Master
2020/2021

## Advanced Microeconomics

Type:
Compulsory course (Financial Economics)

Area of studies:
Economics

Delivered by:
International College of Economics and Finance

When:
1 year, 1-4 module

Mode of studies:
Full time

Master’s programme:
Financial Economics

Language:
English

ECTS credits:
8

### Course Syllabus

#### Abstract

This is a yearlong course in Advanced Microeconomics. During the first two modules we study the decisions of individual economic agents, beginning with the theory of consumer choice and the producer theory. We introduce the concept of duality and analyze it in the context of consumption and production decisions. Afterwards, we study decision-making under uncertainty and introduce the expected utility theory. We also discuss its critiques. The first part concludes with the study of competitive equilibrium and its welfare properties in a general equilibrium setting. The remaining modules can be divided into four subparts: game theory, contract theory, matching theory, and social choice theory. Game-theoretical subpart covers static and dynamic games, both of complete and incomplete information. All other subparts use tools introduced here. Theory of contracts focuses on the principal-agent models with asymmetric information and unobservable actions. As another example of a mechanism design problem, we cover two-sided matching. We end the course by social choice theory that studies preference aggregation rules and their normative appeal. Pre-requisites: Calculus, Probability Theory, Mathematics for Economists.

#### Learning Objectives

- introduce basic concepts of microeconomics related to economic decisions of consumers and firms
- introduce basic concepts of game theory
- relate the concept of Pareto efficiency to economic and social outcomes
- connect studied theoretical concepts to real life

#### Expected Learning Outcomes

- Set up and solve models of consumer choice theory to obtain individual and aggregate market demands for goods
- Analyze properties of demand functions.
- Explain the relationship between observed choices and unobserved consumer preferences
- Set up and solve firm problems, derive and analyze individual and aggregate market supply functions
- Analyze the relationship between properties of technologies and firm production decisions
- Discuss and apply the standard approach to modelling uncertainty in the economics and finance literature
- Set up and solve decision problems involving uncertainty
- Apply the key efficiency concept – Pareto efficiency to evaluate market and non-market allocations of goods and resources
- Set-up and solve the benchmark general equilibrium model, find the equilibrium prices and allocations of goods and compare these allocations to the socially optimal outcomes
- Outline the fundamental principles of strategic reasoning
- Predict the equilibrium outcomes among agents with strategic power
- Evaluate the impact of information asymmetries on strategic reasoning and equilibrium outcomes
- Explain the role of time and observation of the opponents' moves in dynamic strategic interaction
- Predict the long term outcomes of repeated strategic interaction
- Evaluate the role of communication in determining economic outcomes
- Outline the main tradeoffs in models with adverse selection and moral hazard
- Apply deferred acceptance algorithm to one-to-one matching problems
- Be able to discuss properties of different social choice functions

#### Course Contents

- Consumer Choice TheoryThis chapter studies in detail the individual decisions of consumers. First, we consider individual decision making in an abstract setting: the preference-based vs. the choice-based approach. Then, we focus on the optimal decisions of individual consumers. We derive individual demands and work out their properties. We further discuss the duality of utility maximization and expenditure minimization, study the problem of integrability, and analyze the relation between the earlier results and the choice-based approach. We conclude with the issues of demand aggregation.
- Producer TheoryThis part of the course studies the behavior of the firm and develops a theory parallel to the theory consumption analyzed earlier. We study profit maximization and cost minimization, work out the properties of firm’s supply, discuss efficiency in production. The chapter finishes with supply aggregation
- Choice Under UncertaintyWe start by learning how to represent risky alternatives by means of lotteries. Then, by imposing rationality, continuity, and independence on individual preferences we obtain a central result known as the expected utility theorem. We analyze the attitude of different individuals towards risk and discuss some classical measures of risk aversion. We then move to comparing alternative distributions of monetary returns in terms of stochastic dominance. We consider the limitations of the expected utility theory and we provide Savage’s foundation for subjective expected utlity theorem. Violations of Savage axioms lead to a brief discussion of Ellsberg’s paradox and ambiguity aversion.
- General EquilibriumIn this part of the course we consider a competitive market economy in a general equilibrium setting. We formally introduce the notions of Pareto optimality and competitive (or Walrasian) equilibrium and analyze their interrelation summarized in the two fundamental theorems of welfare economics. We study in detail the 2 by 2 exchange economy model and the 2 by 2 (two products, two factors) production economy model.
- Game theoryDominance and rationalizability Nash equilibrium Incomplete information games Dynamic games Repeated games Cheap-talk, signaling, persuasion games
- Contract Theorya. hidden information: screening b. hidden action: moral hazard
- Matching theorya. deferred acceptance algorithm b. lattice structure of stable matchings c. strategy-proofness: impossibility result
- Social choice theorya. Arrow impossibility theorem b. restricted domain: single-peaked preferences and median voter theorem

#### Assessment Elements

- Exam WinterWritten examination
- Intermediate Test 1Written examination
- Short QuizzesShort Quizzes
- Intermediate test 2Written examination
- Intermediate test 3Written examination
- Exam springWritten examination
- Home assignmentsNot included in the final grade.

#### Interim Assessment

- Interim assessment (2 module)0.68 * Exam Winter + 0.29 * Intermediate Test 1 + 0.03 * Short Quizzes
- Interim assessment (4 module)0.25 * Exam spring + 0.5 * Interim assessment (2 module) + 0.125 * Intermediate test 2 + 0.125 * Intermediate test 3

#### Bibliography

#### Recommended Core Bibliography

- Contract theory, Bolton P., Dewatripont M., 2005
- Martin J Osborne, & Ariel Rubinstein. (2009). A Course in Game Theory. Levine’s Bibliography. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.p.cla.levrem.814577000000000225
- Mas-Colell, A., Whinston, M. D., & Green, J. R. (1995). Microeconomic Theory. Oxford University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.oxp.obooks.9780195102680
- Roth, A. E., & Sotomayor, M. A. O. (1992). Two-Sided Matching. Cambridge University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.cup.cbooks.9780521437882

#### Recommended Additional Bibliography

- Gibbons, R. (1992). Game Theory for Applied Economists. Princeton: Princeton University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=390677
- Mathematics for economists, Simon C. P., Blume L., 1994