions)
(a) The isoquants for each of the three production functions are show below:
f (K, L) = K 2 L
L
f2
(f 1 < f 2 )
f1
K
1
3
f (K, L) = K L
1
Lecture 19
Monopoly
Market structure
Market structures:
N
1
2
310
10
Name
pall
A monopolized market  a single seller.
Monopoly affects the price (has market power)
p( y ) 10 y
Takes the price effect into account
Today: choice without disctimination
Mon
L13
General Equilibrium
(cont)
Edgeworth Box
A
B
(6,1) (4, 4) (10,5)
OA
A
OB
Desirable Allocation: Pareto Efficient
Allocation x Pareto efficient, if there
does not exist allocation y that is
A) at least as good as x for all
B) is strictly better for at
L23
Externalities
Road map
1) Consumers choice
2) Equilibrium, Producers
(Pareto efficiency)
3) Market Failures
 fixed cost: monopoly and oligopoly
 externalities and public goods
 asymmetric information
Externalities
So far: utilities on own actions o
Lecture 19
Monopoly
Announcement (Important!)

On Thursday, April 18th :
L1 (12:15) will be held in 125 Ag Hall
L2 (2:303:45 will be held in Ingraham B10
This is only a one time change.
Market structure
Market structures:
N
1
2
310
10
Name
pall
A mon
L17
Supply of a firm
Producers
u Producers:
u Maximize
y = f ( K , L)
profit
 cost minimization (engineers)
(IRS, CRS, DRS)
C ( y)
 Today: level of production (managers)
Today and Next Lecture
uTechnology
for free? Typically fixed costs F
uF does not de
Lecture 19
Monopoly
Market structure
Market structures:
N
Name
1
2
Monopoly
Duopoly
310
Oligopoly
pall
10
Perfectly
competitive
market
A monopolized market  a single seller.
Monopoly affects the price (has market power)
p( y ) = 10 y
Takes the price
L17
Supply of a firm
Producers
Producers:
Maximize
y = f ( K , L)
profit
 cost minimization (engineers)
(IRS, CRS, DRS)
C ( y)
 Today: level of production (managers)
Today and Next Lecture
Technology
for free? Typically fixed costs F
F does not depe
Econ 301
Intermediate Microeconomics
Prof. Marek Weretka
Midterm 1 (A)
You have 70 minutes to complete the exam. The midterm consists of 4 questions (40+15+20+25=100
points) + bonus (just for fun). Make sure you answer the rst four questions before workin