EC3101: Microeconomic Analysis II
AY2013/2014, Semester 1, Lecturer: Peter Mcgee
Course Coverage:
1. Intertemporal Choice
2. Uncertainty
3. Exchange
4. Externalities
5. Introduction to Game Theory
6. Duopolies
7. Bargaining
8. Asymmetric Information
This intermediate level microeconomic module builds upon the foundation of EC2101 in its first half, and introduces game theory in the second half.
Intertemporal choice focus on analysis within the Fisher Model of Consumption of one good across a two-period horizon, whereas uncertainty is just a more difficult version of its EC2101 counterpart. Exchange economy is a bit different from most of the analysis thus far. The setting for an exchange economy is often a two person-two goods framework, and graphical analysis is carried out using Edgeworth Box. This segment of the module examines the Pareto efficiency of competitive equilibria of an exchange economy using Walras Law and the two Fundamental Theorems of Welfare Economics, which can be extended into an n person-n goods exchange economy. Externality builds upon exchange economy, and introduces Coase Theorem and quasilinear preference of money in the optimization of externality problems.
The second part of this module introduces Game Theory, a brand new concept for undergraduates. Game Theory is a branch of mathematics which focus on decision making in both discrete and continuous time under uncertainty. Duopoly interaction is one of the main topics in this module, ranging from Cournot Duopoly, Stackelberg Duopoly, Bertrand Duopoly and bargaining games. This topic starts of with strategic interactions in terms of location by using finding the optimal location for the firms. Next, Cournot Duopoly operates under perfect competition and undergoes quatity competition because both firms are assumed to be price takers. Application of trigger strategy will also be used to study the applicability of collusion among competing Cournot firms. The third interaction, the Stackelberg Duopoly will focus on a particular leader of the industry, which will make the first move, and all other firms, assumed to be identical, will make their optimal choice according to the leader's action. The last interaction is Bertrand Duopoly, which assumes market power for both firms, hence allowing them to undertake price competition. This is the most applicable interaction to describe oligopoly interactions. All these strategic interactions are studied under complete information settings for simplicity. Bargaining games are relatively easier, usually in a three period setting. Once you get the hang of backward induction, it shouldn't go wrong.
The last topic introduces asymmetric information scenarios such as adverse selection and moral hazard, and the existence of pooling or separating equilibrium. The most common adverse selection example is the market for cars, where lemons(bad cars) and plums(good cars) are assumed to be identical to the buyers until they owned it. A pooling equilibrium dictates that after some time, buyers can distinguish the value of the car through the willingness of the owners to sell, and hence identify lemons and plums, resulting in lemons being drive out of the market and the remaining plums are traded at their valuation. The second type of asymmetric information is signaling, where the typical example is education. Workers uses college degrees as a signal of ability to their employers, and hence reaching either a market equilibrium depending on wages offered and best alternatives. Third type is moral hazard, which is typical of car insurance. Now that the car is insured, zoom! That, is moral hazard. Last of it all is incentive contracting, where principal designs incentive or rental contracts such that the worker exert the optimal amount of effort which maximize the principal's profit.
In general, the module is pretty straightforward but covers more content than EC2101. The last two topics, strategic interactions and asymmetric information can be quite confusing at the start but 'Practice makes perfect' is the key for this module. Game Theory questions can get a little bit tricky in exams, but with enough exposure to the different kind of questions, you should be able to see right through them.
Workload: Light
Difficulty: Easy
Grade: A-
Course Coverage:
1. Intertemporal Choice
2. Uncertainty
3. Exchange
4. Externalities
5. Introduction to Game Theory
6. Duopolies
7. Bargaining
8. Asymmetric Information
This intermediate level microeconomic module builds upon the foundation of EC2101 in its first half, and introduces game theory in the second half.
Intertemporal choice focus on analysis within the Fisher Model of Consumption of one good across a two-period horizon, whereas uncertainty is just a more difficult version of its EC2101 counterpart. Exchange economy is a bit different from most of the analysis thus far. The setting for an exchange economy is often a two person-two goods framework, and graphical analysis is carried out using Edgeworth Box. This segment of the module examines the Pareto efficiency of competitive equilibria of an exchange economy using Walras Law and the two Fundamental Theorems of Welfare Economics, which can be extended into an n person-n goods exchange economy. Externality builds upon exchange economy, and introduces Coase Theorem and quasilinear preference of money in the optimization of externality problems.
The second part of this module introduces Game Theory, a brand new concept for undergraduates. Game Theory is a branch of mathematics which focus on decision making in both discrete and continuous time under uncertainty. Duopoly interaction is one of the main topics in this module, ranging from Cournot Duopoly, Stackelberg Duopoly, Bertrand Duopoly and bargaining games. This topic starts of with strategic interactions in terms of location by using finding the optimal location for the firms. Next, Cournot Duopoly operates under perfect competition and undergoes quatity competition because both firms are assumed to be price takers. Application of trigger strategy will also be used to study the applicability of collusion among competing Cournot firms. The third interaction, the Stackelberg Duopoly will focus on a particular leader of the industry, which will make the first move, and all other firms, assumed to be identical, will make their optimal choice according to the leader's action. The last interaction is Bertrand Duopoly, which assumes market power for both firms, hence allowing them to undertake price competition. This is the most applicable interaction to describe oligopoly interactions. All these strategic interactions are studied under complete information settings for simplicity. Bargaining games are relatively easier, usually in a three period setting. Once you get the hang of backward induction, it shouldn't go wrong.
The last topic introduces asymmetric information scenarios such as adverse selection and moral hazard, and the existence of pooling or separating equilibrium. The most common adverse selection example is the market for cars, where lemons(bad cars) and plums(good cars) are assumed to be identical to the buyers until they owned it. A pooling equilibrium dictates that after some time, buyers can distinguish the value of the car through the willingness of the owners to sell, and hence identify lemons and plums, resulting in lemons being drive out of the market and the remaining plums are traded at their valuation. The second type of asymmetric information is signaling, where the typical example is education. Workers uses college degrees as a signal of ability to their employers, and hence reaching either a market equilibrium depending on wages offered and best alternatives. Third type is moral hazard, which is typical of car insurance. Now that the car is insured, zoom! That, is moral hazard. Last of it all is incentive contracting, where principal designs incentive or rental contracts such that the worker exert the optimal amount of effort which maximize the principal's profit.
In general, the module is pretty straightforward but covers more content than EC2101. The last two topics, strategic interactions and asymmetric information can be quite confusing at the start but 'Practice makes perfect' is the key for this module. Game Theory questions can get a little bit tricky in exams, but with enough exposure to the different kind of questions, you should be able to see right through them.
Workload: Light
Difficulty: Easy
Grade: A-