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Advanced Microeconomics ECH-51806 Part 1: Consumer Theory and Theory of the Firm Dušan Drabik Advanced Microeconomics ECH-51806 Part 1: Consumer Theory and Theory of the Firm Dušan Drabik de Leeuwenborch 2105 Dusan. [email protected] nl The material contained in these slides draws heavily on: Geoffrey A. Jehle and Philip J. Reny (2011). Advanced Microeconomic Theory (3 rd Edition). Prentice Hall, 672 p.

Disclaimer These slides are not meant to be your sole study material. They are Disclaimer These slides are not meant to be your sole study material. They are just a (incomplete) summary of what will be covered in Part 1 of the course. 2

Quotes to live by “You've got to be very careful if you don't know Quotes to live by “You've got to be very careful if you don't know where you are going, because you might not get there. ” “I'm not going to buy my kids an encyclopedia. Let them walk to school like I did. ” - Yogi Berra 3

General Information • Advance level course (abstraction, mathematically oriented, but fun) • All relevant General Information • Advance level course (abstraction, mathematically oriented, but fun) • All relevant information (e. g. , problem sets, home assignments, tests) here: http: //home. deds. nl/~pvmouche/advmicro. html Textbook Recommended supplemental reading 4

General Information • Exercises to be solved at home and discussed in class (not General Information • Exercises to be solved at home and discussed in class (not graded) • Home assignment for Part 1 due on or before September 18, 2017 in room 2105 (hand-written is fine) (graded) • No official office hours for Part 1. Write me an e-mail or stop by 5

Consumer Theory 6 Consumer Theory 6

Primitive notions Four building blocks: • • Consumption (choice) set Consumption bundle (plan) Preference Primitive notions Four building blocks: • • Consumption (choice) set Consumption bundle (plan) Preference relation Behavioral assumption 7

Preferences and utility Axioms of consumer choice 8 Preferences and utility Axioms of consumer choice 8

Preferences and utility 9 Preferences and utility 9

Preferences and utility 10 Preferences and utility 10

Preferences and utility 11 Preferences and utility 11

Preferences and utility 12 Preferences and utility 12

The utility function 13 The utility function 13

Consumer’s problem Find Consumption bundle Feasible set Utility maximization problem Solution to the UMP Consumer’s problem Find Consumption bundle Feasible set Utility maximization problem Solution to the UMP is Marshallian demand functions 14

Consumer’s problem and consumer demand behavior 15 Consumer’s problem and consumer demand behavior 15

The indirect utility function Indirect utility function is a maximum value function: 16 The indirect utility function Indirect utility function is a maximum value function: 16

The expenditure function Hicksian (compensated) demand functions 17 The expenditure function Hicksian (compensated) demand functions 17

Properties of the expenditure function Advanced Microeconomic Theory – Consumer Theory 18 Properties of the expenditure function Advanced Microeconomic Theory – Consumer Theory 18

Relations between IUF and EF Advanced Microeconomic Theory – Consumer Theory 19 Relations between IUF and EF Advanced Microeconomic Theory – Consumer Theory 19

Duality between Marshallian and Hicksian demand functions Advanced Microeconomic Theory – Consumer Theory 20 Duality between Marshallian and Hicksian demand functions Advanced Microeconomic Theory – Consumer Theory 20

Income and substitution effects 21 Income and substitution effects 21

The Slutsky equation 22 The Slutsky equation 22

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Relationships between UMP and EMP Utility maximisation Expenditure minimisation Slutsky equation (for derivatives) x(p, Relationships between UMP and EMP Utility maximisation Expenditure minimisation Slutsky equation (for derivatives) x(p, y) Roy’s identity v(p, y) v(p , =x )) , y (p , e (p , u )) e(p, u) = v(p, e(p, u)) v(p, y) = e(p, v(p, y)) e(p, u) x u) p ) y (p , h p x( = p, xh(p, u) = x h( xh(p, u) e(p, u) Adapted from Mas-Collel, Whinston and Green (1995); p. 75 24

Theory of the Firm 25 Theory of the Firm 25

Production • Production possibility set • Production plan • Production function 26 Production • Production possibility set • Production plan • Production function 26

Production 27 Production 27

Cost Conditional input demand 28 Cost Conditional input demand 28

Properties of the cost function 29 Properties of the cost function 29

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The competitive firm Profit maximization . . . or Cost function 34 The competitive firm Profit maximization . . . or Cost function 34

The profit function 35 The profit function 35

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