1. Write the formula for the
expenditure function for the utility
function.
2. Dierentiate the expenditure
function with respect to p1 to
obtain the compensated demand
function for q1
Income Eect - Th
AC decreases with output
Average cost decreases when
MC<AC
Price taking with economies of
Scale is IMPOSSIBLE.
Increasing Returns to Scale
MC decreases as q increases
a rm is a price taker if nothing
Class 9
EC201
Margaret Bray, LSE
December 2014
1
Deadlines
For classes Monday January 12 Friday January 9
Class Quiz deadline: 12 noon the day before your class.
Note there are exam questions to hand
EC201
Lent Term
Erik Eyster
Homework 1
Aki and Binh form a two-person exchange economy with two goods:
wheat in year 2014 and wheat in year 2015. Aki is endowed with wA > 0
units of wheat in year 2014
EC 201 Lent Term
Week 6&7
No roll of the dice will never eliminate uncertainty
-Stphane Mallarm (1897)
So far weve examined preferences over choices (e.g.
consumption bundles) with certain consequenc
Graph Sketching for Microeconomics
Margaret Bray
London School of Economics
November 25, 2014
1
Introduction
Graph sketching is using your algebraic and calculus skills to work out what
the graph of a
EC 201 Lent Term
Week 9
Asymmetric Information:
Adverse Selection
Economic actors often interact with others who
have superior information about the consequences
of transactions
Insurance consumers h
EC 201 Lent Term
Weeks 3&4
Welfare
Now that we know how competitive market
produces and allocates goods, we are interested
in assessing desirability or efciency of
economic equilibria.
Does the market
EC 201 Lent Term
Week 8
Johnny is a risk-averse expected-utility maximiser
who will never accept a 50-50 win 11 lose 10 bet,
no matter how great his wealth. What is the biggest
Y such that we know Joh
EC201
Lent Term (Dr. Eyster)
Quiz 6.
1. Consider the Leningrad Lottery that pays e2 (e is the base of the natural
logarithm, i.e. ln(e) = 1) with probability one-half, e4 with probability
k
one-fourth
EC201
Lent Term (Dr. Eyster)
Quiz 5.
Joan Robinson-Crusoe lives on an island by herself. Joan consumers endowment consists of 24 hours of time everyday plus any prots earned by Joan rm.
Joan rm can tr
EC 201 Lent Term
Week 1
General Competitive Equilibrium
Why Study General Equilibrium?
One Reason is that Markets are Interconnected
In 2007, UK government increased its excise duty on bottle of
wine
Walras Law
Recall from last term that any consumer who has non-
EC 201 Lent Term
Week 2
satiated preferences spends all of her income, i.e. has
uncompensated demand that lies on the budget line,
for
Conditional factor demand and cost functions with a
Cobb-Douglas production function
EC201 LSE
Margaret Bray
January 15, 2015
1
Introduction
This note is about nding conditional factor demand and rst
Arrows Impossibility Theorem, the Borda Count and Alternative
Voting
This note explores the properties of two alternatives to the rst-pastthe-post voting system used in British parliamentary elections
Negative Externalities from
Alcohol Consumption
Excess alcohol consumption estimated to cost the NHS
2.7 annually
Government proposes a price oor to curb excessive
drinking
Suppose that demand for alc
EC201
Lent Term
Erik Eyster
Example 1: Finding a General Competitive Equilibrium in an
Exchange Economy.
1. In an exchange economy, Agent A has endowment (2, 2) and preferences uA (xA , xA ) = xA
1
2
An Illustration of the Second Welfare Theorem
An exchange economy consists of two consumers, A and B, and two goods, x and y.
Consumer A has utility function uA xA , y A = xA
function uB xB , y B = x
1. Worked Example of Robinson Crusoe Economy
Joan Robinson-Crusoe inhabits an island by herself, where the only goods are beach
time (leisure) and coconuts. Having earned her degree in Economics, Joan
Insurance Demand
Banker has a job paying 300 that she will lose with
probability 1-p, in which case her income falls to 27.
Banker is expected-utility maximiser with utility-ofwealth function u(w)=!
EC 201
Externalities & Public Goods
Consumption Externalities
Until now, we have assumed that each consumers
preferences depend only upon her private
consumption: ui depends only on (y1i,y2i)
Yet ma
EC201
Lent Term (Dr. Eyster)
Quiz 4.
1. Consider a world with two people A and B. Let S be the utility possibility set: (UA,UB)
is in S if it is possible for A to get utility level UA and B to get uti
EC201
Lent Term (Dr. Eyster)
Quiz 7
1. A student is sitting an exam. If she passes, she will earn a wage wp. If she fails, she will
earn only wf < wp. In figure 1, what is the students chance of passi
EC201
Lent Term (Dr. Eyster)
Quiz 2
1. Which of the following are assumptions (not conclusions) of the general
equilibrium model?
Choose at least one answer.
a. Producers and consumers are price taker
EC201 Classes 8 - 10
Margaret Bray, LSE
December 2014
There is no new work for class 10
Class 8
1
Deadlines
For classes Monday December 8 Friday December 20
Class Quiz deadline: 12 noon the day before
Conditional Factor Demand and Costs with a Fixed
Proportions Production Function
EC201 LSE
Margaret Bray
November 22, 2009
This example works with the perfect complements production function f (K, L)
Comments on the exam questions for EC201 class 9
Margaret Bray
1. (a) Show that the marginal revenue of a rm selling a good with price p is
p 1+
1
e
where e is the own price elasticity of demand.
This
Comments on the exam questions for EC201 Class 5
Margaret Bray
1. (a) Suppose that a consumer can consume only two goods. The price of good 1 is 8; the price
of good of 2 is 4; and income is 40, all m