Economics 520 (5/9/2012)
Microeconomics – Fall 2012
Dr. Stokes
Microeconomics 520
Dr. Houston H. Stokes
722 UH
E-mail hhstokes@uic.edu
Web www.uic.edu/~hhstokes
TA: Zhongkai Wen zwen5@uic.edu
750 UH
Texts:
1. Pindyck, Robert & Daniel Rubinfeld, Microeconomics, 8th Edition, Prentice Hall,
2013
2. Suslow, Valerie & Jonathon Hamilton, Study Guide Microeconomics Robert S.
Pindyck & Daniel Rubinfeld, Prentice Hall 2013 Or earlier editions
Study Notes:
1. Stokes, Houston H., Microeconomics Study Notes, 2012. Available on line from
Economics 520 web page. These notes form the basis of the lectures. They can be
down loaded and edited.
2. See also "Quantitative Skills Refresher" In the Study Guide.
General Outline of the course:
Microeconomics is concerned with scarcity and how to make rational choices in
the face of alternatives. The goal of this course is to equip you with the necessary
theoretical and analytical skills that would allow you to make reasoned choices
among various alternatives. Thus the main focus of the course is on problem
solving. Students will be using Excel, MATLAB and B34S as necessary.
Goals of Course
The course will discuss the relevant theory and will illustrate this theory by showing how
to structure a spreadsheet to solve key managerial decisions such as:
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Whether to lease or buy?
Whether to buy a big machine or a small machine
How to determine the shape of the cost curve of a production process
How to price a product
How to estimate Demand for a product
How to forecast Demand
How to estimate a production function
How a production function can be used to set wages
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Economics 520 (5/9/2012)
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Microeconomics – Fall 2012
Dr. Stokes
How to determine the appropriate level of advertising
How to estimate the cost of service of a utility
How to determine the minimum cost of a diet
Tests:
There will be two tests, and one final; all will be worth 25%. Questions will be
short answer, multiple choice and fill in. Problems will be assigned and discussed in
class. There will be 3-4 graded problem sets which will be worth 25%. Students
must turn in problems, and take tests on time to obtain credit. For all class
tests students will be allowed to bring one sheet of notes the size of this handout
written on both sides. The lecture discussion of problems is a practice for the tests
in class. The study guide contains the type of questions that will be used. It is
important that you work very hard with this resource. The emphasis of the course is
on practical problem solving. Students are expected to do the reading prior to class
and to attend class and be ready to discuss the problems. The reading consists of the
text and the study guide. In general one chapter will be covered per class period.
Class participation can influence grades at the margin. Problem sets can be done by
yourself or as part of a two person team. If you decide to form a team, then the team
cannot be broken up. All members of the team must work on the project. It is
recommended that students bring the text to class and print out the study
notes which form the basis of the lectures.
Academic Integrity
The University of Illinois is dedicated to learning and research, and hence is committed
to truth and accuracy. Integrity and intellectual honesty in scholarship and scientific
investigations are, therefore, of paramount importance. These standards require
intellectual honesty in conducting research, writing of research results and relationships
with colleagues.
Academic dishonesty includes, but is not limited to:
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Cheating: either intentionally using or attempting to use unauthorized materials,
information, people, or study aids in any academic exercise or providing to, or
receiving from, another person any kind of unauthorized assistance on any
examination or assignment.
Fabricating: knowing or unauthorized falsification, reproduction, lack of attribution,
or invention of any information or citation in any academic exercise.
Facilitating academic dishonesty/plagiarism: intentionally or knowingly representing
the words or ideas of another, as one’s own in any academic exercise.
Offering bribes, favors, or threats: bribing or attempting to bribe or promising favors
to or making threats against any person with the intention of affecting a record, grade
or evaluation of academic performance and any conspiracy with another person who
then takes, or attempts to take, action on behalf of, or at the direction of the student.
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Microeconomics – Fall 2012
Dr. Stokes
Taking an examination by proxy: taking or attempting to take an exam for someone
else is a violation by both the student enrolled in the course and the proxy or
substitute.
Grade tampering: any unauthorized attempt to change, actual change of, or alteration
of grades or any tampering with grades.
Submitting non-original works: submission or attempt to submit any written work,
written in whole or in part, by someone other than the student.
The academic Integrity discussion above is based on the University Honor Code which is
excepted below:
Honor Code for the College of Business Administration
As an academic community the College of Business Administration at the University of
Illinois at Chicago is committed to providing an environment in which teaching, learning,
research, and scholarship can flourish and in which all endeavors are guided by academic
and professional integrity. All members of the college community – students, faculty,
staff, and administrators – share the responsibility of insuring that high standards of
integrity are upheld so that such an environment exists.
In pursuit of these high ideas and standards of academic life, as a student I hereby
commit myself to respect and uphold the University of Illinois at Chicago (UIC) College
of Business Administration Honor Code during my entire matriculation at UIC. I agree
to maintain the highest moral and ethical standards in all academic and business
endeavors and to conduct myself honorably as a responsible member of the college
academic community. This includes the following:
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Not to seek unfair advantage over other students, including, but not limited to
giving or receiving unauthorized aid during completion of academic
requirements;
To represent fact and self truthfully at all times;
To respect the property and personal rights of all members of the academic
community.
An abbreviated version of the Honor Code pledge may be printed on course syllabi, exam
booklets, and other uses as deemed appropriate. The abbreviated version is as follows:
This course and its associated coursework are being administered under the
policies of the University of Illinois at Chicago (UIC) College of Business
Administration Honor Code. All students are expected to respect and uphold this
code.
Honor Code Violations and Enforcement
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Dr. Stokes
Violations of the Honor Code are just causes for discipline under the University of
Illinois at Chicago Student Disciplinary Procedure, and all allegations of Honor Code
violations shall be handled pursuant to that Procedure.
(For a complete description of just causes for discipline, disciplinary procedures, and
sanctions, see the pamphlet “Student Disciplinary Procedure of the Senate Committee on
Student Discipline,” available from the Office of the Dean of Students, SSB, Suite 3030,
1200 W. Harrison St., M/C 318.)
Problem sets
Problem sets must be typed and turned in on time to receive credit.
presentation of your report will be heavily weighted in the grade.
The
Study Tips:
Students are expected to study the chapter summaries and questions in the Study
Guide that provide a good review for the tests. Students should do the assigned
problems and be ready to discuss them in class. It is important that the reading be
done prior to the class where it is discussed. Bring the text and the study guide to
each class. A complete set of class notes is on line in MS Word 97 format. Students
with laptops can down load this file and annotate these notes during the lecture.
After reading each chapter try the tests. Answers are provided at the end of the
study guide. Microeconomics is best learned by problem solving, not
memorization. The main purpose of this class is to equip you with the tools of
micro analysis that will allow you to lead productive lives, both in business and in
personal finance.
Excel Files Available on Class Web Site
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utility
ch1_1.xls
ch2_1
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ch2_2
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ch2_3
ch3_1
ch7_1.xls
ch9_1
ch9_2
ch9_3
ch9_4
ch12_1
ch12_2
p354_12
- Illustrates Utility Theory and Market Supply and Demand
- Economic Data from Table 1.2
- Demand and Supply Curves are given. Calculates P & Q
Example 2.5
- Given Demand and Supply elasticity and Market P and Q get
Demand and Supply Curves
- Data from Stigler Theory of Price Ed(4). Estimate C Function.
- Utility Theory Solution
- Solves the Appendix to Chapter 7
- Agricultural Market equilibrium and Policy Analysis (Fig 9.12)
- Tariff and Quota Analysis (Figure 9.15 & 9.16)
- Effect of a Government tax in Dollars on Consumer Welfare
- Effect of a Government tax in % on Consumer Welfare
- Nash Equilibrium of Two Firms with different price and products
- P & G decision Model Template
- Special Case of Problem 12 page 354
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table4_6
Microeconomics – Fall 2012
Dr. Stokes
- Problem 5 page 396
- Table 4-6 P & Q Data
Excel Application Files
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large_small.xls
pricing.xls
demand.xls
sales.xls
Test_lp1.xlsx
-Large vs Small Machine Template
-Pricing Template
-Demand Template
-Sales Forecasting
-Excel LP setup
Students are expected to attend all classes and participate in the discussion. Class
attendance may figure in the final grade.
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Microeconomics – Fall 2012
Dr. Stokes
Assignments
I.
Introduction: Markets and Prices
Chapter 1 Preliminaries
Discuss questions for review 1, 2 and 5 page 19
Study Exercises 1 and 2.
Take "Self Test" in Study Guide. Study Answers.
In workbook be sure you know all terms listed on page 1.
Chapter 2 Basics of Supply and Demand
Discuss questions for review 1-4 page 61
Discuss problems 1-2 page 62
Take "Self Test" in Study Guide. Study Answers.
II.
Producers, Consumers, and Competitive Markets
Chapter 3 Consumer Behavior
Discuss questions for review 2, 3, 5, 6, 9 page 106
Discuss exercises 1, 3, 14 page 107-108.
Take "Self Test" in Study Guide. Study Answers.
Graded Problem Set # 1
1. Carefully discuss what is meant by "change in demand" and "change in quantity
demanded." Give example.
2. Solve problem 9 page 108
3. Solve applications Problem # 1 (Large-Small Machine Case)
4. Solve Problem 11 page 108
Chapter 4 Individual and Market Demand
Discuss questions for review 1, 2, 5, 8 page 144
Take "Self Test" in Study Guide. Study Answers.
Chapter 6 Production
Discuss questions for review 1, 5, 11 on page 226
Discuss exercise 2 and 7, 8 page 227
Take "Self Test" in Study Guide. Study Answers.
Midterm # 1
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Dr. Stokes
Chapter 7 The Cost of Production
Study Closely Appendix pages 273-278
Discuss problems 1,2, 4 278
Learn how to use ch7_1.xls
Take "Self Test" in Study Guide. Study Answers.
Chapter 8 Profit Maximization and Competitive Supply
Discuss problems 11 & 13 page 316
Take "Self Test" in Study Guide. Study Answers.
Graded Problem Set # 2
1. Problem 9 page 227 In addition assume Pk  $10.78 and PL  $18.00 and q =
100, using material in appendix 7 and q  K .522 L.612 what is L, K?
2. Problem 6 page 315-316
3. Problem 7 Page 316
4. Solve Applications Pricing Problem
Chapter 9 The Analysis of Competitive Markets
Discuss questions for review 2, 4, 7 page 352.
Midterm # 2
III.
Market Structure and Competitive Strategy
Chapter 10 Market Power: Monopoly and Monopsoney
Discuss questions for review 1, 5, 11 14 page 395
Chapter 11 Pricing with Market Power
Discuss questions for review 10 page 434. See also exercises 1-3,
Graded Problem Set # 3
1. Exercise # 5 page 396.
2. Exercise # 4 page 450
3. Exercise # 2 page 352
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Economics 520 (5/9/2012)
Microeconomics – Fall 2012
Chapter 12 Monopolistic Competition and Oligopoly
Discuss 1, 2, 3, 8 page 483-484.
Chapter 14 Markets for Factor Inputs
Discuss questions for review 1, 5, 6, page 556-557
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Dr. Stokes
Microeconomics – Fall 2012
Economics 520 (5/9/2012)
Dr. Stokes
IV Linear Programming (Optional Topic if we get Time)
Final
l
Graded Problem Set # 4 -- Linear Programming
The officer in charge of a military mess hall was ordered to design a meal that
could be used in the event of an emergency. The meal is to consist of only
milk and ground beef but must provide the following nutrient-units:
calories=300, protein=250 and vitamins=100. The nutrient content per ounce
of each food is as follows:
Calories
Protein
Vitamins
Milk
20
10
10
Ground Beef
15
25
4
Milk costs $.02 per ounce and ground beef $.04 per ounce
a. Use linear programming to determine the composition of the lowest cost
meal (i. e. ounces of milk and beef) and the cost of the meal.
b. Set up the associated dual problem and explain how the shadow price (i. e.
value) of calories, protein and vitamins would be determined.
c. Show what happens to the solution if milk were to increase in cost to $.03.
d. Carefully discuss what is meant by the "primal" and the "dual" in context to
this problem,
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Microeconomics – Fall 2012
Economics 520 (5/9/2012)
Dr. Stokes
Statistical Help
OLSQ:
A key aspect of solving the problems in the course involves use of OLS.
To run a regression in Excel of y = f(x,z) place y in a1:a6 and x and z in the block b1:c6
What are the coefficients? Is the model any good?
Y
X
1
2
3
4
5
6
0.5
0.4
0.3
0.2
0.1
0
Z
11
33
77
22
77
22
SUMMARY OUTPUT
Regression Statistics
Multiple R
1
R Square
1
Adjusted R Square
1
Standard Error
1.1749E-15
Observations
6
ANOVA
df
Regression
Residual
Total
SS
2
3
5
MS
F
Significance F
17.5
8.75 6.338E+30
1.15E-46
4.1415E-30 1.381E-30
17.5
Coefficients Standard Error
t Stat
P-value
Lower 95% Upper 95% Lower 95.0% Upper
6
1.2538E-15 4.785E+15 2.013E-47
6
6
6
-10
2.8942E-15 -3.455E+15 5.346E-47
-10
-10
-10
1.3721E-17
1.8517E-17 0.7410176 0.5124148
-4.5E-17 7.26E-17
-4.5E-17
7.
Intercept
X Variable 1
X Variable 2
RESIDUAL OUTPUT
Observation
1
2
3
4
5
Predicted Y
1
2
3
4
5
Residuals
-2.22E-16
0
-4.441E-16
4.4409E-16
8.8818E-16
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Microeconomics – Fall 2012
Economics 520 (5/9/2012)
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6
1.7764E-15
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Dr. Stokes
Microeconomics – Fall 2012
Economics 520 (5/9/2012)
Linear Programming Help
Assume a Linear programming problem of the form
Max (min)  = 300X + 200Y + 100Z
8X + 4Y + 2Z  32
6X + 5Y + 4Z < 30
5X + 8Y + 3Z < 40
S. T.
Using the B34S build a command file test.b34 containing:
b34sexec lpmax n=3 m1=3 m2=0$
* Test problem for Economics 520
* max should be 1350
* primal = 2.5, 3.0, 0.0
* Dual
= 18.75 25.
* n = 3 => # in primal
* m1= 3 => # le
* m2= 0 => # eq
amatrix(8. 4.
2.
6. 5.
4.
5. 8.
3.
)$
bvector(32. 30. 40,
)$
cvector(300. 200. 100. )$
b34srun$
$
$
$
$
$
$
$
The above commands are entered with pico and run with
b34s test
Answers are
LPMAX Command. Version
1 September 1997
Of
3000000 double precision slots in space,
Number of activities (X)
3
Number of constraints (m1+m2)
3
Number of inquality constraints (m1) 3
Number of equality constraints (m2) 0
Constraint Matrix (A)
1
2
3
1
8.00000
4.00000
2.00000
2
6.00000
5.00000
4.00000
3
5.00000
8.00000
3.00000
Constraint vector (B)
32.0000
30.0000
40.0000
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78 are being used.
Dr. Stokes
Microeconomics – Fall 2012
Economics 520 (5/9/2012)
Dr. Stokes
Cost vector (C)
300.000
200.000
100.000
Objective function maximized at
1350.000000000000
Primal values
2.50000
3.00000
0.00000
25.0000
0.00000
Dual values
18.7500
A maximum of 1350 is obtained where production of X, Y and Z are 2.5, 3.0 and 0.
Shadow prices of 18.75 and 25 indicate that if the constraint of b(1) = 32 were raised to
33, profit would increase 18.75. If the constraint of b(2) = 30 were raised to 31, profit
would increase 25. b(3) = 40 is not a constraint.
The B34S LPMAX command has required sentences are AMATRIX, BVECTOR and
CVECTOR. N = # of cols of A. M1 = number of inequality constraints. M2 = number of
equality constraints. The number of rows of A = M1 + M2.
MATLAB
The MATLAB programming system, for which there is a student version
available under $100.00, contains a hook to Maple® which allows derivatives to be
taken. An example of the usefulness of this system is shown below.
syms x
diff(10*x^3)
produces the correct answer of 30*x^2
Excel(r)
It is assumed that by this time you all know how to run excel. Excel will be used
heavily in this course.
This is the template for the LP problem discussed above:
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Economics 520 (5/9/2012)
Microeconomics – Fall 2012
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Dr. Stokes
Microeconomics – Fall 2012
Economics 520 (5/9/2012)
Dr. Stokes
Application Problems:
1.
Large – Small Machine Case
File large_small.xls
Firm faced with decision concerning whether to purchase large or small machine. MBA's
have researched the decision. The facts are:
P Heavy
P Heavy P med
1
P med 1 P Light 1 2
2
P Light 2
Assumptions of analysis
Large machine cost
Small Machine cost
0.2
0.3
0.5
L M, Profit
10000
4000
$2,000 S M Profit
7000
5000
0.4
0.4
0.2
-1000
12500 5000
1000
1000
8000 6000
2000
$1,700
10%
Interest
What does the firm do if the interest rate were to fall to 5%?
What happens if cost of large machine falls to $1,875?
What Happens if there is a recession?
Discuss possible problems of the analysis.
Template can be modified for a number of related problems!!
2.
Pricing Problem
File
pricing.xls
Your firm is considering the introduction of a new product and you are required to set the
price. You are considering three price strategies: High ($6.00), medium ($4) and low
($2.50). The MBA's on your staff have indicated the probability distribution of sales at
these prices as follows:
Pricing Problem
Y1 sales Prob
y1 sales
Prob
y1 sales prob
y2 sales prob
y2 sales prob
y2 sales prob
High Price
$6.00
3500
0.1
2500
0.3
1500
0.6
5000
0.2
4000
0.3
3000
0.5
Medium Price
$4.00
5000
0.2
4000
0.5
3000
0.3
8000
0.3
6500
0.4
5000
0.3
Low Price
$2.50
10000
0.4
7500
0.3
5000
0.3
12000
0.3
9000
0.5
7500
0.2
Cost
$1.00
Interest
0.125
Cost
$22,000
The economics team assures you that the per unit costs are $1.00 and that you need to
make an initial investment of $22,000. The Interest rate is 12.5%. What do you advise?
Resolve problem with interest rate .05%.
Resolve problem with costs increased to $1.50 due to an unfavorable union settlement in
the industry.
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Economics 520 (5/9/2012)
3. Demand Analysis
Microeconomics – Fall 2012
Dr. Stokes
File demand.xls
Billabong Boomerangs, Inc and Swahili Spears are direct competitors in the fast-growing
segment of the hunters equipment market. Because of recent intense competition, both
companies have redeveloped their main product, requiring the user's skills to be less
developed than before and thus avoiding extensive field trips by company representatives
for on the job training. This also reduced the need for costly instruction manuals. Stephen
Psener, president of Billabong Boomerangs, has decided to hire a local market research
company to assist his company in planning its strategy. After extensive research using
modern methods of data collection and statistical analysis, the researchers came up with
Billabong;s demand function.
Qd  1700Pb  750Yh  350 Ab  250 As  1,585Ps  1.05H  7.25W
Qb  boomerangs demanded
Pb  price of boomerangs ($29.95)
Yh  average income of hunters in thousands (12.5)
Ab  advertising budget for Billabong in thousands (680)
As  advertising budget of Swahili in thousands (525)
Ps  price of spears ($32.25)
H  total number of hunters in millions (24.68)
W  estimated population of wildlife in hundreds (8.75).
The current values of each of the variables is given in ( )
What is current level of demand for Billabong boomerangs:
Calculate values of price elasticity, cross price elasticity, and advertising elasticity.
Is the price of boomerangs too high, or too low in view of the president's desire to
maximize profits?
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Microeconomics – Fall 2012
Economics 520 (5/9/2012)
4. Sales Analysis
File
Dr. Stokes
sales.xls
The Lieberman Plastics Company wishes to predict sales for its plastic pails for the 1992
year. It has recorded data for its past ten years' demand and has obtained data on the
number of households within its market area. The information obtained was:
Sales Analysis
Year
Households
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Sales
350000
462000
548000
610000
694000
830000
985000
1080000
1210000
1330000
7000
6750
7150
8300
8000
9200
9050
10100
10300
10600
Plot the annual sales data against the number of households in the area and draw a line
that appears to be the best fit.
Using Excel fit a regression line.
Suppose the best data available suggests that the number of households in 1992 will
increase by 165,000 in 1992. Use the estimated line to forecast sales. What are the
problems and assumptions of your analysis? What might be done to improve your
model?
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