ECONOMICS 602
MICROECONOMIC THEORY
Dr. James Thornton
Monday, 7:15 – 9:55
Winter 1999
Pray-Harrold 422
Office and Phone: Pray-Harrold 707-F, 487-0080
Office Hours: M 4:45-7:15, T TH 8:00-9:15, 12:00-12:30, and by appointment.
Text: Walter Nicholson, Microeconomic Theory: Basic Principles and Extensions, Seventh
Edition.
The purpose of this course is to analyze the behavior of consumers and producers, their
interactions in a market setting, and the social outcome of these interactions. Primary emphasis is
on the formulation of theories using the analytical techniques of optimization and equilibrium,
and the application of mathematical methods to deduce implications about the behavior of
economic agents in various types of market environments. The role played by economic theory
in specification and inference in econometric modeling is also stressed.
Your grade in the class will be based on two tests, two computer assignments, and four
homeworks assignments. The examinations will be worth 60 percent of your grade, the
computer assignments will be worth 30 percent of your grade, and the homework assignments
will be worth 10 percent of your grade.
The examinations will consist of short answer questions and problems that will test your
knowledge of basic principles and concepts, as well as your ability to apply geometric and
mathematical reasoning to microeconomic problems. The purpose of the computer assignments
is to illustrate the link between theoretical and empirical analysis; in particular, these
assignments are designed to teach you how to use economic theory to guide specification and
inference in econometric modeling. There are several ways in which economic theory can be
used to guide econometric analysis. Theory reveals structural relationships of interest between
economic variables, and may also suggest appropriate functional forms to estimate. In addition,
the restrictions implied by economic theory can be tested and/or imposed to obtain better
estimates of model parameters. Each computer assignment will give you detailed information on
what to do, and how to use a statistical package to do it. You will then be asked to answer a
number of questions that require you to use the knowledge of economic theory you acquire in
class lectures and readings.
SUPPLEMENTARY TEXTS
The following texts are recommended for review, background, and supplemental reading. These
texts are not required.
Silberberg, E., The Structure of Economics: A Mathematical Analysis. McGraw-Hill Publishing
Company, 1990.
Chiang, A., Fundamental Methods of Mathematical Economics. McGraw-Hill Publishing
Company, 1984.
Deaton, A., and J. Muellbauer, Economics and Consumer Behavior. Cambridge University Press,
1980.
Varian, H., Microeconomic Analysis. W.W. Norton Publishing Company, 1984.
Varian, H., Intermediate Microeconomic Analysis. W.W. Norton Publishing Company, 1985.
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Jehle, G., Advanced Microeconomic Theory. Prentice Hall, 1990.
Kreps, D., A Course in Microeconomic Theory. Princeton University Press, 1990.
Chambers, R., Applied Production Analysis: A Dual Approach. Cambridge University Press,
1988.
Fuss, M., and D. McFadden, Production Economics: A Dual Approach to Theory and
Applications. North Holland, 1978.
Pollak, R., and T. Wales, Demand System Specification and Estimation, Oxford University Press,
1992.
Chung, J., Utility and Production Functions. Blackwell, 1994.
COURSE OUTLINE
The following is an outline of topics to be covered and a list of related reading assignments.
Readings are divided between required (*) and optional. Optional readings are designed to
supplement class lectures and provide students with additional information on topic areas.
1.
The Methodology of Microeconomic Analysis
A. Observable phenomena and economic processes.
B. The structure of an economic theory.
C. Variables, assumptions, hypotheses, and implications.
D. Analytical techniques: optimization and equilibrium.
E. Judging the validity of an economic theory.
F. Economic theory, empirical analysis, and econometrics.
Readings:
Nicholson, Chapters 1, 2. (*)
Friedman, M., “The Methodology of Positive Economics,” in M. Friedman, Essays in Positive
Economics. University of Chicago Press, 1953. (*)
Varian, H., Microeconomic Analysis. W.W. Norton and Company, 1984. Chapter 0. (*).
Lange. O., “The Scope and Method of Economics,” in R. Neel, Readings in Price Theory.
Southwest Publishing Company, pp. 3-20. (*)
Nagel, E., “Assumptions in Economic Theory,” American Economic Review, May 1963, pp.
211-219.
Samuelson, P., Foundations of Economic Analysis. Harvard University Press, 1962. Chapters 1,2
Kuhn, T., The Structure of Scientific Revolutions. University of Chicago Press, 1947.
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2.
The Theory of Consumer Behavior: Basic Elements
A. Fundamental assumptions and simplifying assumptions.
B. The consumption set.
C. The budget set.
D. The Preference Relation and the axioms of preference.
E. The utility function and utility function theorems.
Readings:
Nicholson, Chapters 3, (pages 67-90), 4 pages 98-101. (*)
Deaton, A., and J. Muellbauer, Economics and Consumer Behavior. Cambridge University Press,
1980. Chapter 2 pages 25-36. (*).
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Chapter 2.
Varian, H., Intermediate Microeconomic Analysis. W.W. Norton Publishing Company, 1985.
Chapters 1, 2, 3, 4.
Silberberg, E., The Structure of Economics: A Mathematical Analysis. McGraw-Hill Publishing
Company, 1990. Chapter 10.
3.
The Problem of the Consumer and the Solution
A. The set-theoretic approach.
B. The Lagrange multiplier approach.
C. Properties of consumer demand functions.
D. Homogeneity, adding-up, and Slutzky matrix properties.
E. Estimating demand functions and demand systems.
Readings:
Nicholson, Chapters 4 (pages 101-112), 5 (pages 125-139), 6, 7. (*)
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Chapter 2.
Varian, H., Intermediate Microeconomic Analysis. W.W. Norton Publishing Company, 1985.
Chapters 5, 6, 8
Varian, H., Microeconomic Analysis. W.W. Norton Publishing Company, 1984. Chapter 4.
Silberberg, E., The Structure of Economics: A Mathematical Analysis. McGraw-Hill Publishing
Company, 1990. Chapter 10.
4.
The Theory of Consumer Behavior: Duality in Consumption
A. The fundamental principle of duality.
B. Primal and dual problems.
C. Indirect utility function and expenditure function.
D. Properties of the indirect utility function and expenditure function.
E. Duality and the theory of consumer behavior.
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Readings:
Nicholson, Chapters 4 (pages 112-118), 5 (pages 139-148) (*)
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Chapter 3.
Deaton, A., and J. Muellbauer, Economics and Consumer Behavior. Cambridge University Press,
1980. Chapters 3, 4.
Varian, H., Microeconomic Analysis. W.W. Norton Publishing Company, 1984. Chapter 3.
5.
Topics in Consumer Behavior
A. Functional form and utility functions.
B. Homothetic utility functions.
C. Properties of demand functions generated by homothetic utility functions.
D. Stone-Geary utility function and linear expenditure system.
Readings:
Nicholson, Chapters 4 (pages 122-124), 3 (pages 90-93, 95-97). (*)
Abbot, M., and O. Ashenfelter, “Labor Supply, Commodity Demand and the Allocation of
Time,” Review of Economic Studies, 43, pp. 389-411. (*)
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Chapter 3.
Stone, R., “Linear Expenditure Systems and Demand Analysis: An Application to the Pattern of
British Demand,” Economic Journal, September 1954, pp. 511-527.
Christensen, L., D. Jorgenson, and L. Lau, “Transcendental Logarithmic Utility Functions,”
American Economic Review, June 1975, pp. 367-383.
Brown, A., and A. Deaton, “Surveys in Applied Economics: Models of Consumer Behavior,”
Economic Journal, December 1972, pp. 1145-1235.
6.
The Theory of Firm Behavior: Technology
A. The relationship between production and technology.
B. Assumptions about technology.
C. Properties of the production function.
D. The structure of production functions.
E. Estimating production functions.
F. Commonly used functional forms for production functions.
Readings:
Nicholson, Chapter 11. (*)
Thornton, J., “Do Physicians Employ Aides Efficiently? Some New Evidence on Solo
Practitioners,” Journal of Economics and Finance, Fall 1998. (*)
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Chapter 4.
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Varian, H., Microeconomic Analysis. W.W. Norton Publishing Company, 1984. Chapters 1, 4.
Silberberg, E., The Structure of Economics: A Mathematical Analysis. McGraw-Hill Publishing
Company, 1990. Chapter
Fuss, M., and D. McFadden, Production Economics: A Dual Approach to Theory and
Applications. North Holland, 1978.
Jorgenson, D., Christensen, L., and L. Lau, “Transcendental Logarithmic Production Frontiers,”
Review of Economics and Statistics, February 1973, pp. 28-45.
Diewert, W., “A Generalized Leontief Production Function,” Journal of Political Economy,
1971, pp. 481-507.
7.
The Theory of Firm Behavior: Cost Minimization
A. Behavioral, market structure, technology, and simplifying assumptions.
B. The cost minimization problem.
C. The solution of the cost minimization problem.
D. Properties of input demand and cost functions.
Readings:
Nicholson, Chapter 12. (*)
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Chapter 4.
Varian, H., Microeconomic Analysis. W.W. Norton Publishing Company, 1984. Chapter 1.
Silberberg, E., The Structure of Economics: A Mathematical Analysis. McGraw-Hill Publishing
Company, 1990. Chapter 8.
8.
The Theory of Firm Behavior: Duality in Production
A. The fundamental principle of duality in production.
B. Properties of the cost function.
C. Derivation of cost minimizing input demand functions.
D. Derivation of the dual production function.
E. Output-Cost elasticity, returns to scale, and economies of scale.
F. Allen-Uzawa measure of elasticity of substitution.
G. The structure of cost functions.
F. The restricted cost minimization problem.
G. Estimating cost functions.
Reading:
Nicholson, Chapter 12. (*)
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Chapter 5.
Varian, H., Microeconomic Analysis. W.W. Norton Publishing Company, 1984. Chapter 1, 4.
Silberberg, E., The Structure of Economics: A Mathematical Analysis. McGraw-Hill Publishing
Company, 1990. Chapter 9
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Bendt, E, and D. Wood, “Technology, Prices, and Derived Demand for Energy, Review of
Economics and Statistics, August, 1975, pp 376-384.
9.
The Theory of Firm Behavior: Profit Maximization
A. Behavioral, market structure, technology, and simplifying assumptions.
B. The profit maximization problem.
C. The substitution method of solution of the profit maximization problem.
D. Properties of input demand and output supply functions.
E. The two-stage method of solution of the profit maximization problem.
F. The profit function and duality in production.
G. The restricted profit maximization problem.
Reading:
Nicholson, Chapters 13, 21 (pages 635-652). (*)
Lau, L., and P. Yotopolous, “Profit, Supply, and Factor Demand Functions,” American Journal
of Agricultural Economics, 54, 1972, pp. 11-18. (*)
Henderson, J., and R. Quandt, Microeconmic Theory. McGraw-Hill Publishing Company, 1980.
Chapter 4.
Varian, H., Microeconomic Analysis. W.W. Norton Publishing Company, 1984. Chapter 1.
Silberberg, E., The Structure of Economics: A Mathematical Analysis. McGraw-Hill Publishing
Company, 1990. Chapters 4, 6, 7.
10.
Market Structure and Firm Behavior
A. Perfect Competion.
B. Monopoly.
C. Oligopoly.
Readings:
Nicholson, Chapters 14, 15, 17, 18, 19, 10, 20. (*)
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