Microeconomic Theory
Monday, Wednesday and Friday 12:20 – 1:10
311 Lafayette
Professor Sara Solnick
Tuesday 10:00 - 11:00
or by appointment
Required Textbooks:
Microeconomics and Behavior by Robert H. Frank, Irwin McGraw-Hill, Fourth Edition, 2000.
Study Guide to Microeconomics
and Behavior by James Halteman, Irwin McGraw-Hill, Fourth Edition,
2000.
Prerequisites: Economics 11, 12, Math 19
Grading:
Your course grade is made up of four components, weighted equally:
25% Homework assignments25% Midterm 125% Midterm 225% Final Exam
* Homework assignments: Assignments will be
announced in class and posted here. The due dates are noted in this
syllabus. Homework is due in class, at the beginning of class on
the date specified. Late assignments will be penalized. There
are eleven assignments; the lowest grade will be dropped. You are
welcome to come to office hours for help on homework assignments and to
work on homework assignments with other students (each person must turn
in a separate copy).
* Exams: The final is not cumulative.
Course Schedule:
NEW! Jump to details and hints forHomework 1
Homework 2
Homework 3
Homework 4
Homework 5
Homework 6
Homework 7
Homework 8
Homework 9
Homework 10
Homework 11
August 27-September 5Assignment: Chapter 1 Problems 1, 4, 10, and 13; Chapter 2 Problems 1, 3, 10 and 14.Hint for Chapter 1 Problem 13: You are asked to evaluate a statement "You should do X." There are three logical alternatives:
(1) You should definitely do X. In this case the statement is TRUE.
(2) You might do X, in some cases you would, but there are also possible circumstances in which you should not do X. In this case the statement "You should do X" is FALSE.
(3) You should definitely not do X. It never makes sense to do X. In this case the statement is FALSE.Hint for Chapter 2 Problem 14: A tax drives a wedge between the price consumers pay and the price suppliers keep. For example, if the tax is $10 per unit, then Ps = Pc - $10. No matter what Pc happens to be, $10 must be taken out and given to the government and the suppliers keep the remainder. But tax in this question is a percentage of the price, not a fixed dollar amount. In such a case, if the tax is 10% of the price, Ps = Pc * .90. Ten percent of what consumers have paid goes to the government and the suppliers keep the rest. With a percentage tax, rather than add a fixed amount to the supply curve in order to shift it, as in Example 2-6, we must multiply.
September 7- September 24Assignment: Chapter 3 Problems 1, 4, 14, 17 and Homework Assignment Problem 2 on page 39 of study guide
Hint for Problem 14: (a) For Paula, plays and movies are perfect substitutes. Sometimes students think that goods can only be perfect substitutes when one X is equally as good as one Y. For example, one pink highlighter is as good as one blue highlighter, so they are perfect substitutes. But goods can also be perfect substitutes if two (or some other number) X is equally good as one Y. For example, two nickels are as good as one dime, so nickels and dimes are perfect substitutes in the 2:1 ratio. What makes something a perfect substitute is that there is a fixed ratio at which we are willing to trade no matter how many of X or Y we have. I'll trade you two nickels for a dime if I have no dimes in my pocket, or if I have 27 dimes in my pocket. (b) When goods are perfect substitutes the only thing that matters is the price and there are only two possible outcomes. If the goods cost the same per unit of value that I get out of them, for example, if dimes cost twice as much as nickels, then I don't care what combination of dimes and nickels I have. Any combination is equally acceptable to me. But, if one of the goods is a better deal, for example if I could get a nickel for less than half of a dime or a dime for less than twice a nickel, then I would spend my entire on budget on the good that is cheaper. See example 3-3 on pages 90-91.NEW DUE DATE: September 24Assignment: Chapter 4 Problems 5, 7, 8, 18 and Homework Assignment Problem 1 on page 61 of study guideHint for the assignment: The problems are somewhat "out of order;" that is, the first questions refer to topics covered later in the chapter or in class.
Hint for Problem 8: Although it looks like an essay question, this is not an essay question. Do not offer your thoughts as to the importance of safety or how the rich do or don't lead safer lives than the poor. Instead, refer to the economic definition of luxuries and necessities on pages 134-135 and decide how the situation described compares to those definitions.
Hint for Problem 18: In order to draw a price-consumption curve for good X and/or a demand curve for good X, we need to vary the price of good X while holding everything else (preferences, income and price of good Y) constant. You are given preferences, income and price of rice for Smith. To find her price-consumption and demand curves for wheat, you must vary the price of wheat and determine the quantities of rice and wheat that she purchases at different wheat prices. Try the following prices of wheat: $1, $2, $3, $4, $10.
Homework 4
NEW DUE DATE September 28
Assignment: Chapter 5 Problems 4, 7, 8, 12 and Homework Assignment Problem 1 on page 77 of study guideImportant for Problem 4: There is a typo in the text. The demand curve is P = 20 - 2Q.
Hint for Problem 8: Find his optimal consumption bundle for the original interest rate of .05. You don't need to find it for the second interest rate of .20.
Hints for Problem 12: (1) The budget constraint shows all the combinations available to Crusoe. Ask yourself, what is the maximum number of coconuts Crusoe could (not necessarily will) consume in the present period? What is the maximum number of coconuts he could consume in the next period? What other possibilities does he have? (2) In answering what his consumption will be, simply draw the appropriate indifference curve and choose the best affordable bundle (on the budget constraint and on the highest indifference curve that he can reach from the budget constraint). Don't worry whether your answer is realistic (i.e., if anyone would have preferences that would lead them to choose that bundle.)
September 28-October 3
October 8-October 19Homework 6
Assignment: Chapter 9 Problems 1, 2, 4 and 7
due October 15Hint for Problem 7 parts c and d: In the first section of the curve, TP increases as L increases. After the curve reaches its maximum, which you found in part b, TP begins to decline. When TP is increasing, MP is positive. Adding more labor increases TP. When TP is falling, MP is negative. Adding more labor actually results in less TP. Part d asks you to identify the region of the curve in which MP is negative. So you are comparing MP to a fixed number, zero. Part c asks you to compare MP with itself. MP can be increasing (each additional unit of labor adds MORE total product than the previous unit of labor did) or decreasing (each additional unit of labor adds LESS total produce than the previous unit of labor did). In part c, you identify the region where MP is increasing and the region where it is decreasing.
October 22-November 9
Homework 8
Assignment: Chapter 11 Problems 1, 5, 16 and Homework Assignment Problems 1-6 on page 161 of study guide
due October 29;Homework 9
Assignment: Chapter 12 Problems 2, 5, 7 and 9
due November 5Hint for Problem 9: This problem is tricky. Students try to solve it in the same manner as Example 12-3 on page 417 or Problem 5. But this situation is different because there are two downward sloping demand curves, rather than one downward sloping and one horizontal demand curve, which are easier to combine. Having recognized that distinction, how do we attack this problem? To find the joint MR function, first figure out the MR function for each country separately. Then, we have to recognize that the two MR functions do not have the same y-intercept. If we only had one missle to sell, which country would we sell it to? The country which would pay more for it, which would give us more MR. We will continue to sell exclusively to a single country (I'll leave it to you to figure out which one) until we get to a certain quantity, that is, until we have had to lower price to such a point that it begins to be attractive to sell to the other country as well. At this point we combine the two MR curves. So, below a certain Q, the joint MR is just the MR of one of the countries. Above that Q, the joint MR is the MR of the two countries combined. Thus, the joint MR is made up of two parts. (That was the hardest part.) Now we have to decide which part of the two-part MR our MC will intersect with. Then set MC equal to whichever part is relevant. Find the optimal total Q to be sold to both countries. Then the amount sold to Iraq will be the quantity for which MR from Iraq = our firm's MC at the optimal total Q. The amount sold to Iran will be the quantity for which MR from Iran = our firm's MC at the optimal total Q. Finally, the price for Iraq is found along its demand curve, at the quantity we decided to sell to Iraq, and the price for Iran is found along its demand curve, at the quantity we decided to sell to Iran.
November 16-November 19
November 26-November 28
November 30-December 5
Final Exam: Monday Dec 10, noon to 3 pm