University of London The London School of Economics and Political Science
EC 201

Spring 2014
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 many times consumers preferences depend
upon other people
University of London The London School of Economics and Political Science
EC 201

Spring 2014
EC 201 Lent Term
Week 7
Loss Aversion
Johnny is a riskaverse expectedutility maximiser who will
never accept a 5050 win 11 lose 10 bet, no matter how
great his wealth. What is the biggest Y such that we know
Johnny will turn down a 5050 lose 100/win Y
University of London The London School of Economics and Political Science
EC 201

Spring 2014
1.3 Expenditure minimization and
compensated demand
1.3 Expenditure
minimization and
compensated demand
1. Definitions of compensated & uncompensated demand
2. Definition of the expenditure function
3. Homogeneity of the compensated demand and
expenditure
University of London The London School of Economics and Political Science
EC 201

Spring 2014
EC 201 Lent Term
Week 11
Revision
Rational Beliefs II
Let 50% of people be men, and 50% be women
Suppose you look at the window and can just make
out a persons head in the distance, and the only thing
that you can see is that a hat covers the persons head
University of London The London School of Economics and Political Science
EC 201

Spring 2014
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 onehalf, e4 with probability
k
onefourth, e8 with probability oneeighth. It pays e2 with proba
University of London The London School of Economics and Political Science
EC 201

Spring 2014
EC210
Problem Set 2
1. Microeconomic foundations: Consider the neoclassical model from lectures in which consumers decide
about allocations of consumption and leisure and firms decide how much labour to hire. Suppose that
consumers are subject to a propor
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
Chapter 5
Multiple Regression
Chapter Objectives: In this chapter we shall consider regression models with two regressors.
We shall obtain the OLS estimators of the population regression model, understand the
properties of the OLS estimators and learn how
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
Tutorial 2
1. Let
Solutions
Y i= 1 + 2 X i +ui
be the population regression model and let
Y i= ^1 + ^
2 X i + u^ i be the OLS estimated model.
Adding and dividing by n, we get
Y i=n ^1 + ^ 2 X i + u^ i
Y i = ^ + ^2 X i ( u^ =0)
1
n
i
n
Y = ^1 + ^
2
X
S
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
Chapter 7
Transformation of Variables
Chapter Objectives
We have considered regression models linear in parameters and variables for estimation by
Ordinary Least Square Method. Quite often we encounter models which are non linear in
parameter and variable
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
Singapore Institute of Management
University of London
PRACTICE QUESTION 2
SIMPLE REGRESSION
2
1. Suppose the true relationship between two variables is Yi 1 2 X i 3 X i + i
where Xi is a deterministic sequence, E ( i ) 0 for all i. A researcher, instead
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
Singapore Institute of Management
University of London
Practice Questions 1
1. Consider the model
Yt X t u t , t 1, 2,.,6, E (u t ) 0, E (u t2 ) 2 and E (u s u t ) 0 if s t.
The observations on Xt are
X1
X2
X3
X4
X5
X6
1
2
3
4
5
6
~
1
8
Consider an estima
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
Tutorial 1
Solutions
1. To prove that
2
2
V ( aX +bY )=a V ( X )+ b V ( Y ) +2 abcov ( X , Y )
2
2
By definition V ( ax+ bY )=E ( aX +bY ) cfw_ E(aX+ bY )
2
E [ a2 X 2 +b2 Y 2+ 2abXY ] [ aE ( X ) +bE (Y ) ]
2
2
a2 E ( X 2 ) +b 2 E ( Y 2 ) +2 abE ( XY )
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
Chapter 3
Simple Regression
Introduction
We have observed earlier that for a specified value of an explanatory variable, X the
response variable, Y is stochastic. We wish to estimate the average value of the response
variable at a given value of X. The av
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
University of London
Tutorial 2 Simple Regression Model
2
1. R2, the coefficient of determination is defined as R
Explained Sum of Squares
Total Sum of Squares
.
Show that R2 lies between 0 and 1 when there is an intercept term in the model.
2. Let the r
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
Chapter 4
Normal Linear Regression
Introduction
Observe that the application of the method of OLS to classical linear regression model
does not require any assumptions about the probability distribution of the disturbances
ui. It requires only the assumpt
University of London The London School of Economics and Political Science
Principles of Econometrics
EC 221

Fall 2016
University of London
Tutorial 1 Review of Basics
1. Let X and Y be two random variables. Show that
V (aX bY ) a 2V ( X ) b 2V (Y ) 2ab COV ( X , Y ) , where a and b are known constants.
Explain how this results changes if X and Y are independent.
2. A sim
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102
Microeconomics
Economics
B
MT
Moodle Test 4 (Lectures 6, 7 & 8)
Question 1:
Tesco is one of the largest UK retailing company. It hires half a million of workers, each of
which costing 40,000 on average
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102  Economics B MT
Microeconomics
Moodle Test 2 (Lectures 3 & 4)
Notes: there might be more than correct choice for the following questions. Full credit will only
be given if all the correct choice are ch
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102  Economics B MT
Microeconomics
Moodle Test 1 (Lectures 1 & 2)
Notes: there might be more than correct choice for the following questions. Full credit will only
be given if all the correct choice are ch
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Case study
analysis
HOW THE COURSE WORKS CONTENT, CUEGIS CONCEPTS AND
CASES!
What are case studies?
a story, about a real business making decisions about the future
E.g. Heinz Corporation Millennium Project
Case studies present information for you to thin
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Department of Economics
EC102
Economics B
(Microeconomics)
Professor Gianmarco Ottaviano
Michaelmas Term 2016/2017
1/2
Part 1 of 2. Only a single hard copy is distributed to each
student in week 1. No further hard copies will be available
from us. An elec
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Department of Economics
EC102
Economics B
(Microeconomics)
Professor Gianmarco Ottaviano
Michaelmas Term 2016/2017
2/2
Part 2 of 2. Only a single hard copy is distributed to each
student in week 5. No further hard copies will be available
from us. Part 1
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102  Economics B MT
Microeconomics
Moodle Test 7 (Lectures 14)
Question 1:
Consider the initial situation of the tablet market in which Apple is a monopolist
thanks to its Ipad. Suppose that Apple spends 2
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102  Economics B MT
Microeconomics
Moodle Test 6 (Lectures 11, 12 & 13)
Question 1:
Consider the potato market represented by the following figure:
where sM is supply by Mash Farm, s S is supply by Spuds S
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102  Economics B MT
Microeconomics
Problem Set 1 (Lectures 1 to 4)
This problem set consists of one long question divided in shorter subquestions.
Question:
Consider consumer between two goods:
a. Briefly
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102  Economics B MT
Microeconomics
Moodle Test 6 (Lectures 11, 12 & 13)
Question 1:
Consider the potato market represented by the following figure:
where sM is supply by Mash Farm, sS is supply by Spuds Su
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102  Economics B MT
Microeconomics
Moodle Test 3 (Lectures 5)
Notes: there might be more than correct choice for the following questions. Full credit
will only be given if all the correct choice are chosen
University of London The London School of Economics and Political Science
EC 102

Winter 2014
Gianmarco Ottaviano
London School of Economics
EC102  Economics B MT
Microeconomics
Problem Set 2 (Lecture 5)
This problem set consists of one long question divided in shorter subquestions.
Question:
Mr Bond is on a special mission to Monte Carlo in Pri
University of London The London School of Economics and Political Science
EC 201

Spring 2014
EC201 Class 3
Last
week
Uncompensated demand and tangency
Special case: CobbDouglas utility
Elasticity
Perfect Complements
Changes in uncompensated demand:
Normal and inferior goods
Pasta and rice, pasta and pesto
Solution in
steps
Today
Compensate