ECONOMICS 400
GENERAL ECONOMIC THEORY
MSPE
Spring 2003
Mr. Giertz and Mr. Brouhle
Lecture Schedule: See below.
Study Questions: See below:
Time and Location:
Lecture:
Review Session: To be determined (Brouhle)
Text:
Landsburg, Price Theory and Applications, 5th Edition.
Note that Landsburg has a comprehensive set of Internet linkages in the inside cover.
Offices:
Professor of Economics
Institute of Government and Public Affairs
1007
Telephone: 244-4822 Fax: 244-4817
e-mail: j-giertz@uiuc.edu
Office Hours:
Keith Broule:
Office: 431 DKH
Telephone:. 333-7594
e-mail: brouhle@students.uiuc.edu
Office Hours: To be determined.
Course Outline:
I. Introduction and Review
Supply and Demand, Ch 1.
Gains from
What is economics? Ch. 19.
II. Consumer Behavior and Demand
Chs. 3-4.
III. The Firm: Production and Cost
Chs. 5-6.
IV. Competitive Markets
Firm and Industry Equilibrium and
Welfare
V. Market Power
Monopoly, Ch. 10.
Market Power, Ch. 11
VI. Input Markets
Factor Markets,
Labor Markets,
Investment and Capital Markets,
VII. Special Topics
Public Goods and Externalities, Chs. 13-14. (Also pages 324-331)
Knowledge and Information,
Risk and Uncertainty,
Examinations and Homework: (Subject to revision)
There will be three exams (2 mid-terms and a final). Only the final
examination will be cumulative. Plus and minus grade options will be used in
the class. The final examination will be held from
First Examination:
Second Examination:
Final Examination: Tuesday,
There will also be 5 sets of study questions sets that will be distributed periodically.
The examinations will each count 25 percent (for a total of 75 percent of the course grade) and each set of study questions will count 5 percent for a total of 25 percent.
|
2 mid-term examinations |
@ |
25% |
= |
50% |
|
1 final examination |
@ |
25% |
= |
25% |
|
5 study question sets |
@ |
5% |
= |
25% |
|
Course Total |
|
|
|
100% |
Lecture Schedule: (subject to revision)
Month |
Day |
|
Coverage |
|
January |
21 |
Tuesday |
Introduction and Demand and Supply-Chapters 1, 2, & 19. |
|
January |
23 |
Thursday |
Math Review |
|
January |
28 |
Tuesday |
Demand and Supply |
|
January |
30 |
Thursday |
Elasticity (pp. 107-111) First Study Questions Distributed |
|
February |
4 |
Tuesday |
Consumer behavior and derivation of demand-Chapters 3-4. |
|
February |
6 |
Thursday |
Consumer behavior and derivation of demand |
|
February |
11 |
Tuesday |
Production and cost-Chapter 6 |
|
February |
13 |
Thursday |
Production and Cost followed by Profit maximization and derivation of supply-Chapters 5 & 7. |
|
February |
18 |
Tuesday |
Profit maximization and derivation of supply-Chapters 5 & 7. |
|
February |
20 |
Thursday |
Complete Supply. First Study Questions Due |
|
February |
25 |
Tuesday |
Examination Review |
|
February |
27 |
Thursday |
Welfare analysis: Simple general equilibrium analysis) Chapter 8 (pp. 240-276) |
|
March |
4 |
Tuesday |
FIRST EXAMINATION-Chapters 1-7 and 19 |
|
March |
6 |
Thursday |
Complete welfare analysis and begin m onopoly: Basics-Chapter 10 Second Study Questions Distributed |
|
March |
11 |
Tuesday |
Monopoly: Price discrimination and regulation |
|
March |
13 |
Thursday |
Imperfect competition-Chapter 11 |
|
March |
18 |
Tuesday |
Imperfect competition |
|
March |
20 |
Thursday |
Imperfect competition Second Study Questions Due and Third Study Questions Distributed |
|
March |
25 |
Tuesday |
NO Class Spring Vacation |
|
March |
27 |
Thursday |
NO Class Spring Vacation |
|
April |
1 |
Tuesday |
Factor Markets-Chapter 15 and Labor Markets-Chapter 16 |
|
April |
3 |
Thursday |
SECOND EXAMINATION—Chapters 8, 10, & 11 |
|
April |
8 |
Tuesday |
Labor Markets and Capital Markets-Chapter 17 Fourth Study Questions Distributed |
|
April |
10 |
Thursday |
Externalities-Chapter 13 (Coase: Nobel Prize Citation) |
|
April |
15 |
Tuesday |
Externalities-Chapter 13 |
|
April |
17 |
Thursday |
Public Goods-Chapter 14 |
|
April |
22 |
Tuesday |
Complete Public Goods |
|
April |
24 |
Thursday |
Information Problems-- pages 324-331 (Asymmetric Information and Market Failure-2001 Nobel Prize |
|
April |
29 |
Tuesday |
Risk and Uncertainty-Chapter 18 Fifth Study Questions Distributed |
|
May |
1 |
Thursday |
Game Theory-Chapter 12 (Harsanyi, Nash, and Selten: Nobel Prize Citation and Landsburg on Nash and Dixit on Game Theory.) |
|
May |
6 |
Tuesday |
Game Theory-Chapter 12 LAST CLASS |
|
May |
10 |
Saturday |
Final Examination |
Study Questions II
Due
1. The idea of "gains from trade" suggests that both parties involved in a transaction benefit from the exchange. Show geometrically the following:
a. The gains from trade for producers and consumers in a partial equilibrium analysis of a single competitive market.
b. The gains from trade for consumers in a simple general equilibrium model with 2 persons, 2 goods, and not production.
c. The gain for a small country trading with the rest of the world at a fixed price ratio.
2. Assume a per unit tax is imposed on a competitive industry. Show the short-run impacts on economic efficiency. What is the welfare impacts for consumers, producers, and society in general?
3. Under what conditions for a monopolist would the maximization of total revenue result in the maximization of profit?
4. Explain why is marginal revenue less than price for a monopolist.
5. Effective government regulation of a monopoly can always insure economic efficiency and zero economic profit in the industry. Agree or disagree and explain
6. Show a situation where a monopolistic industry would cease to exist in long-run equilibrium.
7. Show the winners and losers from a price ceiling set below the equilibrium price in a competitive industry. What is the relationship between the amount gained by the winners and the amount lost by the losers?
8. Can price discrimination ever increase economic efficiency? What might be the objections to price discrimination that increases efficiency?
9. The major efficiency problem connected with monopoly is the existence of economic profits in the long run. Agree or disagree and explain.
10. Landsburg, Page 287-1. Explain.
11. Landsburg, Page 287-2. Explain.
12. Landsburg, Page 291-27
13. Landsburg, Page 372-3
14. Landsburg, Page 374-12
15. Landsburg, Page 376-25
Study Questions I
1. Governments sometimes use crop restriction programs in attempts to increase the incomes of farmers. Under what conditions would a restriction in supply result in higher total gross incomes for farmers?
2. Given that a consumer has a diminishing MRS, will a consumer ever maximize utility where the MRS is not equal to the price ratio?2. Is it possible for all goods to be inferior goods? (Assume only two goods and no saving.)
3. An individual spends all his income on two goods, x and y. If a $2 increase in the price of x does not change the amount of y consumed, what is the price elasticity of good x?
4. Use indifference curve analysis to show that an individual would never prefer (although he might be indifferent to) a gift of a certain quantity of a particular good to a gift of money equaling the value of the good.
5. It has been observed that the number of domestic servants in the
6. Trace through the impacts on equilibrium price and quantity of the following changes in the butter market:
a. The price of margarine falls.
b. A new report finds that butter does not contribute to heart disease.
c. Incomes of consumers rise and the cost of milk (which is necessary to produce butter) rises. (Assume butter is a normal good.)
7. Construct an offer curve (price consumption curve) for a good with perfectly inelastic demand (a vertical demand curve). Will a higher price ever result in a reduction in the quantity demanded?
8. A consumer has the following utility function: U = f(X,Y) = (X+2)Y.
a. If the consumer's income is 200 and Px = 2 and Py = 4, what are quantities of the X and Y that maximize utility.
b. Find the own demand curve for X when income is 200 and Py = 4.
c. Find the income demand curve (Engel curve) when Px = 2 and Py = 4.
9. Assume a firm has a cost function of the form: TC = Q2/2 + 100Q + 100.
a. Why is this necessarily a short-run cost function?
b. Find the expressions for fixed cost, average fixed cost, variable cost, average variable cost, average cost, and marginal cost.
10. Derive the marginal and average product curves for the total product curves below:
11. Draw the variable, average variable, and marginal cost curves that correspond to the total product curves above. (Assume labor is the only variable factor and its price is fixed.)
12. Complete the table below:
|
Quantity |
Fixed Cost |
Variable Cost |
Total Cost |
AFC |
AVC |
ATC |
MC |
|
5 |
? |
220 |
? |
24 |
? |
? |
XXXX |
|
6 |
? |
? |
408 |
? |
? |
? |
? |
|
7 |
? |
? |
? |
? |
52 |
? |
? |
|
8 |
? |
? |
? |
15 |
? |
71 |
? |
|
9 |
? |
? |
664 |
? |
? |
? |
? |
|
10 |
? |
665 |
? |
? |
? |
? |
? |
The following questions will be due as part of the second set of study questions.
13. Why is a competitive firm's demand curve horizontal when industry demand is downward sloping?
14. Landsburg, Page 234: Questions 1(a. though k.)
15A. $1 per unit subsidy is provided in a competitive industry that is in long-run equilibrium. The industry is a constant cost industry. Show the short-run impact of the subsidy.
15B. $1 per unit subsidy is provided in a competitive industry that is in long-run equilibrium. The industry is a constant cost industry. Show the long-run impact of the subsidy.
16. The long-run supply curve in a competitive industry is the summation of all the firms' marginal cost curves above long-run average cost. Agree or disagree and explain.
17. Show a situation where an industry would cease to exist in competitive long-run equilibrium.
18. Landsburg, Page 235: Question 11.