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Econ 411: Advanced Microeconomics Course Outline Course Instructor: Mushtaq A. Khan Office: Room 251 Telephone Extension: 8078 Email: [email protected] Office Hours: Tuesdays and Thursdays, 12:30 – 02:00 or by appointment Objective: This course is intended to provide an introduction to advanced microeconomic theory in the light of cotemporary thoughts, primarily for senior level undergraduate and first year graduate students. Attention will be given to general equilibrium theory and applications, welfare economics, and the economics of choice under uncertainty. Prerequisites: A working knowledge of undergraduate microeconomic theory (Intermediate Microeconomic) is required. Abilities to use techniques of mathematical optimization and the method of comparative statics are necessary. Required Readings: Silberberg, E., and Wing Suen (2000). The Structure of Economics: A Mathematical Analysis, Third edition, McGraw-Hill. Varian, Hal (1992). Microeconomic Analysis, Third edition, W.W. Norton. McKenna, C.J.(1986). The Economics of Uncertainty, Oxford University Press. Layard, P.R.G., and A.A. Walters (1988). Microeconomic Theory, International Edition, McGraw-Hill. Additional Readings: Jehle, G.A., and Philip J. Reny (2000). Advanced Microeconomic Theory, Second edition, Addison Wesley. Mas-Colell, A, Whinston, M.D., Green, J.R. (1995). Microeconomic Theory, Oxford University Press. Kreps, David M. (1990). A Course in Microeconomic Theory, Princeton University Press. *Friedman, M. and L. Savage, “The utility Analysts of Choices Involving Risk”, Journal of political Economy, 56 (1948): 279-304. Holthausen, Duncan M., “Hedging and the Competitive Firm Under Price Uncertainty”, The American Economic Review, Vol. 69, No. 5. (Dec., 1979), pp. 989-995. Lapan, Harvey, Giancarlo Moschini, and Steven D. Hanson, “Production, Hedging, and Speculative Decisions with Options and Futures Markets”, American Journal of Agricultural Economics, Vol. 73, No. 1. (Feb., 1991), pp. 66-74. Aradhyula, Satheesh V. and E. Kwan Choi, “Production, Hedging, and Speculative Decisions with Options and Futures Markets: Comment”, American Journal of Agricultural Economics, Vol. 75, No. 3. (Aug., 1993), pp. 745-747. Ahsan, Syed M., Ali A. G. Ali, and N. John Kurian, “Toward a Theory of Agricultural Insurance”, American Journal of Agricultural Economics, Vol. 64, No. 3. (Aug., 1982), pp. 520-529. Nelson, Carl H., and Edna T. Loehman, “Further toward a Theory of Agricultural Insurance”, American Journal of Agricultural Economics, Vol. 69, No. 3. (Aug., 1987), pp. 523-531. Paris, Quirino, “Long-Run Comparative Statics under Output and Land Price Uncertainty”, American Journal of Agricultural Economics, Vol. 70, No. 1. (Feb., 1988), pp. 133-141. Meyer, Jack, and Lindon J. Robison, “The Aggregate Effects of Risk in the Agricultural Sector”, American Journal of Agricultural Economics, Vol. 73, No. 1. (Feb., 1991), pp. 18-24. Flacco, Paul R., and Douglas M. Larson, “Nonparametric Measures of Scale and Technical Change for Competitive Firms under Uncertainty”, American Journal of Agricultural Economics, Vol. 74, No. 1. (Feb., 1992), pp. 173-176. Brunk, G. G., “A Test of the Friedman-Savage Gambling Model”, Quarterly Journal of Economics, (May 1981): 341-348. *Ehrlich, I. and G. S. Becker, “Market Insurance, Self-Insurance, and Self-Protection”, Journal of Political Economy, 82 (1972): 623-648. Chang, Y. M. and I. Ehrlich, “Insurance, Protection from Risk, and Risk-Bearing”, Canadian Journal of Economics (August 1985): 574-586. *Pauly, M. V., “Overinsurance and the Public provision of Insurance: The Role of Moral Hazard and Adverse Selection”, Quarterly Journal of Economics, 88 (1974): 44-54. *Routhchild, M. and J. Stiglitz, “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Competition”, Quarterly Journal of Economics, 90 (November 1976): 629-649. *Schmitz, A., H. Shalit and S. J. Turnovsky, "Producer Welfare and the Preference for Price Stability", American Journal of Aqricultural Economics, (1981): 158-160. *Sandmo, A., "On the Theory of the Competitive Firm under Price Uncertainty", American Economic Review, (March 1971): 65-71. *Ishii, Y., "On the Theory of the Competitive Firm under Price Uncertainty: Note", American Economic Review, (September 1977): 768-769. Batra, R. and A. Ullah, "Competitive Firm and the Theory of Input Demand under Uncertainty", Journal of Political Economy, (June 1974): 537-548. *Leland, H. E., "Saving and Uncertainty: The Precautionary Demand for Saving", Quarterly Journal of Economics, 82 (1968): 465-473. *Sandmo, A., "The Effect of Uncertainty on Saving Decisions", Review of Economic Studies, 37 (1970): 353-360. Dreze, J. H., "Consumption Decisions under Uncertainty”, Journal of Economic Theory, 5 (1972): 308-335. *Chang, Y. M. and I. Ehrlich, “On the Economics of Compliance with the Minimum Wage Law", Journal of Political Economy, 93 (January 1985): 84-91. Chang, Y. M., "Noncompliance Behavior of Risk-Averse Firms under the Minimum Wage Law", Public Finance Quarterly, 20 (July 1992): 390-401. *Stolper, W. R., and P. A. Samuelson, “Protection and Real Wages”, Review of Economic Studies, 9 (1941): 58-73. Jones, R. W., “The Structure of Simple General Equilibrium Models”, Journal of political Economy, 73 (1965): 557 -572. Mayer, W., “Short-Run and Long-Run Equilibrium for a Small Open Economy”, Journal of Political Economy, 82 (1974): 955-967. Jones, R. W., “Distortions in Factor Markets and the General Equilibrium Model of Production”, Journal of Political Economy, 79 (1971): 437-459. Harberger, A. C., “Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay”, Journal of Economic Literature, 9 (1971); 785-797. Baumol W. and Bradford, D., “Optimal Departures from Marginal Cost Pricing”, American Economic Review, 69 (1970): 256-283. Rabin, M. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem." Econometrica 68, no. 5 (2000): 1281-92. Hirshleifer, J., and J. Riley. The Analytics of Uncertainty and Information. Cambridge University Press, 1992, Chapter 5. Hart, O., and B. Holmstrom. "The Theory of Contracts." In T. Bewley (ed.), Advances in Economic Theory -- Fifth World Congress. Cambridge University Press, 1987. Lectures: 28 sessions of 100 minutes each. Grading: Quizzes (2) Midterm exam Assignments (4) Final exam 10% 30% 20% 40% Session Schedule: Tentative schedule of the course is given below: Sessions 1-3 Topics Readings General Equilibrium: Linear and Non-linear Models, Fixed Coefficient Technology, Duality Analysis in General Equilibrium, Contract Curve and Production Possibilities Frontier Varian Ch. 17, 18. Silberberg & Suen Chs. 15, 16. Layard & Walters Ch. 2. Mayer 4-7 The Stolper-Samuelson Theorem, The Rybcznski Theorem, Pure Varian Ch. 21. Exchange Model of General Equilibrium, The Core of an Silberberg & Suen Chs. 15, 16. Exchange Economy, Walrasian Competitive Adjustment Layard & Walters Ch. 2. Mechanism, Existence and Stability of Walrasian Equilibria Stolper and Samuelson Mayer 7-9 10-11 Pareto Optimality in Production and Consumption, Overall Pareto Optimality, The Efficiency of Perfect and Imperfect Competition, External Economies and Diseconomies in Production and Consumption Varian Ch. 21. Welfare: Measurement of Welfare Change, Optimal Pricing to Maximize Social Welfare Varian Ch. 22. Silberberg & Suen Chs. 15, 16. Layard & Walters Ch. 2. Silberberg & Suen Ch. 17. Layard & Walters Ch. 1. 12-14 15 16-17 Public Goods: Efficient Provision, Demand Revealing Mechanism Varian Ch. 23, 24. Externalities: Solution, Pigovian Taxes, Missing Markets, Property Rights, Compensation Mechanism, Efficiency Conditions Layard & Walters Chs. 3. Silberberg & Suen Ch. 17. Midterm The Expected Utility Hypothesis, The Expected Utility Theorems Varian Ch. 11. Mckenna Chs. 1, 2, 3. Silberberg & Suen Ch. 13. Friedman and Savage 18-20 Attitudes Toward Risk, The Measurement of Risk Aversion, Risk Shedding and Risk Pooling, Risk Bearing Varian Ch. 11. Mckenna Ch. 3. Silberberg & Suen Ch. 13. Ehrlich and Becker 21-22 Demand for Protection and Insurance, Moral Hazard and Adverse Selection Varian Ch. 11. Mckenna Chs. 6, 7. Silberberg & Suen Ch. 13. Pauly Routhchild 23-25 Theory of Firm under Uncertainty, Production Uncertainty Varian Ch. 20. Mckenna Chs. 4, 5. Silberberg & Suen Ch. 13. Sandmo Ishii 26-28 Price and Cost Uncertainty, Consumption and Saving Decisions Varian Ch. 20. under Uncertainty Mckenna Chs. 4, 5. Silberberg & Suen Ch. 13. Sandmo Leland Final Exam