PhD Program 2011/2012
Period 1 – Sep/Oct 2011
Microeconomics A
Professor:
Timothy Van Zandt
timothy.van-zandt@insead.edu
Assistant:
Christine Ng
christine.ng@insead.edu
Objectives
The microeconomics core course is an introduction to microeconomic theory. It has
two parts: Part A in P1, followed by either Part B or Part C in P2. This syllabus is for
part A.
This part follows the same topics as INSEAD’s MBA microeconomics course (Prices
and Markets) but uses more formal and rigorous modeling. Such structuring of the
course has two goals: (a) to ensure that all students learn not only the PhD-level mathintensive microeconomics but also the intuition and applications; (b) so that students
learn to do simple models rigorously and with some independence rather than being
led by the instructor through more advanced models. The main assessment for this
part of the course is a PhD exam, but students also have to self-prepare for and take
the MBA exam.
This part of the course is based on the quasilinear or valuation model of consumers
and firms and the surplus-maximization model of Pareto efficiency. The course begins
with an introduction to trade with quasilinear utility and then studies consumer demand and firms’ production and cost curves. We proceed with competitive markets,
individual firms’ decisions in imperfectly competitive markets, and—using the tools
of game theory—equilibrium among firms in imperfectly competitive markets.
Math tutorials and review sessions
PhD math tutorials run concurrently in P1 and provide further prerequisite math tools.
Though these run independently of the microeconomics course and are intended to
support several of the more technical PhD courses, microeconomics is the PhD course
most tightly related to the tutorials.
Prerequisites and advanced preparation
See the syllabus for the Math Tutorials course and the separate document, Math Preparation, for details on math prequisites and preparation.
In terms of economics, the prerequisite for this course is “intermediate” microeconomics; this would usually be a second university course in economics or a high-level
managerial economics course taught in an MBA program. An example of the kind
Microeconomics A • Syllabus
of textbook used for such a course is Pindyck and Rubinfeld’s Microeconomics. Some
such courses are calculus based and some are not. From our point of view, it is important that you know the math but not necessarily that you have taken a calculus-based
microeconomics course.
Don’t be fooled by the fact that this course covers topics of intermediate microeconomics. It merely uses them to teach you the advanced methods of microeconomic
modelling. If you are learning the intermediate-level microeconomics at the same time
as the PhD microeconomics, and also getting up to speed in the math, then your one
microeconomics course has become three—impossible!
Therefore, come prepared. If you have not taken at least intermediate microeconomics
or if that course was more than a couple years ago, then you should study the material
before coming to INSEAD. You can use any intermediate microeconomics textbook,
including the Pindyck and Rubinfeld book mentioned above. Alternatively—and this
would be the most efficient if you are pressed for time—you can use the MBA lecture
notes that are required reading for P1 of this course. You can download them from
http://faculty.insead.edu/vanzandt/teaching/FPM-Aug2006b.pdf
Homework
I will give out a problem set for each topic, due one week later. These will be graded
mainly for effort and completeness.
Grading
This course has an MBA exam, which counts for 25%, and a PhD exam, which counts
for 65%. The homework counts toward 10% of the grade.
Continuation in P2
There are two versions of the second half of the microeconomics core course in P2
(Nov–Dec):
Microeconomics B. This version continues the development of mathematical
microeconomic modeling.
Microeconomics C. This version covers the essentials of microeconomics for
empirical (econometric and qualitative) work.
This is the second year that we have two versions and the exact content and restrictions
are yet evolving. Students in some fields will be required to take Microeconomics B,
which is also a prerequisite for the Game Theory and Industrial Organization courses.
Other students will be able to choose which course to take. In principle the two courses
will be more complementary than substitutes for one another, but we do not anticipate
that students would take both courses. You will receive further details in P1.
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Microeconomics A • Syllabus
Honor code
Students are expected, individually and collectively, to uphold the rules of the PhD
program and the professional norms regarding cheating and plagiarism. If you have
any doubts about what entails cheating, consult with one of the professors or with
the PhD program office. Violations, even in the form of facilitating cheating by other
students, may result in a failure grade or expulsion from the program.
The homework exercises are provided for your pedagogical benefit. There are no rules
governing the execution of the exercises, other than that each student must hand in
his or her solutions separately. Collaboration, such as working in groups or consulting
with students from previous years, is encouraged to the extent that it helps you learn
the material.
Simply copying from group members or consulting past solutions would invalidate
the pedagogical value of the exercises and it is up to you to avoid this. Such actions are
typically viewed very dimly by classmates, who take satisfaction from the challenge of
the exercises.
Exams are entirely individual. Collaboration of any form during an exam constitutes
cheating.
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Microeconomics A • Syllabus
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Course content
Overview
This part of the course is unusual. It is like two courses in one—a self-study course at
the MBA level and an in-class PhD course.
• Self-study MBA course. The electronic coursepack for Microeconomics A includes
relevant portions of the coursepack for the MBA microeconomics source, Prices
and Markets. In particular, it includes the lecture notes called Firms, Prices, and
Markets (FPM). In advance of each class, you must read the assigned FPM readings and hand in selected assigned exercises, listed as “Preclass assignment” in the
outline. At the end of the period, you have to take the same exam as the MBA
students. Your exam will not be curved together with the MBA students and you
will not be informed how your grade compares with theirs.
• PhD course. We cover the same MBA topics in class but with full rigorous modeling
and proving the assertions that appear in the MBA course. A typical class begins:
“Ok, how can we formally model what is in the FPM chapter? We want to be very
precise—even pedantic—and prove the assertions in the chapter. We should try to
generalize the results.” You will have to rely on in-class notes, occasional printed
lecture notes, and some supplementary readings. The problem sets and additional
exercises are also an integral part of the course material. You will have a final exam.
Main textbooks
BD
Bolton, Patrick and Mathias Dewatripont. Contract Theory. MIT Press, 2005.
MWG
Mas-Colell, Andreu, Michael Whinston, and Jerry Green. Microeconomic Theory.
Oxford: Oxford University Press. 1995.
Osborne
Osborne, Martin. An Introduction to Game Theory. Oxford University Press, 2004.
FPM
Van Zandt, Timothy. Firms, Prices & Markets. 2006.
Varian
Varian, Hal. Microeconomic Analysis. 3rd edition. Norton & Co., 1992.
The electronic coursepack includes the relevant chapters from BD and MWG, along
with FPM and the other MBA readings. We use too many chapters from Varian and
Osborne to be able to distribute them without violating copyright restrictions. These
books are on reserve at the libraries, but I recommend that you purchase them.
Preparation guides
For each topic, there is a preparation guide in the PhD course pack. This outlines the
advanced preparation, readings, and other assignments required for each topic.
Microeconomics A • Syllabus
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List of topics
The topics are numbered 1 to 14 to match our fourteen 1.5-hour sessions.
Demand, Supply, and Equilibrium
1.
Pareto efficiency with quasilinear utility
2.
Choice and equilibrium with quasilinear utility
3a.
Empirical estimation of demand
Production and Costs
3b.
4.
Production and technology
Cost functions
Perfect Competition
5.
Competitive supply and market price
6.
Short-run costs and prices
Single-Firm Pricing Decisions with Market Power
7.
Pricing with market power
8.
How pricing depends on the demand curve
9.
Explicit price discrimination
10.
Monopolistic screening without adverse selection
Game Theory and Imperfect Competition
11.
Static games and Nash equilibrium
12.
Imperfect competition
13.
Explicit and Implicit Cooperation
14.
Strategic commitment
Microeconomics A • Syllabus
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Outline
I only list readings that are directly related to the topics as I will cover them. You can
find extensions in MWG and the other references.
MBA ⇒ MBA material, in the electronic course pack.
FPM ⇒ MBA lectures notes, in the electronic course pack.
Unit I.
Topic 1.
Demand, Supply, and Equilibrium
Pareto efficiency with quasilinear utility
The quasi-linear model of partial equilibrium with money and one good. Total valuation and marginal valuation. Total cost and marginal cost. Pareto optimality and
surplus maximization. First-order conditions for Pareto optimality.
Readings:
FPM Math Review, Preliminaries
FPM Ch. 1
Preclass assignment:
FPM Exercise P.1. Do part (c) twice: Once with Excel and once with Mathematica
or equivalent.
Topic 2.
Choice and equilibrium with quasilinear utility
Demand, supply, and competitive equilibrium. Elasticity of supply and of demand.
Effect of taxes.
Readings:
FPM Chs. 2 and 3
Varian Ch. 13 (except §13.5)
Preclass assignment:
FPM
Exercises 2.5 and 3.3
Topic 3a. Empirical estimation of demand
Estimating constant-elasticity demand using OLS.
Preclass assignment:
MBA “Estimating the Elasticity of Demand for Gasoline”
Microeconomics A • Syllabus
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Unit II.
Topic 3b.
Production and Costs
Production and technology
Technology, production functions, and profit maximization of firms. Returns to scale.
Law of diminishing marginal product.
Readings:
Varian Ch. 1, 2, 3
Topic 4.
Cost functions
Sunk costs and opportunity costs. Analysis of cost curves—fixed versus variable cost,
marginal versus total cost. Economies of scale. Deriving cost curves from production
functions.
Readings:
FPM Ch. 4
MBA “Long-Run Fixed Costs in the Cellular Industry”
Varian Chs. 4 and 5
Preclass assignment:
FPM
Exercises 4.4 and 4.5
Unit III.
Topic 5.
Perfect Competition
Competitive supply and market price
Competititive supply and market price.
Readings:
FPM Ch. 5
MWG Ch. 10
Preclass assignment:
FPM
Exercises 5.3 and 5.4
Microeconomics A • Syllabus
Topic 6.
Short-run costs and prices
Short-run cost curves. Trade-off between fixed cost and marginal cost. Law of diminishing return. Short-run versus long-run pricing and supply. Industry volatility and
overshooting. Capacity constraints.
Readings:
FPM
Ch. 6
Preclass assignment:
FPM Exercises 6.1 and 6.2
Continuation of simulation exercise
Unit IV.
Topic 7.
Single-Firm Pricing Decisions with Market Power
Pricing with market power
Pricing with market power. Socially efficient quantity, profit-maximizing quantity,
deadweight loss. Pricing with linear demand and constant-elasticity demand. Entry
and exit decisions with a long-run fixed cost.
Readings:
FPM Ch. 8
MBA “Apple Slips”
Varian §14.1–14.4
MWG §12.A–B
Preclass assignment:
FPM
Topic 8.
Exercises 8.4–8.8
How pricing depends on the demand curve
Effects of a shift in the demand curve on pricing. Marginal revenue and elasticity. Effect
of a shift in elasticity on pricing, with constant marginal cost. Effect of an increase in
the volume of demand on pricing, with increasing marginal cost.
Readings:
FPM
Ch. 9
Preclass assignment:
FPM
Exercise 9.3
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Microeconomics A • Syllabus
Topic 9.
9
Explicit price discrimination
Charging different prices in different market segments.
Readings:
FPM Ch. 10
MBA “Will the Roxy Theater Maximize Profits by Eliminating …”
Preclass assignment:
On-line survey about “Roxy Theater”
Topic 10.
Monopolistic screening without adverse selection
Private information about valuations and the extraction of surplus. Perfect price discrimination. Informational requirements of perfect price discrimination. Methods
for screening when consumer characteristics cannot be observed. Menus and selfselection. Versioning. Bundling. Nonlinear pricing.
Readings:
FPM Chs. 11 and 11B
BD §2.1
Preclass assignment:
FPM
Exercises 11.1–11.4 and 12.4
Unit V.
Topic 11.
Game Theory and Imperfect Competition
Static games and Nash equilibrium
Players, actions, timing, and payoffs. Dominant strategies. Best responses and bestreply curves. Strategic complements and substitutes. Dominant-strategy equilibrium.
Nash equilibrium.
Readings:
FPM Ch. 12
Osborne Chs. 1 and 2
Preclass assignment:
FPM
Exercise 12.5
Microeconomics A • Syllabus
Topic 12.
10
Imperfect competition
Price competition with differentiated products. Quantity competition with perfect
substitutes (Cournot). Imperfect competition with free entry.
Readings:
FPM Ch. 13
Osborne Ch. 3 (available at http://www.economics.utoronto.ca/osborne/igt)
MBA “Gamebox: Another Kind of Network Externality”
Preclass assignment:
“Imperfect Competition with Free Entry”
Topic 13.
Explicit and Implicit Cooperation
Externalities and the inefficiency of Nash equilibrium. Role of positive and negative
externalities. Repeated games and tacit collusion. Trigger strategies.
Readings:
FPM Ch. 14
Osborne Ch. 14
Preclass assignment:
FPM
Topic 14.
Exercise 14.3
Strategic commitment
Sequential games. Stackelberg (leader-follower) games. Comparison with simultaneousmove games. How timing matters: the role of externalities and strategic complementarities. First-mover advantage and disadvantage.
Readings:
FPM Ch. 15
Varian Ch. 16
Osborne Ch. 6
Preclass assignment:
FPM
Exercises 15.5 and 15.6