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A (micro) course in Microeconomic Theory forMSc students
Alexia Gaudeul
∗
May 22, 2009
Abstract
Those lecture notes cover the basics of a course in microeconomictheory for MSc students in Economics. They were developed over fiveyears of teaching MSc Economic Theory I in the School of Economics atthe University of East Anglia in Norwich, UK. The lectures differ fromthe standard fare in their emphasis on utility theory and its alternatives.A wide variety of exercises for every sections of the course are provided,along with detailed answers. Credit is due to my students for ‘debugging’this material over the years. Specific credit for some of the material isgiven where appropriate.
JEL codes:
A1, A23, D0.
Keywords:
Microeconomics; Utility Theory; Game Theory; IncentiveTheory; Online Textbook; Lecture Notes.
∗
Please direct comments and report mistakes to me ata.gaudeul@gmail.com.My websiteis athttp://agaudeul.free.fr.
1
 
1 PROGRAMME 
2
1 Programme
The programme of this course is divided in three parts; choice under uncertainty,game theory and incentive theory. The whole of the course can be covered insixteen hours of teaching, along with eight hours of workshops, over eight weeks.This is an intensive program that is designed both to cover the basics in eacharea and progress quickly to more advanced topics. The course is thus accessibleto students with little background in economics, but should also challenge moreadvanced students who can focus on the later sections in each parts and concen-trate on the suggested readings. Exercises covering each part increase graduallyin difficulty and are often of theoretical interest on their own. Detailed answersare provided.This course may be complemented with lectures on consumer and firm theory,and on general equilibrium concepts. Those are not covered in those notes.The main concepts that are covered in each part are listed below:
Choice under uncertainty (2
×
2 hours lectures, 1
×
2 hours workshop):
Rationality and axiomatic theories of choice. Expected utility theory:its foundations and applications. Experimental tests of expected utilitytheory. Alternatives to EUT: prospect theory, rank dependent expectedutility theory, cumulative prospect theory, regret theory.A large part of this topic is not covered in standard text books and thistopic thus requires independent reading.
Game Theory (4
×
2 hours lectures, 2
×
2 hours workshops):
Normal(or strategic)-Form Games. Dominance, Nash equilibrium, and mixed-strategy extensions. Extensive-Form Games. Information sets, subgame-perfect equilibria, and backward induction. Incomplete-information games,Bayesian Games, Bayesian-Nash equilibria, forward induction. Purifica-tion of mixed strategy equilibria. Auctions. Repeated games and the Folktheorem.
Incentive Theory (2
×
2 hours lecture, 1
×
2 hours workshop):
Principal-agent models. Adverse selection (hidden information). Moral hazard(hidden action). Second best and efficiency. Liability constraints. Riskaversion. Commitment. Repeated adverse selection. Hold up problem.Informed principal. Revelation principle. Direct Revelation Mechanism.
2 Textbooks:
The main texts for the course are:
•
Kreps D.M., 1990, A course in Microeconomic Theory, FT/Prentice Hall(hereafter ‘Kreps’).
•
Varian H.R., 1992, Microeconomic Analysis, Norton, 3d edition (hereafter‘Varian’).
 
2 TEXTBOOKS:
3
•
Mas-Colell A., M.D. Whinston and J.R. Green, 1995, Microeconomic The-ory, Oxford University Press (hereafter ‘Mas-Colell’).All of these cover, more or less, the entire module, except for choice underuncertainty. Each has its strengths, though these are different. Mas-Colellis the most up-to-date and comprehensive, but also the most advanced. Itis advised for those with a good background in microeconomics and withgood mathematical skills, and for those who wish to pursue further studiesin economics.
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