Revision Lecture 1

1. Revision Lecture 1 EC202: Microeconomic Principles II Frank Cowell May 2008

2. Objectives of the lecture • A look back at Term 1 • Introduction to exam preparation • Reference materials used (1) • exam papers (and outline answers) • 2003 1(c) • 2004 1(c) • 2005 1(a) • 2006 1(a) • 2007 1(a) • Reference materials used (2) • CfD presentations 2.9 • related to past exam question • (...more to follow next week)

3. Principles • Scope of exam material • what’s covered in the lectures… • … is definitive for the exam • Resit • syllabus for 2007/8 is same as 2006/7 • so resit candidates from last year get the same paper as new candidates • Structure and format of paper • follows that of last three years • check out the rubric from, say, 2007 paper • Mark scheme • 40 marks for question 1 (8 marks for each of the five parts) • 20 marks for each of the other three questions • multipart questions: except where it’s obvious, roughly equal marks across parts

4. Question Style – three types • 1 Principles • reason on standard results and arguments • can use verbal and/or mathematical reasoning • 2 Model solving • a standard framework • you just turn the wheels • 3 Model building • usually get guidance in the question • longer question sometimes easier? • One type not necessarily “easier” or “harder” than another • get you to display different skills • part A (question 1) usually gets you to do both types 1 and 2 • type 3 usually only in parts B and C of paper Examples from past question 1

5. 2004 1(c) • Straightforward “principles” question • Just say what you need to say

6. 2005 1(a) • Straight “principles” • Note contrast between firm and consumer • Be sure to give your reasons

7. 2006 1(a) • Principles again • But format of question gives you a hint… • …write out decomposition formula • Then read off results

8. 2003 1(c) • A model-solving question • (i) just set E(r) = 0 and twiddle • (ii) check what happens to E if you change r • (iii) draw diagram and reason

9. 2007 1(a) – question and approach • A “hybrid” question • Mainly model-solving • But there’s an important principle will a solution even exist? • What’s the solution to the monopolist’s problem? • Approach: • Find the expression for profits • Then try to maximise…

10. 2007 1(a) – main answer • To get profits we need demand function • You could just jump to last line • Now write down profit expression • Note wording in last line

11. 2007 1(a) – finishing off answer • Use knowledge of basic principles • Effectively the competitive case • No solution! • (we covered this in lectures)

12. Long questions • Let’s look at an example • taken from exercise in the book • but of “exam type” difficulty • covered in CfD • Illustrates type 2 question • Ex 2.9 is mainly model solving • next week: look at model building • Look out for tips • Use simple principles to give you a shortcut to the answer • Use pictures where they help

13. Ex 2.9(1): Question • purpose: demonstrate relationship between short and long run • method: Lagrangean approach to cost minimisation. First part can be solved by a “trick”

14. Ex 2.9(1): Long-run costs • Production function is homogeneous of degree 1 • increase all inputs by a factor t > 0 (i.e. z→tz)… • …and output increases by the same factor (i.e. q→tq) • constant returns to scale in the long run • CRTS implies constant average cost • C(w, q) / q = A (a constant) • so C(w, q) = Aq • differentiating: Cq(w, q) = A • So LRMC = LRAC = constant • Their graphs will be an identical straight line

15. Ex 2.9(2): Question method: • Standard Lagrangean approach

16. Ex 2.9(2): short-run Lagrangean • In the short run amount of good 3 is fixed • z3 = `z3 • Could write the Lagrangean as • But it is more convenient to transform the problem thus • where

17. z2 z1 Ex 2.9(2): Isoquants • Sketch the isoquant map • Isoquants do not touch the axes • So maximum problem must have an interior solution

18. Ex 2.9(2): short-run FOCs • Differentiating Lagrangean, the FOCS are • This implies • To find conditional demand function must solve for l • use the above equations… • …and the production function

19. Ex 2.9(2): short-run FOCs (more) • Using FOCs and the production function: • This implies • where • This will give us the short-run cost function

20. Ex 2.9(2): short-run costs • By definition, short-run costs are: • This becomes • Substituting for k: • From this we get • SRAC: • SRMC:

21. q Ex 2.9(2): short-run MC and AC marginal cost average cost

22. Ex 2.9(3): Question method: • Draw the standard supply-curve diagram • Manipulate the relationship p = MC

23. p q Ex 2.9(3): short-run supply curve • average cost curve • marginal cost curve • minimum average cost • supply curve p q

24. Ex 2.9(3): short-run supply elasticity • Use the expression for marginal cost: • Set p = MC for p≥p • Rearrange to get supply curve • Differentiate last line to get supply elasticity

25. Ex 2.9: Points to remember • Exploit CRTS to give you easy results • Try transforming the Lagrangean to make it easier to manipulate • Use MC curve to derive supply curve

26. Next time • Think more about method for long questions • Look at a few CfD • 4.12, 4.13 • 5.1 • 7.8 • 9.6 • See how they illustrate method • Connect these to past exam questions