# Frank Cowell Microeconomics Revision Lecture EC 202 http

- Slides: 45

Frank Cowell: Microeconomics Revision Lecture EC 202 http: //darp. lse. ac. uk/ec 202 24 th March 2011 Frank Cowell

Overview. . . Revision lecture Frank Cowell: Microeconomics Styles of question How to see what you need to do Doing short questions Doing long questions

Objectives of the lecture Frank Cowell: Microeconomics n n n A look back at Term 1 Exam preparation Reference materials used (1) u n Exam papers (and outline answers) t 2006 1(a), 4 t 2008 1(b) t 2009 1(c) t 2010 1(a), 3, 5 Reference materials used (2) u u u Cf. D presentations 3. 3, 8. 12 Related to past exam questions Cf. D now available on the web site

The exam paper Frank Cowell: Microeconomics n Scope of exam material u u n Structure and format of paper u u u n what’s covered in the lectures… … is definitive for the exam similar to that of last five years rubric changed from last year’s paper now only 3 long questions in each of parts B and C 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: marks per part shown on the exam paper

Question style – three types Frank Cowell: Microeconomics 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 part A (question 1) usually gets you to do both types 1 and 2 type 3 is usually only in parts B and C of paper

Overview. . . Revision lecture Frank Cowell: Microeconomics Styles of question How to tackle the main types of question Doing short questions Doing long questions

2009 1(c) Frank Cowell: Microeconomics n n Straightforward “principles” question Just say what you need to say

2010 1(a) Frank Cowell: Microeconomics n n n Straight “principles” Be sure to read the question carefully Be sure to give your reasons

2010 1(a) Frank Cowell: Microeconomics

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

2008 1(b) Frank Cowell: Microeconomics n n n Principles and model-solving Write down the principle Write down the basics of the model WARP can be stated simply in terms of “affordability” To check whether week 2’s bundle can be afforded at week 1’s prices (etc. ) we need to write down the costs Check the on-line answers for the (short) detailed reasoning…

2006 4 Frank Cowell: Microeconomics n n n Straight principles can come up in long questions Don’t ignore them in a rush to get to the model! Compare this with Cf. D 8. 12 Cf. D (from book) doesn’t have this bit, but take it seriously There are some easy marks just writing down the definition… …and the diagram helps you to answer part (b)

Overview. . . Revision lecture Frank Cowell: Microeconomics Styles of question How to do well in exams Doing short questions Doing long questions • Preparing • Cf. D 3. 3 • Cf. D 8. 12 and planning

Planning Answers Frank Cowell: Microeconomics n What’s the point? u u n See the big picture u u n take a moment or two. . …make notes to yourself what is the main point of the question? and the subpoints? balance out the answer imagine that you’re drawing a picture if pressed for time, don’t rush to put in extra detail… …you can go back Be an economist with your own time u u u don’t solve things twice! reuse results answer the right number of questions!!!

Frank Cowell: Microeconomics Tips n Follow the leads u u n Pix u u n help you to see the solution help you to explain your solution to examiner What should the answer be? u u u n examiners may be on your side! so if you’re pointed in the right direction, follow it… take a moment before each part of the question check the “shape” of the problem use your intuition Does it make sense? u u again take a moment to check after each part we all make silly slips

Frank Cowell: Microeconomics Long questions n Let’s look at two examples u u u n Illustrates two types of question u u n taken from exercises in the book but of “exam type” difficulty covered in Cf. D Ex 3. 3 is straight model solving Ex 8. 12 incorporates some model building Look out for tips u u In all both questions, use pictures to clarify solution following hints in 3. 3 [The “Explain carefully…” bits]

Overview. . . Revision lecture Frank Cowell: Microeconomics Styles of question A problem with discontinuous supply… Doing short questions Doing long questions • Preparing • Cf. D 3. 3 • Cf. D 8. 12 and planning

Ex 3. 3(1) Question Frank Cowell: Microeconomics n n purpose: to derive competitive supply function method: derive AC, MC

Ex 3. 3(1) Costs Frank Cowell: Microeconomics n Total cost is: F 0 + ½ aqi 2 Marginal cost: aqi Average cost: F 0/qi + ½ aqi n Therefore MC intersects AC where: n This is at output level q where: n At this point AC is at a minimum p where: n For q below q there is IRTS and vice versa n n

Ex 3. 3(1) Supply Frank Cowell: Microeconomics n If p > p the firm supplies an amount of output such that u n If p < p the firm supplies zero output u n otherwise the firm would make a loss If p = p the firm is indifferent between supplying 0 or q u n p = MC in either case firm makes zero profits To summarise the supply curve consists of :

Ex 3. 3(1): Supply by a single firm Frank Cowell: Microeconomics p §Average cost §Marginal cost §Supply q qi of output

Ex 3. 3(2) Question Frank Cowell: Microeconomics n n purpose: to demonstrate possible absence of equilibrium method: examine discontinuity in supply relationship

Ex 3. 3(2): Equilibrium? Frank Cowell: Microeconomics §AC, MC p and supply of firm §Demand, low value of b §Demand, med value of b §Demand, high value of b Solution for high value of b is where Supply = Demand AC § MC ly Supp rm) fi (one qi

Ex 3. 3(2) Equilibrium Frank Cowell: Microeconomics n Outcome for supply by a single price-taking firm High demand: unique equilibrium on upper part of supply curve 2. Low demand: equilibrium with zero output 3. In between: no equilibrium 1. n Given case 1 “Supply = Demand” implies n This implies: n But for case 1 we need p ≥ p u from the above this implies

Ex 3. 3(3) Question Frank Cowell: Microeconomics n n purpose: to demonstrate effect of averaging method: appeal to a continuity argument

Ex 3. 3(3) Average supply, N firms Frank Cowell: Microeconomics n Define average output n Set of possible values for average output: n Therefore the average supply function is

Ex 3. 3(3) Average supply, limit case Frank Cowell: Microeconomics n As N the set J(q) becomes dense in [0, q] n So, in the limit, if p = p average output can take any value in [0, q] n Therefore the average supply function is

Ex 3. 3(3): Average supply by N firms Frank Cowell: Microeconomics p §Average cost (for each firm) §Marginal cost (for each firm) §Supply firms q q of output for averaged

Ex 3. 3(4) Question Frank Cowell: Microeconomics n n purpose: to find equilibrium in large-numbers case method: re-examine small-numbers case

Ex 3. 3(4) Equilibrium Frank Cowell: Microeconomics n Equilibrium depends on where demand curve is located u n High demand u n characterise in terms of (price, average output) equilibrium is at (p, p/a) where p = a. A / [a+b] Medium demand equilibrium is at (p, [A – p]/b) u equivalent to (p, bq) where b : = a[A – p] / [bp] u Achieve this with a proportion b at q and 1–b at 0 u n Low demand u equilibrium is at (p, 0)

Ex 3. 3(4): Eqm (medium demand) Frank Cowell: Microeconomics §AC and MC (for each firm) §Supply of output (averaged) §Demand p §Equilibrium achieved by mixing firms at 0 and at q § 1 b here q* q q

Ex 3. 4: Points to remember Frank Cowell: Microeconomics n n Model discontinuity carefully Averaging may eliminate discontinuity problem in a large economy u n depends whether individual agents are small. Equilibrium in averaged model may involve identical firms doing different things u equilibrium depends on the right mixture

Ex 3. 4: spinoff – 2010 Q 3 Frank Cowell: Microeconomics

Overview. . . Revision lecture Frank Cowell: Microeconomics Styles of question Modelling choice under uncertainy Doing short questions Doing long questions • Preparing • Cf. D 3. 3 • Cf. D 8. 12 and planning

Ex 8. 12(1): Question Frank Cowell: Microeconomics n n purpose: to develop an analysis of insurance where terms are less than actuarially fair method: model payoffs in each state-of-the-world under different degrees of coverage. Find optimal insurance coverage. Show this responds to changes in wealth

Ex 8. 12(1): model Frank Cowell: Microeconomics n n Use the two-state model (no-loss, loss) Consider the person’s wealth in extremes u u n Suppose partial insurance is possible u u n if uninsured: (y 0, y 0 L) if fully insured: (y 0 κ, y 0 κ) if person insures a proportion t of loss L… …pro-rata premium is tκ So if a proportion t is insured wealth is u u ([1 t]y 0 + t [y 0 κ], [1 t][y 0 L] + t [y 0 κ]) which becomes (y 0 tκ, y 0 tκ + [1 t]L)

Ex 8. 12(1): utility Frank Cowell: Microeconomics n Put payoffs (y 0 tκ, y 0 tκ + [1 t]L) into the utility function Expected utility is n Therefore effect on utility of changing coverage is n Could there be an optimum at t =1? n

Ex 8. 12(1): full insurance? Frank Cowell: Microeconomics n What happens in the neighbourhood of t = 1? We get n Simplifying, this becomes [Lπ κ] uy(y 0 κ) n u u u n n positive MU of wealth implies uy(y 0 κ) > 0 by assumption Lπ <κ so [Lπ κ] uy(y 0 κ) < 0 In the neighbourhood of t =1 the individual could increase expected utility by decreasing t Therefore will not buy full insurance

Ex 8. 12(2): Question Frank Cowell: Microeconomics Method n Standard optimisation n Differentiate expected utility with respect to t

Ex 8. 12(2): optimum Frank Cowell: Microeconomics n For an interior maximum we have n Evaluating this we get n So the optimal t∗ is the solution to this equation

Ex 8. 12(3): Question Frank Cowell: Microeconomics Method n Take t* as a function of the parameter y 0 n This function satisfies the FOC n So to get impact of y 0: u u Differentiate the FOC w. r. t. y 0 Rearrange to get t* / y 0

Ex 8. 12(3): response of * t to y 0 Frank Cowell: Microeconomics n Differentiate the following with respect to y 0: n This yields: n On rearranging we get:

Ex 8. 12(3): implications for coverage Frank Cowell: Microeconomics n Response of t* to y 0 is given by n The denominator of this must be negative: u u n n n uyy(⋅) is negative all the other terms are positive The numerator is positive if DARA holds Therefore ∂t*/∂y 0 < 0 So, given DARA, an increase in wealth reduces the demand for insurance

Ex 8. 12: Points to remember Frank Cowell: Microeconomics n Identify the payoffs in each state of the world u u n Set up the maximand u n n n ex-post wealth under… …alternative assumptions about insurance coverage expected utility Derive FOC Check for interior solution Get comparative static effects from FOCs

Ex 8. 12 spinoff : 2010 Q 5 Frank Cowell: Microeconomics

- The firm basics
- Frank cowell
- Almost essential
- Cowell microeconomics
- Cowell microeconomics
- Cowell microeconomics
- Cowell microeconomics
- Cowell microeconomics
- Frank cowell
- Frank cowell
- Intermediate microeconomics lecture notes
- Passive sentence
- Beta d ribofuranosa
- Kevin cowell
- Aintree loss criteria
- Cowell china
- Cowell's method
- 01:640:244 lecture notes - lecture 15: plat, idah, farad
- Frank william abagnale sr
- What is microeconomics
- Unit 1 basic economic concepts
- System of national accounting
- Intermediate microeconomics notes
- Game theory microeconomics
- Almost essential
- Economics michael parkin 13th edition
- Venn diagram
- Microeconomics chapter 12
- Oligopoly model
- Microeconomics ia
- What is macroeconomics
- Microeconomics
- What is the subject matter of microeconomics
- Microeconomics examples
- Walras's law
- 22rents
- Objectives of microeconomics
- Uses of microeconomics
- Significance of microeconomics
- Circulair flow marketing
- Externalities and public goods microeconomics
- Http //mbs.meb.gov.tr/ http //www.alantercihleri.com
- Siat.ung.ac.id krs
- Cvsp aub
- Cse 202
- Enve 202