Intermediate Microeconomics with Calculus by Hal Varian Homework Midterm (50%) (11/10) Final (50%) (1/12) [email protected], Mon 1:30-2:00 or by appointment.

• Intermediate Microeconomics with Calculus by Hal Varian

• Homework• Midterm (50%) (11/10)• Final (50%) (1/12)• [email protected], Mon 1:30-2:00 or by

appointment ( 社科 757)• Course TA 何宗祐 , [email protected]• Letter grades are relative as you will learn in this

class only relative prices matter.

• Initiative• 1 bonus point per class meeting (up to 16 bonus

points)

蘋果橘子經濟學 超爆蘋果橘子經濟學 生命中的經濟遊戲 終結貧窮：可以在 2025 年以前達成 胖子的脂肪該被抽稅嗎？• Cell phone

• Chapter 1 The Market• A model of the apartment market in a

college town• Every student needs one apartment.• All apts identical except: inner ring and

outer ring• Focus on the market in the inner ring.• Assume the rent in the outer ring is fixed and in enough supply (the second best

alternative).

• Consider the demand curve (at every price, how many students would be willing to rent the apartments?).

• When would a student be willing to rent one unit?

• A price at which a student is indifferent between paying and living in the inner ring and renting an apt in the outer ring

• Reservation price (a person’s maximum willingness to pay for something)

• We can now draw the demand curve.

• If a lot of persons, reasonable to assume smoothness

• We see downward sloping and if goods are continuous, marginally indifferent between buying this extra amount and not (draw)

• The idea of surplus

• Turn to the supply curve• Landlords want to make as much profit as

possible, so they jump in when renting and not renting yield equal profit.

• Can similarly have a step-function-like supply curve

• Assume in a short run, reasonable to have a vertical supply curve

• In continuous amounts, P=MC, marginally selling and not selling give the same profit

• Similarly we have the idea of producer’s surplus.

• Putting demand and supply curve together: get an equilibrium price p*

• According to the market mechanism, who is willing to pay above p* gets to live in the inner ring.

• Those who are not willing to pay as high as p* live in the outer ring.

• Those who trade in the market all get some surplus ( 你情我願 ).

• Equilibrium: at p* the number of people who are willing to rent (A) equals the number of apartments available for renting (B)

• p>p*: A<B (surplus, incentives to lower the price)

p<p*: A>B (shortage, incentives to raise the price)

• Comparative statics

• (1) The university builds some new apartment. All these inner ring apartments are the same.

• (2) Government passes a law that every landlord has to pay t<p* for every apartment he owns.

(elasticity and tax incidence)

• Consider other ways to allocate apartments.

• Discriminating monopolist (DM): a single seller who can perfectly discriminates by charging every consumer’s reservation price.

Who gets the apartment? Still those whose reservation price is higher than p*.

• Ordinary Monopolist (OM): a single seller who can only charge a price, so he maximizes pD(p). Suppose he therefore charges p’>p*.

Those whose reservation price is higher than p’ get apts.

• Rent Control (RC): pmax<p* to be effective

We don’t know who gets the apt except their reservation price will be at least pmax.

• We now compare which is better.

• Suppliers: DM > OM > Market > RC

• Consumers: DM: indifferent to living in the outer ring

OM: some surplus

Market: more people with higher surplus

RC: some with highest surplus, but some become indifferent to living in the outer ring

• Pareto efficiency, due to Vilfredo Pareto (1848-1923): if there exists a way to make some better off without making anyone worse off, then it is a Pareto improvement. ( 皆大歡喜 )

• An allocation that allows for a Pareto improvement is Pareto inefficient while an allocation that does not allow for a Pareto improvement is Pareto efficient.

• Suppose utility takes the form v I - p I if living in the inner ring; v O - p O if living in the outer ring.

• Suppose we randomly assign people to live in the inner ring or outer ring and a person who is willing to pay 400 is assigned to the outer ring and another who is willing to pay 300 is assigned to the inner ring.

• 400: v400, I – 400 = v400, O – pO

300: v300, I – 300 = v300, O – pO

• Swap, the change of utility is: 400: (v400, I – pO) – (v400, O – pO) = 400 – pO

300: (v300, O – pI) – (v300, I – pI) = - (300 – pO)

a transfer, say 350 – pO from the 400 person to the 300 person

( 黃牛票 )

• Market: Pareto Efficient (1st welfare theorem)

• DM: Pareto Efficient (so efficiency says nothing about distribution)

• OM: empty apts in the inner ring, not Pareto efficient.

v200, I – 200 = v200, O – pO, move in, willing to pay up to (v200, I – pO)-(v200, O – pO)= v200, I –v200, O =200 – pO > 0, a transfer of (200 – pO)/2 to a landlord with an empty room in the inner ring would do.

• RC: not Pareto Efficient

• Remark

• Model: not a one-to-one correspondence to reality

• Endogenous variable and exogenous variable (demand curve, we control pO) ( 相關物品價格 )

• Optimization (U-max, profit max)

• Equilibrium (behaviors consistent)