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Questions tagged [microeconomics]

Microeconomics is a branch of economics that studies the market behavior of individual actors (usually firms and consumers) and the aggregation of their actions in different institutional frameworks (usually the market).

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Why does $\frac{MP_L}{MP_K} = \frac{w}{r}$?

I did a practice problem set. I was given a production function $F(K,L)$ and had to derive the firm's cost function. To do this, I used the following relationship: \begin{equation} \frac{MP_L}{MP_K}=...
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787 views

The Sonnenschein-Mantel-Debreu results, what are the implications for macroeconomics?

I have always wondered why such a negative result such as Sonnenschein–Mantel–Debreu theorem (SMD) theorem is usually ignored or disregarded by practitioners, specially in macro. The result roughly ...
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Random Utility interpretation

Can someone explain intuitively, the Block-Marschack Polynomials that completely characterize random utility.
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Is non-monotonic local non-satiation supported by consumer theory in economics?

In general (Walrasian) equilibrium, local non-satiation is one of the assumptions that guarantee existence of equilibrium. Question is, is non-monotonic local non-satiation preference supported by ...
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Difference between 'surplus' and 'welfare'

I see these two terms used interchangeably but I have the feeling they are not exactly the same. My gut feeling tells me this: 1) Surplus is the additional aggregate utility from the existence of one ...
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267 views

How is labor disutility modeled in Arrow-Debreu model?

In DSGE models, utility function contains labor disutility components. But I cannot not see how labor disutility is incorporated in Arrow-Debreu-Mackenzie model.
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Is special case of utility function in “Intertemporal Substitution in Macroeconomics” also a special case of a Ramsey growth model utility function?

So in RBC and Ramsey-derived utility function, the following is usually the form of utility: $$u(c,l) = c^{1-\sigma}(1 + \omega(l))$$ where $\omega(l)$ is arbitrary function of $l$, labor, that ...
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187 views

Does rioting impair the economy?

In this article, the author looks at some of the indirect effects caused by the rioting in Ferguson, Missouri after the jury's decision not to indict the police officer. He explains that the rioting ...
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If all firms in an economy are in monopolistic competition with constant elasticity of substitution, can they profit-maximize at $MC=MR=AC$?

Suppose all firms are monopolistically competitive with constant elasticity of substitution. Can they profit maximize at the quantity point $MC=AC$ (So $P \neq MC$ but $Q$ is set at where $MC=MR=AC$ ...
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Has any progress been made on the Pacman Conjecture on Finite Time Horizons?

The Pacman conjecture states that the optimal strategy for monopolistic durable goods manufacturers is to set price high and slowly drop it (i.e. eating their way down the demand curve). Empirically ...
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The relationship between the expenditure function and many others!

I dont understand the relationships between Hicksian demand, walrasian demand (marshallian), the expenditure function and the indirect utility function (including the value function V(b)). I have ...
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Are there any economic studies of License-On-Transfer agreements?

A recent entry at GitHub's blog caught my attention: https://github.com/LOT. The "network" claims to provide protection from patent trolls by entering into an agreement automatically granting all ...
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why is real wage divided by marginal product of labor often called real marginal cost?

As said in the title, why is real wage divided by marginal product of labor often called real marginal cost? In mathematical formula, $mc_t = (W_t/P_t)/MPN_t$ where $MPN_t$ refers to marginal product ...
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Is it possible to derive indifference curves given marshallian demand function?

In a two good world, will a marshallian demand function the likes of D(p,m) where p is the price of one good and m the income yield a utility function or ...
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1answer
227 views

Usage of natural gas in 1970 (where was the demand elasticity?)

The following historical graph of US Marketable Natural Gas volume has me puzzled: How was the gas used in 1970 (a peak production period), given that we would seem to be using a lot more gas now? ...
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277 views

Is this supply and demand reasoning in Picketty's book circular?

In his hugely successful book, Thomas Piketty writes: To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process: the mechanism of supply ...
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Lee and Saez (2012): Pareto-Improvement?

I'm interested in the following quote that came up in this earlier answer. Second, when labor supply responses are along the extensive margin only, which is the empirically relevant case, the co-...
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3answers
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Best resource to learn Microeconomics fast? [closed]

I'm going to be honest, I have 2 full days to study for an Introductory Microeconomics exam final, and I am starting from scratch. The course was given online and the assignments were very easy to ...
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What is the advantage and disadvantage to have a high value of USD for USA?

What is the advantage and disadvantage to have a high value of USD for USA? China and Japan always want to keep their currency low as oppose to USA.
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Why absolute value in elasticities and marginal rate of substitution?

This is a point I find very confusing and very hard to justify to students. Depending on the books, one finds many different conventions regarding the sign of elasticities and marginal rate of ...
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1answer
154 views

What's is the purpose of “conditional preferences” as specified in Savage's framework?

In this paper, "Savages’ Subjective Expected Utility Model" by Edi Karni, he gives a definition of "conditional preferences." See here: What situation is this supposed to capture? It seems like it ...
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1answer
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Is there a class of demand functions that deliver equal surplus to consumers and a monopolist?

Consider a market with a monopolist firm that has zero marginal cost and faces demand $D(p;\mathbf{a})$, where $\mathbf{a}$ is a vector of parameters and $p$ is the price. The monopolist maximizes ...
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Empirical studies on network equilibria

There have been a number of papers in the literature (pioneered by Sanjeev Goyal, Jackson, Kranton, amongst others) emphasising the role and importance of network structure in economics, the ...
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1answer
992 views

The Savage sure thing principle and Subjective utility representation

I have tried reading and understanding Savage's proof of the subjective utility representation, it is too complicated. Is anyone aware of a shorter/more elegant proof of this? It is not a problem if ...
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1answer
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Ambiguous definition of Substitution and Income effect?

Consider the (schematic) indifference curve diagram of two good-quantities Q1, Q2: According to Wikipedia we call the vector AB' the substitution effect and the vector B'B as the income effect. I ...
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336 views

Recover cost function from profit function

How do I recover the cost function from the profit function? Suppose I have $$ \pi(p, w_1, w_2) = p^3 \cdot w_1 \cdot w_2 $$. How do I get the cost function? Using Hotelling's lemma I get the ...
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789 views

When can one safely talk about decreasing marginal utility?

One thing I hear a lot is talk of decreasing marginal utility—the idea being that additional units of a good become progressively less attractive the more units of that good one has already. However, ...
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964 views

Alternatives to Pigouvian tax

Two common drawbacks of Pigouvian subsidy mentioned in the literature are related to monetisation and measurement of social cost (Baumol) and reciprocity of social cost (Coase). What alternatives to ...
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2answers
123 views

What is the main cause of differences in the costs of living?

Following question is not formulated in technical language of economics, since I am not an economist and I am mostly interested in accessible answers. Yet, I think it goes deeply into theory of ...
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1answer
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Marginal buyer/seller as determinant of price

In competitive markets without frictions, the marginal buyer/seller determine the price. To what extent is this argument true in markets where a fraction of the sellers are constrained? Think about ...
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4answers
154 views

What are different ways of specifying utility and decision making?

This question is related to this question about the Machina paradox and about the expected utility model. In this question, I'd like to know a little more about various or even competing ways of ...
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1answer
160 views

Random Choice interpretation

Due to McFadden Economists usually interpret Random Choice, in the population sense, as each DM being drawn from the probabilistic choice rule independently and identically. However, Psychologist have ...
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436 views

Oligopolistic producers and retail price wars

Consider an industry with few producers selling differentiated products. The products must be sold through retailers of whom also there are a few and who therefore possess some degree of market power. ...
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Topological concepts in economic theory

QUESTION: What are the major or systematic applications of post-1960s mathematics to microeconomics? For example, in the late 19th century, Fisher first used the mathematical ideas of Gibbs to ...
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1answer
245 views

Price dispersion in online retail

There are a number of online booksellers that are popular in India right now. The prices they charge for the same book often differ by as much as 10% (See this price comparison site to check http://...
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2answers
155 views

Tests of rational inattention

Can you provide a reference regarding a revealed preference test(s) of rational inattention models, as proposed by Sims, ergo, using a mutual information measure as the cost of putting attention. And ...
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Consumer optimum in an economy with a continuum of commodities

Consider an economy with a continuum of commodities, with one commodity for each point in $[0,1]$. Suppose a consumer wants to maximise $$U = \int_0^1 c_i^\theta\,di\qquad 0<\theta<1$$ subject ...
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Collusion model with imperfect public monitoring

It is well known that consumers' intertemporal incentives may play a key role on the potential of firms to sustain collusion. To my knowledge, most previous efforts studying the topic have assumed ...
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58 views

Is there some kind of consensus on the determinant factors of education achievement?

There is quite a bit of literature on the economics of education. One of the most debated aspects of it arises when estimating the achievement of the student (usually in the form of standardized test ...
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1answer
231 views

Time costs and the St. Petersburg paradox

In the St. Petersburg paradox, we end up with the problem that a rational agent should be willing to play the game for any wager, if we look at expected income or utility of expected income. The ...
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What are the recent advancements in building a unified theory of bounded rationality?

It seems that bounded rationality models focus on explaining a particular psychological bias, in a very specific way. In particular, its seems that the state of the art consensus is that one size does ...
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What are Giffen Goods?

What exactly are Giffen goods and are they of purely theoretical interest or has there been empirical evidence of their existence?
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926 views

What are the arguments against the rational expectations hypothesis?

I believe the rational expectations hypothesis says that agents in a model bear expectations that are the same as mathematical expectations. Under what circumstances does this hypothesis become ...
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4answers
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Partial vs. general equilibrium

Microeconomic models are usually classified as partial and general equilibrium models. As a layman, I understand that partial equilibrium focuses attention on a few economic variables to find the ...
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580 views

Are there theories that invalidate the “tragedy of the commons”?

Wikipedia states: The tragedy of the commons is an economics theory by Garrett Hardin, according to which individuals, acting independently and rationally according to each one's self-interest, ...
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Fundamental equations in economics

For the other sciences it´s easy to point to the most important equations that ground the discipline. If I want to explain Economics to a physicist say, what are considered to be the most important ...