ECON10005: FINALS SUMMARY

⑦
Elasticity .

an

2x=/as
B
P D

Demand Elasticity Ep =
D
a
a) Ep> 1 a
ED = 0 1) [D>0

a G Perfectcy a a
Perfectly Elastic Inelastic
elastic Inelastic

P P B
P -

as e 13 2570
Supply Elasticity Es = .

Es = Do
-)
Es 1
Es =
0

a O
Perfectly
Q
Elastic perfectly a
Inelastic
elastic Inelastic

Income Elasticity Ex
Las . . Noemal
goods E Do 0
Necessary goods 17 Ex>0
:

:
=

Interior goods Ex<0 luxury goode

·
: o :

21

Cross-price elasticities · subsitate goods :

EABTA
·
complementary Goods :

EABCO

④ Welfare

max
S
IS PSc I in ·

perfect competition CS 48 =
[S + PS
pr - ⑧

PS

I *
D

a
a ·

&
Government intervention

1 Indirect intervention
.
(on sorD)

Taxes otax on suppli Taxe

es
·
on consumers :

it
Pr
↑t S
PX S

: WI

· ·
·
Ps

·C S

: RR

>O >a

ofPs+t PS : PD- t

a tax burden falls more

heavily on the side of the market that is less elastic
 P
Subsidies S Before
subsidy After subsidy
PS
CS A B +
A B +
+

E + F
A

·
PS F G
+
F G +
+
B 2 +

Pu
G B-C-D E F
subsidy cost
-

D 2
- -

*
a as a DWL -
D
↑

2 .
Direct intervention (on PNC)

Price floor pu 1

suppl
! y alal
a
·

--
*
p -

ps pul b ----

--
I
!
as at as
" >

Squota
1 S
Price quota B

Pause
e

-& A

! *
D
7
a

⑦ International Reade

Pw) pl Autarby Reade

P

18 A B
+
A
Export
A -
PS L B +
2 +

on - B
- i
B A B
+ +
2 A B c D
+ + +

>O
apPW) a
* GSCOW)

1P
PW <p1
Autally Trade
·

15 A A + B +
D

A alt"
-
PS B +
C . C

5 A B
+ +
[ A B GD
+
+

>
re
 Import talify P1 S Fele trade talify

CS At F A B +

PS G C G
+

A tanff E
revenue
B
Pw+t Is At G A B +E G

iii
+ +
+

L
D
Pu

B
D-F cost of tariff
7
-
:

As(Pw) asCOw+t) Gp(Putt) Ap (Pw) O

Import quota pr S free tra de Quota

es As F A B
+

PS G G 2

or
+

auota owners E

ES A- G AtB + E G
+ +

ascon. SCP) abC) apcon) A

& Market failure externalities

:

G
Pr =
SMB - the market equilibrium is socially efficient

PMC =
SMC

P
$ pMc=S)
SMC

" pMBI D)=

" SMB

a
at a aA

competitive market Efficient / Socially

equilibrium optimal outcome

Sme
Negative externality o
PMC

(Smc> PMC MC= PMC

Negative external effect
i
e .

g industrial pollution
:
py ----
- inefficiency in Fee Market

I PMB = SMB

C
at
 Positive Inefficiency
externality P in Free Market pic-sme
"

("G
<SMB) PMB)
↑ SMB =
PMB +

positive external effect .

e .

g vaccinations
.

py -----
ine
education
! DMB
SMB

a7
a

④
Government intervention

SMC
P
Pigouvian tax on -

PMC
No tax After tall Net
gain
↑ taxt CS A D A B-C- D
negative externalities
!
- -

CD PS G -

F F -
G-H- I

ii
R
C-D- E F H I -C H F I D+ E
Internality
- -
-
- - - +

F
PMB
Tax revenue O B ( G 1
+ + +
B + c+
G H
+

Net
gain E

Pigouvian subsidy on Before subsidy After subsidy Net

P
PMC = SNC change
positive externalities CS A +B A +
B C+ G+ H
+
C+G H +

Erin
!
PS C D + 2 D B F I
+ + + +
B F I
+ +

·
- -

a k It ]
-

Enternality +f E F
+ + k+ 1 +
5 +

Tsum =ame e
subsidy 8
-

B C
- -

F-G 1-3 1-
- It I

a
*
Wer
a gain
⑦ Production decisions

production function a F(k ,)

GK capital
= :

L :

labour

& ALCKB
Cobb-Douglas production function :
=

total output & Total

product (ip) the total the level of inputs
productivity o :

quantity of outputs given

the T output from
·
Marginal--(mp) : in an additional unit of input
↓
i
mo -

the law of Diminishing ↑

as the use of an input in
equal increments (with other inputs fixed) ,
a
point will
eventually be reached where

Returns the
resulting additions to output ↓

↑P MP

60
so Diminishing Mp

-
no
0
I
⑦
U
W

24 0 0 10L 1358 M

The Total Cost Function tells the cheapest way of

producing a certain amount of an output given prices

Profit maximization R(a) =

PXQ

n(0) =
RR (a) +C(a)
-

Ma-a
= A Maca) Me e
-
=

> MR (a*) =
Me(a*) optimal
:
level

time & cost SRTC/C) =

FC+VCC) SR at least :
one
input is fixed
LR time needed for
:

all inputs to become variable

the firm key decisions otp the rela between the quantity of out put
:

& concepts input

the
OTC : total costs (depend on quantity of impute) a the
quantity of output
SRMe-> unt of
Diminishing MP implies :
an
increasing produce each extra output
MCT the returns of L
as :

upward stope of the Mc reflects the

property of diminishing
 ·i a
camcar
FL

& costs :

Summary
.

I am logs
1RTC(a) the te of amount of G
using the possible combination
producing an best of

LRTC (a)
LRATC (a) LRATC(a) =
-

F2 inputs that don't valy with the amount of output but that can be recovered
by shutting down

flabour
ve(a) the poction of skcosts that
vacy with typically Costs
a

erial

SRMe(a) SRMC(C) dSRTC(a) = I

ave(a)
- -

d(a) d(a)

SRTC(a) SKTCIC) =
FC + vecal

SRAT(a) SRATe(a) -
(A) -
Ve(a)= AFC+ Arca

AFC(a) AFC(a) =
Fl
T

Ave(a) Avccal ,
(a)
O

Sunk Costs(SC) &

part of decision-making , distinct from accounting plofits
 mc

·
~
cost curves max Ave :
fall for a while before stating to rise

At
ra

·
↳
~
a
i

ene
AFC (always ↓)

↓ MP

case Costs of
study 5 2 .
:

university education

COMMERCE MEDICINE

· "Basic" level of resources required for

teaching o
"High" level of resources required for teaching
~
largest share of costs : FC
largest share of costs :
Va

AVe constant with number of students Are increases with number of students
relatively
o

"Lasta
SRATC

~ AUCY dominant

AFC dominant -
&
Are
- AFC I

a a
Commerce/Law medicine
 RADEOFFS IN TECHNOLOGY

method 1( bucket a hose) Method 2 (automation)

large physical capital required

oflargest
No investment in

Scapacity
machinery
·

constraint affects mis Mp

capacity constraints are less
binding on

SRMC
low He/Increasing High FC/constant SRMC
->
.
->

E .

g :
small-scale retail activity E .

g
:

electricity generation , online sale of books , wineries

Imples low
ECahing
MP of labour
Implies high #C Mp of
electricity
· ·
a constant
-
↓ ↓
SRMC (A) & AVCIA) Skmc(a) & Avc(a) are constant over
:

rising over output output

0 SRATC is U-shaped over output because : 0 SRATC is ↓ over output because :
at low output , the share larger & AFC(a)↓
of Fe
->
is -) AFC (a) is ↓ throughout
+
high output, veca)-Ave(a)↑
- - 1) Ave (a) is constant throughout
· &Mc (a) intersects min SRATC (a)

letrcal)-a-[re+vecal] a

SRme(a)G = FC +
ve(a) -> SRMC(A) = SRATC (a)

SRMC(a)

e "
$

W
point
SRATC(n)
Avai SRAT (a)

- AFC(a)
Arecal sumcal
.
=

aa

a
a

↓ ↓
cheaper at a lower perduction level cheaper at higher production
a level

LRATC(A) SRATCIA]
 technology & Scale
SRATC(A) Of Method 1

=
... -----
-
SATCA) of method 2

LRAC curve

SRYLR ATC In the LR

· ->
adjust all inputs

E ↑ factory size ↑ FC but ↑MP of labour

g
.
:
=

Each SRAT curve deaw for fixed

· is a
specific level of inputs
·
LRATC lies below SRATC -> in the LR-
get to choose which Securve it wants to use

When LRAT ↓ as outputs1-> economies of scale

Economies of Scale the output over which LRATC are ↓

large

↑
Often awise because production levels allow specialisation among worker - each horter becomes better at

their assigned tasks

Diseconomies of Scale the output range over which LRATC are t

can arise because of coordination problems that are inherent in

any large organisation

Constant Returns to Scale

.
o
LRATC& vacy with the level of output -> constant returns to scale

& efficient scale c minimum efficient scale :

lowest level of production that uinimizes LRAI
 "
LRAR

scale scale
Economies of
Efficient Diseconomies ea
of scale
should ↑
production I
a
↓ ATC minimum ↑ ATC
Efficient Scale

⑦ Profit maximization in perfectly competitive markets

<Perfectly) competitive o
Many suppliers
markets
Homogenous (identical) products
·

*
suppliers peice takes a p the market price
· are , is

· free entry/exit

a firm in a competitive · Each firm faces a

constant/perfectly elastic demand curve that is equal to the market plice py
e
pix a
Aha
/mas- (e)
market in(a) =
+

F
p = MR (A) =
AR (a)
.

= per

" *
Profit maximization &(a) =
RR(a)-TC(a) =
p xa-Ate x & = (P -
AT) x a

MR>, MC

Profit maximizing :
MR(07) =
MC(a*) : py

(P AT)
* *
M(ax) =
R (a) -
Tc (C) =
-
x a

Profits (G p*
*
Perfect comp P Optimal output
*

.
O at

F
ar
P &
F
RCA) RCA) P &
F

~
=
=
RCA) = P &

.....
py MRCa) ARIAT py ~
! MRca)
mecas

ARIA) py
I
~cas Ata)
2 MRca) ARIA)
! ·
: -
: -
:

*
a at
⑪ The individual firm in
supply curve of an a competitive market

RRIAY)> TC (at,

↓
reflect OC but not sc

ACCOUNTING ECONOMICS
o costs :
SC+FC+VC(a) · UC :

FC+ve(a)
· Profit :
PC-[SC+ FC +VC(a)] ·
Profit :
PC-[FC+vc(a)] =
a[P-AR(al]

valy by units but can be

include so useful saved
to e
g : compute depreciation enclusively looking at "active" decisions
(FC
:
.

I
-

shutting down
veca) depend on the no .
of
units produced

$ MC (a)

-
Pz => Ps
opportunity costs maximizing ploits

-
ot must at least cover :

ps-----------

JER operate
ifPuStat ee
:
SRAT (A)
P --------
breaks even
a -

Pr -
0 -> P- Pc :

8 Outputs

an az a

SHORT-RUN SUPPLY LONG-RUN SUPPLY

the that firms that are already othe allowed adjust

supply curve exists when
supply curve that exists when all firms are to

in the market
respond to market shocks =
Skte functions their factors of productions

firms may ente

existing tims
produce
-
chooses current technologyy An unlimited number of new e

& &R
perfectly competitive
&R
supply in
perfectly competitive markets
supply in markets

AS (P4) =
CYP4) a (P4)+
+
...
+

cn(P) ·
firms can enterd exit
freely & can adjust their tech
·
Suppose firms are
earning (H) it inthe SR :

=Ea* P -> entice new firms to enter the

industry
-> market
supply shett to the
right p * -

->
process continue until last firm enter make & profit
->
O firms may enter

Firms inSR-firs exit

-> firms prefer to shut down in the UK
· are
earning If accounting
until the least firm that remains in the market
may stay
in SR as
many of their costs may be sunk
plofitable
is
making & economic
 Film profite ·
Each firm fi chooses & · last time to enter must be
making zew profit in the UR
:

· p
*I SRAT ( AFil If nots firs will continue to enter/exit - market
price
·
Firms that decide- shut down adjustments until I con
entry/exit
Ci & production) incur
. e .

accounting losses : sunk costs

Market outcomes o In equilibrium s market price DX =

· In equilibrium, the market price is pu

USP4 A C as (P a Y(P )
*
~market as =
= · =

Il 11

xp(p) Cp(P4
All Sims must
supply <)G & earn 7, 0 economic

u↑
Market
supply
Firm 1

n Sara
Firm's cond
supply
&-profit
Se

antra
p p
Mc
ae
LRAT
-

- supply
~ as
P= min
a IRAT
- - - - - - - - -
-

Supply
anp2

Fiem I starts
supplying at Pr Fiemz starts
supplying at R2
O actimis a <market)

Skindustry
supply

Initially :
the firm is in a LR equilibrium
market Firm
P in LR
① A market begins equilibrium P & ...
with the firm earn o profit
SR S1 me
supply
A
I
W
e

!
P1 ⑧

LRsupply-- Pr
⑧

Demand Pr

O
a <market)
an a(tin)
Response to
a positive When profits induce eltey
demand market fin
supply increases & T ↓
Fin Sin
shock But ther an
leading to SR profit market

P
↑
demand ↑ price P
P
↑ P
estoling (Requi
↑
g MC
91 ...

S1 Me
MR> AT LRAT
B Se ATC

in
W

--
i
- - -

A
- ⑧

2
-
↓
e
p
Rupply
⑧ --- &

Pr
in a

1st equi
0
an as a market activit O an as as a 0 a
(market (im)

If incumbent a new firms have identical cost stencture :

perfectly elastic
E
· Prices should fall backto the same lue as initial (R->(R industry supply is

constant-cost industry
 ·

Market the extent of a firm's market

· market structure influences the power
structure
Market power refers firm's to raise its
selling prices above its me a above the level
·
:
a
ability
that would exist in a
perfectly competitive market

o in a perfectly competitive market -> firms have no market

power

Market A firm's ability to set its its me depends

power price above on :

↓
related
· Barriers to entry ,
i
.
e ., the constraints the preclude other firms from entering the market
inversely
to the degree of
>
government granted over /e .

g .

patents)
natural
monopolies/economies of scale (e lines)
competitive in - .

g power
.

the market # network effects

· Product differentiation :
all products naturally have substitutes , produces have market
power if consumers
are
unwilling to switch to another product

Market Features Market power of firms Demand for firm's

type $
output
Perfect ·
Many suppliers zes

Fece py D
Competition ·
entry/exit
· Identical products 9

$
Monopolistic Intermediate
·
Many suppliers
Competition · free
entry/exit
D

9
· Differentiated products

$
Monopoly .
·
single supplier High
Barriers to
entry
D
q

a e
monopoly Inverse Demand curve P(a)

a pcase i
:

Inverse Demand R(C) = P(A) x &

$

Ha)-
ARIA) =
ac = Place

MR macal (a)
1Th p(a)+
monopoly
=
: =

da da

0 MR (a)1 ARLA)
MR(2) < P(A) - MR site below the demand curve
 R(a) =
P(a) a

Mitpaitai
S
e

↓bit ,
biphasi ai
->
--

ai+
assume

~
L
p(a)
for insa

=
AR(a)

additional revenue from

marginal consum e

marginal consumer

MR in general Consider an inverse demand P(A) = a -

ba

RIA) =
P(a)a =
(a - ba)a = ac-ba

maxR(a)- Set tre =

(a) =0 +
a -
2ba =
0 -a =
2b

(a)
Maca) - =
MriCa)= a-aba

$1

R(G) =
P(a) a

↳cannoArare
>G

Monopoly :
Profit MRca) =
p(a) +
a pa) =
Mcca)

maximization

p(a) mc(a)
-

=
-
aa)
da

there is a tradeoff in
trying to ↑A by a small amount :

I another customer The profit of this customer is P(a) Mc(a)

o
marginal gain get
-

: .

Infram original loss to sell to

↓
: one more
person, I need to reduce
my price by a) for all a units I'm alrselling
a

a
parts are
exactly equal -> Am maximize profits
dP(a)
Inframarginal
-

-
iC :

a
cost
me(a)

S ~
↓
- D(am)
- marginal gain : P(A) M((a)
-

R(A) P(a) a

-
=

i mcal pa
!
am a
Market Power :
P(a) -
Mcca) = - aa
da
Lerner index
p(a) meca)
- a Fas En
-

P(a) al a
dP
↓
G

mark-up the ( %)
:
↓
amount that denominator :

price elasticity of demand

the Sirme raises

price over its me

↓
"Lerner Index" :

a standard

measure of
market power

-> Despite having freedom to choose any plice , the mourpoly's best action is
fully pinned down by the price elasticity of demand
↓
consumer's tastes fully determine the mons polist decision

I speak of
"supply curve" when
analyzing monopoly problem

a) (a)
Ra
Profit Max I roc- =
0, -

maximization

a market > MR(C) =

MC(0)

power ↓
optimal quantity &M to
produce & price P(GM) to charge
·
Mra) =
(a) = pla) +
a pae
da

p(a)
a 1x(a) mc(a) =
p(a)
Mcca) -- a
-
+
=

↓corner index
meca) a
a
*

En
a
$

I
-
R

S
" R(a) =
P(a) &

$
monopoly sit MCCA)
1

- Areae
market failure

moaMeas
"
by
S
Plax,

!
PS

a
as

*
G

perfectly competitive monopoly

Market Efficient bul
Outcome

Address Pro-competition policy promote competition in the

industry
-> :
o :

Direct constrain the behavior of the

·
regulation :
monopolist
· Public ownership : convert monopolies ->
public enterprises

⑰ Price-discrimination

First-degree each unit of the product is sold to the consumer who values it most , at the maximum
plice that this consumer
price is
willing to pay
-

discrimination
↓
perfectly competitive
↓
efficient achieved (no but
quantify
third-degree the firm identifies different groups of consumers on the basis of observable differences , a sells the same product to
price- different groups at different puces

discrimination

E .

g : constant Mc = $20 MAdults (P) =

&Adults (P) P-CAdults sp) ·
MC

& (P) 110-P (100 -

P) (P-20) 118P-2000 -
p2
Adults
=
=
=

(D)
O
students
(P) 160-2
=
duts > 120-2 = 0 -
Pdults = 68
adults-4
M
Students (p)
(160-2)(P -(0) 2008
3208-2p2-dents(p) Note
+ =
= =

P Pr P
a 60
euo
1 =

100
so So
- . . . . . . . . . . . . . . . . . . . . . .

=so (128-p
--
Ocombined (P) it > 80

so-mas
= ,

MC
man 260-3P If0 < 80
so 20oR

TCP)
&comb(P) P-Ocomy(P) 20 Acomb(P) (P-20) (160-3p) (P-20) 3200-5200-3p2
combined
= =
= =

derivative
↓

)pMe-53
320 -
6P =
0 + e

second-degree
the per unit price of
price- a
product will depend on the
quantity/quality of the product sold

discrimination

· a
types of consumers
-high high
types uto offer several bundles for differenta
:

types of
consumes
ultimately choose
which bundle to take
buy
o 2 constraints : Individual
eationality (IR) Consumer must prefer buying a
product exiting

Incentive
:

(participation constraint)

to the bundle intended for them than

compatibility (IC) : Consumer must prefer buy
anothe bundle

E classes of air teavel Business

.

g different
:
No .
Pantype/me Economy
500 Leisure hip $2 000
, $2 , 500
200 Business Wp $10 , 000
$4 , 500

I rue/passenger $1 ,000 $1 1508

 OIR
UL(Economy Class) 2000 PE> 0 · IC VB (Business Class), VB(Economy dass)
-
:
=
, :

↓
constraint VB/Economy -) =
4500 -

PE7 , 0 ↓ k(Economy -) > , Vi (Business--

constraint
of the V (Business- 1500-PB> 0 ,
=

more
of the less

price Vi (Business--) 18000 PB7 O price sensitive

-

= ,

sensitive
group
group
->
V(Economy Class) > , 0

UB (Business Class) , VL(Business Class)

Products intended for

-> MARY
buyers with low to will often be
poorly designed to ↓ the temptation
:
O

of high Ap consemento
purchase them

·
Buyers with low Wip will receive no surplus from trade
· Products intended for buyers with high Wip will have to match very well the characteristics these

consumers desire

0
Buyers with high up will receive information rents

⑦ Game Theo
ly

A formal representation of which of

game a situation in a number of individuals interact in a
setting
strategic interdependence

A the
age

the
payost

the extensive o game teee (B) & Game Hele (C) :

Pl 1
. covers hand

form 0
① = Initial decision node
⑪
/ -Talk
Heads

representation
0
② ⑧② -Decision node reads/(Tails
-
② ② be 2 info set

/ HailsHeasy (tails
.

of a
dynamical Heads

(-1;1)
reads//tails Measy (tails
sequential (1-2) (1-1) (-1s1) = terminal mode
-
151)(1 2) (1i - -
1)( - 11)
game (aib) PlayerI's payost a
- :
-

-2-b

P1 : 2
strategies HIT
:

P2 : (S1) :
H if Pr :
G> Hif P1 : +

=
Treatmen
 a
steategy .

contigent plane or decision rules that

specifies how player will act
a in
every possible distinguishable
circumstance in

which she
might be called upon to move

feasible decision foreach of info sets

->

specify a a
player's

Normal Pr

Form S1 82 S 34
4 ( 1 ( 1j1)(1j 1) (1i 1)
; 1)
- -
-
-

P1
T(1j -

1)( 111)(15 1)( 1i1)

- - -

④ Simultaneous
games

Dominant A dominant
strategy is one that is better than
any other
strategy for a players regardless of hou
other
Strategies players may play

Wash
different
player can obtain a higher payols by choosing
A set of
equilibrium
strategies (one for each player) is a NE if no a
strategy
CNE)

G- keep
Best-response Hold P2's action fixed & look at what the best choice for P1 is teack= underline

Vice versa for P1 ↓

analysis
->

cell has is ca2 underline -NE

DSEUS NE DSEFNE : DSE

implies NEs NE & imply DSE

-
①
Oligopolistic markets a strategic behaviour

OMS few firms that have (some) market

usually compase just a power all produce a
homogenous product
·

Om with N firms poly

/N
· -> =
1 : mous

N- c :

perfect competition

*Ideal for
studying strategic behavior :

Oligopolite best off fully a perfectly collectively act

+ :

when coordinate - like a

single monopolist
co deviate from coordination BRs
-
↓ binding agreement -> =>
-
 E
g duopoly with As GA+AB
:

=
,
.

P(CD) =
300 -

an
FC = 0 & MC =
1 = $100 million

PN
monopoly R/Cp) =.. SOOCD--Op

4-nom .
outcome
URLGD) : TR'(GD) - 800 -

20p = 100 -> am= 350 , pM = 450 -> +M = 122550

aM =
350 400 -A

Interpretation 11(C) Pla)a ca

> -
=
:

(a) =
Oe plaxa+ alypla

-(a) xa p(a) -
+

e
a
atte
gain Intramarginal
loss

Cartel PN
800

.
<perfect alt al am
=
=
88= 175

"n
-3

4-om
collusions

-46 +(
=
=
(450 180x175
-
= 61 , 25

a
e

cournot ↓ cooperate ma compete -> A's choice affects B's & rice versa

↓
puopoly
game theoretical modelling
·

Players A& B

Rules Each chooses ,

independently of each other, a at the same time , how
many aircrafte - produce
Outcomes No of aircrafts chosen to be
.

produced
Each firm's H its
Payolls =

payols

④
Reasoning
:

Taf a bas given t could A do better ?

 A
Inframalginal loss

Durin
optimizes against residual if it is
A demand as a
monopoly
RA(GA) =
P(Ap) x GA =
1800 -
Cp) &A= /888 -GA-ar) an
= SIDGA-AR-ABCA
MRA(AA) =
800 -2AA-AB = 100 =
MC

I a es
700 =

2AA+ AB

-
Fa =
AA(a) =

350 - 1 AB
↓
AA(175) =

350 - 175= 262 5.

↓
A & B both co incentives to cheat

↓
RS
& BR

to Specific &B 175

queral BR from A to B choosing produce any quantify GB
=

:
:

↓
HA =(P-M2)GA = (800 GA-aB-100) AA
-

thay rai
↓native =H CA-GA-GAGB
↓
&**
700-28A-RB = 0 = BRA(GB) =
350 -

1A
= 35
-175 =
162 5) 175
.

350
A & B have identical costs
symmetric BR functions BRB (AA) &A
· -> -> -

CA
⑧ NE :

350-=
d

for BRB(AA) 350-RA GA= 350 - B

= 350-175+
GA = 175+GA I = 233 3 .

↑
=

I
Il

350 -Mutual
L
BR= NE
pNE = 800 -

A-A
* **
=
800 -2x233 3 = 333 4 a
NE - ⑧ .

a
.

BRA(GB) B

!
A
=
350 -
2
1 = (PNE 1) -

x GN =

(333 .
4-180) x 233 3.
=
54452 22 .

"a
ans 380 for

&
Duopoly plicing
CA
P(AA / GB)
d

Intramarginal loss :

an Aar= As For BRB(AA) =

350 - RA
I
daA
one
marginal gain P(AA , AB) ->
= Can ABE)
:

MB MA <- 350
NE ⑧

350-
-

100 GA BRA(GB)
! !
=

aNE a
a
ans 380 for
 I
Cournot 0
UFC , same MC c

oligopoly · US =
RA+ At ...
+
CN

~leat firm Aas BR to of (N-1) O from other N-1

a
quantity players
P(GA , GB)

R =
P(A) a A
= <800 AA-G-1)AB] AA
-

MR =
800 -2AA-CW-1AB =
100 =
MC
800-(N-1) a

I
100 =
CAA+ (N-1) a

100
-> an(a) = 350 -
NAB
↓
ar = 350-CN-1) AA -> GA=
AA ((N-1)aB) a
-

2
NA

d
Pla>N)
Plap) =
800 -

Nx
Pm 450
=
- O

pNE 333
000
.
4

.
pl= C = IN -----------
o 00

N
I

⑦ Sequential move/dynamic games

P2

Telstea Optus

A Telstra 15 , 5038

Optus 038 5/18

Dynamic filter out ae that are not credible

games Lovercoming coordination problems

Subgame Asubgame is a game comprising a

portion of a longer game , starting from a non-initial mode of the
larger game

Backward starts at the final subgames & finds the NE for these
,
subgames
induction
-> move
up the
game tree
using these choices as the predicted actions of the later subgance

B solve the end

subganes , por of P2
I
a 0 B -

↓
next
layer

sites
⑫
2253 ; 25 033
/ 0 Sone= 0

cusist 10 , ,
 SPRE An equilibrium found through backward induction

of at
every subgame (inct subgames off the equilibrium path of play)
a set
strategies that is NE
->
a

->

predict stable outcomes

takeaways ① Backward induction look ahead -> BR->SPNE:

&
moving 1st Moving and
commt to a
strategy discover into
↓ ↓
workout BR
Gree other
players to

change their decision

- letotherknowoneSentence .gGoodie
revelation
③
strategy :
e

⑰
Stackelberg competition
would firms choose if would take turns
stackelberg What
quantities they
A nuves first B second
Competition Suppose ,
goes :

① A chooses GA max A
/800 -GA-AB (CN)) /NOA -

0 B - AB -
AB (800-AA-GB) -
188 a

⑧ Prices Set -> clear P(AA As) , =

SNO-AA-AB
the market

& Backward induction

1: TB = (800-GA-GB) GB- 100 AB

max
↓

800-AA-LAB 10 0 es 700 AA-LAB 0 -> AB(AA)

350-
-
- =
=
=

1 :

AA=(800
-

GA-350 +

GH AA-NOGA
,

max) [450 GA) GA-18

=
-

&A

450 -

1x (AA-108 =
350 - GA = 0 -> attackelberg = 350 -> attackelberg= 175-> pstackelberg - 2ft

o
moving first allows A to commit to a strategy
loss AB)

Infeamarginal
-a ,
AB
A

force B to react accordingly

=

->
:

da
second allows B learn abt A's
o
Moving to
steategy
putackelberg -

marginal gain :
P(AA AB),
-

>
MA M - an> as - first-mover
advantage
AA
as
a stackelbug
⑦ Consumer
theory
Preferences & consumption Space
n
goods E .

g
:

goods G pizza =
, beer coffeel -> (n) 3=

quantity of goods Ric i 1 ...., Me quantity of pizza

· =
: :

·
consumption bundle :
ux rector = (n , ..., un) a- -
beer -> bundles :
x (112 , 1)
=

y (2011)
consumption space R
=

- all the available bundles ->

use -
offee
...

② Consumer Preferences

Rationality (consistent decisions)

complete
a
2 bundles are
all comparable

:
:

xvy
2) Reflexive :

For least as itself

anyx any bundle
x),:
, is at
good as

3)transitive T,
y , y7 z >, z
:

, =>

Axioms/assumptions for preferences

preferces f(x)
4) Continuous :
1 jump discretely -> presented -
a continuous
utility function
5) Monotonic (non-satiation/move is better)
6) Convex :

>, R & z7, R

Goodez 0 +< 1 ->

+y + (1 -
t) z >, k

(n's , n'e n2
z =

10 Preferred to k
⑧

-
-

by+ (1-+) = OCt</

- -
· < where

.......
Preferred tox ·

--
z
bundle

ar
x=

R2

·
- - - -

Worse thank un
y (x"x2)
"2
=

x
-
- -

2 "1 u good un

③Indifference Curve/Surface

·
Equally preferred bundles -> IC/IS

· If preferences are · If preferences are :

1) Complete 3) Transitive

4) continuous smoth a continuous 2 Reflexive 5) Monotonic

-> IC IS are

derivatives to find the a function at

> IC/IS0 intersect ICs Us
slope of any single point
-

unf
use
-

>

us uns an
5) monotonic ICIPS downward
sloping
12
Ent

Le
-

Cutility level)

↳ .
6) convey->- FC , h,

W
-
are convex
-> Indiffence curve
IC map

-
⑧

-
Preferred to Korz
·-
worse
·
⑧ a
than
X
x/z ⑤ ICI
-
- . . .

.
an
utility utility function :

a
mapping
:
R * R such that
- n(u)
>n(y) niy +

↓ n(n) =

u(y) nvy->

an
assignment of a single value for a given bundle such that a bundle which is preferred to another
get a
higher number d indifferent - same number

& linear (perfect substitutes) Leontieff (perfect complements)

&Cobb-DonglasCee
:
:
&

u(x1 , n2) k1 +
x2
u(m , x2) =
main <m , n2)
=

· -
-
↳ *13
ne K

!
--

ICL
3 R Is
3
-·
ol
- -

are IC 2 IC2

-
E
e can
1
-

-
al
t
1
i I
2 84E -M 1
ar
fork (113) =
-> u(k) =
u(113) =
min(( , 3) =
1
n(n) =
n(y7 = u (z) =
3
all on IC1

x2(Steep)
Marginal rate 1

the rate at which the student willing to trade off sleep for problem set

-at
mas is answers
of substitution :

(MRS) y

In=m-
·

the incen for

change change incess evaluated along the
↑
a

indifference curve Us

az
·

Us
W
<problem Set Points)

find the substitution of an& ha the same IC (i

keeping the utility level of the consumer constant
·
staying on .
e .

at 11) ->
U(41) Uz(re)) =
I

Ever !ee
how much ae

we require

MRs=-n= constant" -

Cobb-Douglas U(m , x2) more 0 Linear <min2)= mithr n (mine)

-

: = : Leontiefy :

= min (uncur)

mis-t-similial mis-te=
-

at
[0
MRS it un> n
zu in -x)mGrid
I

(1-am
1 =
1 =

0 if R2 <K
2x2 -
limat MRS =
a

limuz-OMRS =
O
Budget o Linear
Budget Sets :
pan+ pinc m par parameter outside the control of
:
consumer

constraint Eds :
(affect the "shape" of the budget set but are not st the
agent chooses
ne

- P1R+PLRc =
m

Pret Pellet I Pulnc Ein Pini= m

Gods
:

..

Rise -
the
Stope i all bundles
satisfy are in
budget set

2
·
-> =

Print Penz <M P2 O form

~
23 a
budget constraint :

Budget seil m/p3 a

straight line (2
goods)
F
u1

mypa2 [
-
a plane (3 goods
my
hyper-plane
Ishrinks prices
27 3 expands
a
goods
upmp ,
a

Preferences Consumption Set B

Utility · n),
y RE
: :

maximizations 1) complete ↓
to 2) reflexive utility Function
Set B
subject U(n) >, Ucy)
Budget
3) transitive a
niy
budget constraint 4) continuous v
Quasi-concave pin+P2x2+ ...
+

Punn & M

5) monotonic
utility function I Budget Enhanstation
6) convex v
<imply convex preferences) (monotonicity Convenity- ,

↓ I
consumer Maximization Problem

manue... Un Unsure pure e

constrained maximization solution

Quasi-concavity ensures a
2

"La
S ② Consider some IC with utility Un

.
Print Paiz =
m
-
↓
0 k

! maximizingulty reachthehighest
- y
indifference

- higher IC Ke
-
·
with utility

Stope-Rise ---e
i
Budget set
->
↳
- pict placem
pan+ pin m

me
>u
-

>Un MD =

Ae
- -
Pr all
budget spent on good in
-

MRSzdr-- e
-mum interior solution situations in which there is a c) amount consumeda
:

↓
Arm
P1
:

Ma equal marginal principle :

marginal Ling -> the

tangency condition requires the mu per $ot expenditure
utility his good is the same for each
that can good
be obtained
from $1 more
spent on good 1
 &
Cobb-Douglas utility
-
↳makanscz
St : Prin +
P2R2 = m
Budget Line Slope :

-
slope of the tangent to the utility function Kiny is-MRS =

de M i
= -

Optimal condition : MRS =

It =
Price rato

& Marshallian demand

StatTo ent
Findinguefau :
solving for 2 : We have :

(1 2)pr
-

xpckz +
(1-2) P2U2=(1-21m
pe a
Pekz =

(1 -
2)m

n Im =

P2

ar-atm 2

marshallain demand functions ->

optimize demand hi (p1 / p , my

Coptimal bundle) ac(p / P2>m>

B
Preferences :
2< Y Consumption Set :
Xe

d
1) complete
2) reflexive utility function Budget Set B
3) transitive r(u) > U(y)e ni, A PentPekzt ...
+
Punn m
4) continuous v
Quasi
5) monotonic
concave
(
Budget Exhaustion

6) convex ~utility function (monotonicity Convexity? ,

↓ ↓
2
manmin U(re , n2) mean
-

Subject
=

pare+ Pale
to =
m

Corner solutions 12
de Ulris)

S Non-linear budget
U
Exceptions
L
:

1 4x25
lines u(min2) =

Corner -8
· solution kinked Budget line
"M -
↳

Expenditure given specific

a level of utility , what is the minimum amount of $ that is necessary to meet thei level of utility
-expenditure minimization problem dual of
utility maximization problem
(minmem Penta=
: :

minimization

: ↓
·

expenditure
k

mi
I