Advanced Microeconomics

ECH-51806
Part 1: Consumer Theory and
Theory of the Firm
Dušan Drabik
de Leeuwenborch 2105
Dusan.Drabik@wur.nl
The material contained in these slides draws heavily on:
Geoffrey A. Jehle and Philip J. Reny (2011). Advanced Microeconomic
Theory (3rd Edition). Prentice Hall, 672 p.
 Disclaimer

These slides are not meant to be your sole study material.

They are just a (incomplete) summary of what will be

covered in Part 1 of the course.

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 Quotes to live by

“You've got to be very careful if you don't know where you

are going, because you might not get there.”

“I'm not going to buy my kids an encyclopedia. Let them

walk to school like I did.”

- Yogi Berra

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 General Information
• Advance level course (abstraction, mathematically oriented, but fun)
• All relevant information (e.g., problem sets, home assignments, tests)
here: http://home.deds.nl/~pvmouche/advmicro.html

Textbook Recommended supplemental reading

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 General Information
• Exercises to be solved at home and discussed in class (not graded)

• Home assignment for Part 1 due on or before September 18, 2017 in

room 2105 (hand-written is fine) (graded)

• No official office hours for Part 1. Write me an e-mail or stop by

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Consumer Theory

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 Primitive notions
Four building blocks:
•Consumption (choice) set
•Consumption bundle (plan)
•Preference relation
•Behavioral assumption

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 Preferences and utility
Axioms of consumer choice

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Preferences and utility

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Preferences and utility

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Preferences and utility

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Preferences and utility

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The utility function

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 Consumer’s problem
Find

Consumption Feasible set

bundle

Utility maximization problem

 Solution to the UMP is Marshallian demand functions

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 Consumer’s problem and
consumer demand behavior

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 The indirect utility function
Indirect utility function is a maximum value function:

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The expenditure function

Hicksian (compensated)
demand functions

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Properties of the expenditure
function

Advanced Microeconomic Theory – Consumer Theory 18

Relations between IUF and EF

Advanced Microeconomic Theory – Consumer Theory 19

 Duality between Marshallian
and Hicksian demand functions

Advanced Microeconomic Theory – Consumer Theory 20

Income and substitution effects

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The Slutsky equation

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Relationships between UMP and EMP
Utility maximisation Expenditure minimisation
x(p, y) Slutsky equation (for derivatives) xh(p, u)

xh(p, u) =
x h(
p,
u)
Roy’s identity

= x(p
, e(p
)) , u))
y
(p ,

p
v
p,

e(p, u)
h
x (
y)=
,
x(p e(p, u) = v(p, e(p, u))
v(p, y) e(p, u)
v(p, y) = e(p, v(p, y))

Adapted from Mas-Collel, Whinston and Green (1995); p. 75

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Theory of the Firm

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 Production
• Production possibility set
• Production plan
• Production function

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Production

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Cost

Conditional
input demand

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Properties of the cost function

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 The competitive firm
Profit maximization

...or

Cost function

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The profit function

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