Frank Cowell EC 202 Microeconomics May 2008 Revision

Frank Cowell: EC 202 Microeconomics May 2008 Revision Lecture 1 EC 202: Microeconomic Principles II Frank Cowell

Frank Cowell: EC 202 Microeconomics Objectives of the lecture n n n A look back at Term 1 Introduction to exam preparation Reference materials used (1) u u u n exam papers (and outline answers) 2003 1(c) 2004 1(c) 2005 1(a) 2006 1(a) 2007 1(a) Reference materials used (2) u u u Cf. D presentations 2. 9 related to past exam question (. . . more to follow next week)

Frank Cowell: EC 202 Microeconomics Principles n Scope of exam material u u n Resit u u n syllabus for 2007/8 is same as 2006/7 so resit candidates from last year get the same paper as new candidates Structure and format of paper u u n what’s covered in the lectures… … is definitive for the exam follows that of last three years check out the rubric from, say, 2007 paper Mark scheme u u u 40 marks for question 1 (8 marks for each of the five parts) 20 marks for each of the other three questions multipart questions: except where it’s obvious, roughly equal marks across parts

Frank Cowell: EC 202 Microeconomics Question Style – three types n 1 Principles u u n 2 Model solving u u n a standard framework you just turn the wheels 3 Model building u u n reason on standard results and arguments can use verbal and/or mathematical reasoning usually get guidance in the question longer question sometimes easier? Examples from past question 1 One type not necessarily “easier” or “harder” than another u u u get you to display different skills part A (question 1) usually gets you to do both types 1 and 2 type 3 usually only in parts B and C of paper

Frank Cowell: EC 202 Microeconomics 2004 1(c) n n Straightforward “principles” question Just say what you need to say

Frank Cowell: EC 202 Microeconomics 2005 1(a) n n n Straight “principles” Note contrast between firm and consumer Be sure to give your reasons

Frank Cowell: EC 202 Microeconomics 2006 1(a) n n Principles again But format of question gives you a hint… …write out decomposition formula Then read off results

Frank Cowell: EC 202 Microeconomics 2003 1(c) n n A model-solving question (i) just set E(r) = 0 and twiddle (ii) check what happens to E if you change r (iii) draw diagram and reason

Frank Cowell: EC 202 Microeconomics 2007 1(a) – question and approach n n n A “hybrid” question Mainly modelsolving But there’s an important principle will a solution even exist? What’s the solution to the monopolist’s problem? Approach: u u Find the expression for profits Then try to maximise…

Frank Cowell: EC 202 Microeconomics 2007 1(a) – main answer n n To get profits we need demand function You could just jump to last line Now write down profit expression Note wording in last line

Frank Cowell: EC 202 Microeconomics 2007 1(a) – finishing off answer n n Use knowledge of basic principles Effectively the competitive case No solution! (we covered this in lectures)

Frank Cowell: EC 202 Microeconomics Long questions n Let’s look at an example u u u n Illustrates type 2 question u u n taken from exercise in the book but of “exam type” difficulty covered in Cf. D Ex 2. 9 is mainly model solving next week: look at model building Look out for tips u u Use simple principles to give you a shortcut to the answer Use pictures where they help

Frank Cowell: EC 202 Microeconomics Ex 2. 9(1): Question n n purpose: demonstrate relationship between short and long run method: Lagrangean approach to cost minimisation. First part can be solved by a “trick”

Frank Cowell: EC 202 Microeconomics Ex 2. 9(1): Long-run costs n Production function is homogeneous of degree 1 u u u n CRTS implies constant average cost u u u n increase all inputs by a factor t > 0 (i. e. z → tz)… …and output increases by the same factor (i. e. q → tq) constant returns to scale in the long run C(w, q) / q = A (a constant) so C(w, q) = Aq differentiating: Cq(w, q) = A So LRMC = LRAC = constant u Their graphs will be an identical straight line

Frank Cowell: EC 202 Microeconomics Ex 2. 9(2): Question method: n Standard Lagrangean approach

Frank Cowell: EC 202 Microeconomics Ex 2. 9(2): short-run Lagrangean n In the short run amount of good 3 is fixed u z 3 = `z 3 n Could write the Lagrangean as n But it is more convenient to transform the problem thus n where

Frank Cowell: EC 202 Microeconomics Ex 2. 9(2): Isoquants n Sketch the isoquant map z 2 z 1 n n Isoquants do not touch the axes So maximum problem must have an interior solution

Frank Cowell: EC 202 Microeconomics Ex 2. 9(2): short-run FOCs n Differentiating Lagrangean, the FOCS are n This implies n To find conditional demand function must solve for l u u use the above equations… …and the production function

Frank Cowell: EC 202 Microeconomics Ex 2. 9(2): short-run FOCs (more) n Using FOCs and the production function: n This implies u n where This will give us the short-run cost function

Frank Cowell: EC 202 Microeconomics Ex 2. 9(2): short-run costs n By definition, short-run costs are: n This becomes n Substituting for k: n From this we get u SRAC: u SRMC:

Frank Cowell: EC 202 Microeconomics Ex 2. 9(2): short-run MC and AC marginal cost average cost q

Frank Cowell: EC 202 Microeconomics Ex 2. 9(3): Question method: n Draw the standard supply-curve diagram n Manipulate the relationship p = MC

Frank Cowell: EC 202 Microeconomics Ex 2. 9(3): short-run supply curve §average cost curve §marginal cost curve p §minimum average cost §supply curve p q q

Frank Cowell: EC 202 Microeconomics Ex 2. 9(3): short-run supply elasticity n Use the expression for marginal cost: Set p = MC for p ≥ p Rearrange to get supply curve n Differentiate last line to get supply elasticity n n

Frank Cowell: EC 202 Microeconomics Ex 2. 9: Points to remember n n n Exploit CRTS to give you easy results Try transforming the Lagrangean to make it easier to manipulate Use MC curve to derive supply curve

Frank Cowell: EC 202 Microeconomics Next time n n Think more about method for long questions Look at a few Cf. D u u n n 4. 12, 4. 13 5. 1 7. 8 9. 6 See how they illustrate method Connect these to past exam questions