Demand and Supply

Topics: Introduction; demand and supply; elasticity of demand; market demand;

consumer surplus.

Reading: Ch. 2 pp. 1935; Ch. 4 pp 116126.

Review Questions

1. Which goods are substitutes?
2. Which goods are called complements?
3. What is the implication of falling (rising) price/quantity of trade in terms of
demand and supply?
4. What is elasticity? Can you calculate elasticity of a curve?
5. Which has more elasticity in the long run - Durable good, or non-durable good?
6. Which has more elasticity in the short run - Durable good, or non-durable good?
7. How income elasticities differ from long run to short run depending on durability
of a good?
8. What is the elastic part of the demand curve? What happens to the consumer
expenditure if price increases/decreases in the elastic part of the demand curve?
9. What is the inelastic part of the demand curve? What happens to the consumer
expenditure if price increases/decreases in the inelastic part of the demand curve?
10. How to add individual demands to aggregate demand?
11. What is consumer surplus?

Problems
Chapter 2: (Questions for review) 1--11. (Exercises) 1-5, 8, 9.
Chapter 4: (Exercises) 6, 7


Consumer Choice

Topics: Consumer preferences; indifference curves; consumer choice; Normal and
inferior goods; income and substitution effects; Giffen goods.

Reading: Ch. 3 pp. 6182, 89-91; Ch. 4 pp. 103-115.

Review Questions

12. What are the three basic assumptions about preferences?
13. What is completeness?
14. What is transitivity?
15. What are indifference curves?
16. What is an indifference map?
17. Can indifference curves intersect? Why or why not?
18. What is marginal rate of substitution between two goods? How is it calculated
from the indifference curve?
19. What is the relation between marginal rate of substitution of two goods and
marginal utilities of these goods?
20. What is the law of diminishing marginal rate of substitution?
21. What is the optimality of utility maximization imply?
22. What is the relation between relative prices of different goods and marginal
utilities of those goods in an optimal allocation?
23. What is a normal good?
24. What is an inferior good?
25. What is substitution effect?
26. What is income effect?
27. What is a Giffen good?
28. Are all inferior goods Giffen good? And vise versa?

Problems
Chapter 3: (Exercises) 26, 8, 9, 1315.
Chapter 4: (Exercises) 14


Technology and Costs

Topics: Production function; short run and long run; average and marginal products;
law of diminishing marginal returns; isoquants; marginal rate of technical substitution;
returns to scale; opportunity cost; sunk cost; long run and short run cost; economies of
scale; product transformation curve; economics of scope.

Reading: Ch. 5; Ch. 6 pp. 171201.

Review Questions

29. What is average product and marginal product of an input?
30. What is the law of diminishing marginal returns?
31. What is an isoquant? What is the isoquant map?
32. Can or not two isoquants cross each other?
33. What is marginal rate of technical substitution?
34. How is marginal rate of technical substitution related to marginal product?
35. What does the law of diminishing marginal rate of technical substitution imply?
36. What is the mathematical form for a production function, when the inputs are
perfect substitutes/complements?
37. What do you mean by increasing/decreasing/constant returns to scale?
38. What is a Cobb-Douglas production function? Verify all the concepts with this
production function.
39. What is opportunity cost?
40. What is fixed cost? What is variable cost? What is sunk cost?
41. How do you define marginal cost, average total cost, average variable cost and
average fixed cost?
42. What is an isocost line?
43. What are economies and diseconomies of scale?
44. What is the relation between short run and long run costs?
45. What is a product transformation curve?
46. What are economies and diseconomies of scope? How to measure the degree of
economies of scope?

Problems
Chapter 5 (Exercises) 110.
Chapter 6 (Exercises) 1 6, 811, 13, 14.


Perfect competition

Topics: Price taking; product homogeneity; free entry and exit; profit maximization;
market and firm demand curves; short run and long run profit maximization;

Reading: Ch. 7; Ch. 8.

Review Questions

47. What are the criteria for perfect competition in a market?
48. What is the condition of perfect competition in a firm?
49. What is the difference between market and individual demand?
50. What is the relation between average revenue, marginal revenue and price in a
perfectly competitive market?
51. What is the condition of profit maximization for a firm?
52. When does a plant shut down when making a loss?
53. When does a plant not shut down even after making losses?
54. How do you find out the supply curve for a firm?
55. How do you find out the supply curve for an industry?
56. What is the price in a perfectly competitive industry in the long run?
57. Who bears the burden of an output tax buyer or seller?
58. Compute the consumer surplus, producer surplus and deadweight loss in
situations, which are departures from a perfectly competitive market
a. Minimum price
b. Import quota
c. Tariff
d. Tax
e. Subsidy

Problems
Chapter 7 (Exercises): 113, and 16.
Chapter 8 (Exercises): 26.


Monopoly

Topics: Average revenue and marginal revenue; monopolists profit maximization;
elasticity and pricing; measurement of monopoly power; source of monopoly power;
social costs of monopoly; price regulation; natural monopoly and regulation.

Reading: Ch. 9 pp 293300, 304316.

Review Questions

59. Given the inverse demand curve, calculate the marginal revenue and the average
revenue of a product.
60. What is the monopolists profit maximizing output? On which things, does it
depend on?
61. If the demand is more elastic in a sector, does it make a monopoly in that sector
keeping a high profit? Discuss economic intuition.
62. What is the index of monopoly power? Discuss the case of supermarkets and
videos to compare the monopoly power in both the sectors.
63. What is the social cost of monopoly in terms of consumer surplus and producers
surplus?
64. What is deadweight loss? Can you calculate deadweight loss for a linear demand
function?
65. What is the effect of price regulation in case of a monopoly? Discuss various
cases.
66. What is natural monopoly? What kind of cost structures gives rise to natural
monopoly?
67. What should be the rule to regulate price for a natural monopoly? How does it
benefit the customers and the firm?

Problems
Chapter 9: (Exercises) 3, 4a, 5, 6, 7, 17, 18.




Further pricing with monopoly power
and Monopolistic Competition

Topics: Price discrimination and consumers surplus; first degree price discrimination;
second degree price discrimination; third degree price discrimination; intertemporal and
peak-load pricing; two part tariff; monopolistic competition- short run and long run
equilibrium, economic efficiency.

Reading: Ch 10, pp. 333353. Ch 11, pp 372-376.

Review Questions

68. What is the (first degree) perfect price discrimination?
69. What is the value of consumer surplus in case of a first degree price
discrimination?
70. What is (second degree) price discrimination?
71. What is (non-linear) block pricing?
72. Clarify with example about block pricing?
73. What is third degree pricing?
74. What is the rule for creating prices for different groups in a third degree pricing?
75. How the elasticity of a market is is related to the third-degree monopoly price
charged in the market?
76. Find examples of third degree pricing.
77. What is peak-load pricing?
78. What is intertempotal price discrimination?
79. What is two part tariff?
80. What are the two characteristics of monopolistic competition?
81. What is the short run and long run profit in monopolistic competition?
82. Is price in monopolistic competition higher than or less than perfect competition?


Problems
Chapter 10: Questions for review: 1--11 (Exercises) 28, 10.

Game theory and oligopoly

Topics: Games as representations of strategic decisions; dominant strategy equilibrium;
Nash equilibrium; prisoners dilemma game; Cournot model reaction curve and
example of linear demand curve; Bertrand model; differentiated goods; competition vs
collusion; implications of prisoners dilemma on price in oligopolistic prices; repeated
and sequential games; sub-game perfect Nash equilibrium (spne); Stackelberg model;
first mover advantage, empty threats, commitments and credibility; entry deterrence.


Reading: Ch. 11 pp. 377-395; Ch. 12 pp. 405411, 416-432

Review Questions

83. In a game, who is a player?
84. In a game, what is a strategy, strategy set and strategy profile?
85. What is dominant strategy for a player?
86. What is a dominant strategy equilibrium?
87. What is a Nash equilibrium?
88. How many Nash equilibriums could be there in a game?
89. What is Cournot duopoly model and Cournot Nash equilibrium?
90. What is the reaction curve in the Cournot duopoly model?
91. What is the relation between Cournot output, monopoly output and perfect
competition output?
92. What is Bertrand model?
93. Why should there be price rigidity in oligopolistic pricing?
94. Explain kinked demand curve as an outcome of price rigidity.
95. What is price leadership in a market dominated by a few firms?
96. What is the outcome in a finitely repeated prisoners dilemma game?
97. What is the outcome in an infinitely repeated prisoners dilemma game?
98. What is a sequential game?
99. How would you refine various Nash equilibria through sub-game mechanism?
100. Demonstrate the following with an example:
a. First mover advantage
b. Empty threats
c. Credible commitment

Problems

Chapter 11: (Exercises) 3a, 3b, 3c, 3d, 4, 5, 6, 8, 10, 11.
Chapter 12: (Exercises) 3b, 3c, 4a, 4c, 5a, 5c, 5d, 7, 8a, 8b, 8c.


Externalities and public goods

Topics: Social cost and social benefit; marginal external cost; negative and positive
externality; inefficiency of externality; concept of property rights; bargaining and
economic efficiency; Coase theorem; Public goods nonrival and nonexclusive;
Efficiency in the allocation of public goods; public goods and market failure; voting and
private goods.

Reading: Ch. 16 pp. 529533, 550553, 557563.

Review Questions

101. What is social cost of an action (say, industry output)?
102. What is the difference between social cost and private cost?
103. What is the definition of external cost?
104. When do we have a case of negative externality?
105. What is the social benefit, private benefit and external benefit of an
action?
106. When do we have a case of positive externality?
107. What is coase theorem?
108. Illustrate Coase theorem with various examples.
109. What are the properties of a public good?
110. What is a nonrival good?
111. What is a nonexclusive good?
112. Draw examples of goods which are nonrival but exclusive.
113. Is there any nonexclusive but rival goods? Clarify.
114. What is the problem of free riding in public goods?
115. What is the efficient way of allocating public goods efficiently?
116. Is there any way to secure public goods through market?
117. Does voting via majority rule secure optimal level of public good? Work
out with an example.

Problems

Chapter 16: (Exercises) 3, 6, 7, 8, 9, and 11.

Decision making under uncertainty

Topics: Description of risk: expected value and variability; preferences toward risk;
Reducing risk: diversification and insurance; behavioral economics.

Reading: Ch. 18 pp. 595611, 621626;

Review Questions

118. Find the expected value of standard deviation of a random variable from
its probability distribution.
119. What is the role of standard deviation in describing risk? Elaborate with
examples.
120. Define risk-averse, risk-neutral and risk-loving preferences.
121. Define risk premium.
122. For a lottery and utility function, calculate risk premium.
123. What is the condition for reduction of risk through diversification?
124. What is the role of insurance in reducing risk? Elaborate.
125. What is actuarial fairness in insurance?
126. Can you observe a behavior in you which is not consistent with neither of
risk-averse, risk-neutral and risk-loving attitude?


Problems

Chapter 18: (Exercises) 18, and 10.

Information economics
Topics: Adverse Selection; Moral Hazard.

Reading: [Kreps] Ch. 1819. [PRM] Ch. 17 pp. 567-584.

Review Questions

127. What is the problem of adverse selection? Clarify with an example.
128. What is the problem of moral hazard? Elaborate.

Problems

Chapter 18 (David Kreps, "Microeconomics for Managers"): 18.1, 18.2.
Chapter 19 (David Kreps, "Microeconomics for Managers"): 19.2, 19.3.