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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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66
votes
13answers
17k views

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 ...
8
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7answers
3k views

Mathematical Micro/Macro Economics Textbook Recommendation

I was formerly an economics major and now also majoring in mathematics. I want a textbook that is rigorously based on mathematics; not just using mathematcis whenever the author wants, but in a more ...
6
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2answers
1k views

Elasticity of demand equals -1 but income decreases!

In my textbook, it's stated that: When $\epsilon < -1$, demand is elastic and raising price will result in smaller income, while lowering price will result in bigger income. When $\epsilon =...
3
votes
1answer
430 views

Optimization problem with Kuhn-Tucker conditions

Consider a game with two players where each player $i=1,2$ has preferences $u_i=s_i^a c_i^{1−a}$, where $c_i$ is consumption and $s_i$ is social interaction. $s_i$ is given by $s_i=t_i+t_{ij}\times t_{...
37
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7answers
3k views

Seminal papers that later were proven to contain errors

I was reading on institutions, and I came across Acemoglu, Johnson and Robinson (AJR) paper on The Colonial Origins of comparative development: An Empirical Investigation, and this paper seemed so '...
10
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2answers
27k views

Marshallian Demand for Cobb-Douglas

When trying maximize the utility having a cobb-douglas utility function $u=x_1^ax_2^b$, with $a+b = 1$, I found the following formulas (Wikipedia: Marshallian Demand): $x_1 = \frac{am}{p_1}\\ x_2 = \...
10
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5answers
1k 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 ...
10
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2answers
8k views

What is a substitute/complement in terms of mixed partial derivatives?

I am trying to understand how substitutability relates to mixed partial derivatives. I thought the change in marginal utility with respect to a change in the amount of $x$ would correspond to $$\frac{\...
3
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1answer
3k views

(Preference Relation/Set) Continuous $\succsim$ imply closedness of upper and lower contour sets

[ADDED/MODIFIED] : I have put my proof where the commodity space is simply $\mathbb{R_+}$(e.g. nonnegative reals) for simplicity below. Please share your 2 cent. I have put words to aid my own ...
8
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2answers
1k 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 ...
7
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2answers
2k views

Why do top professional sport players get usually paid so much?

I'd like to find an answer to this question as I can't see how something like this can be happening. I can see three reasons that they would earn that much but any of them if thought better is wrong. ...
3
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1answer
464 views

Intuition: Difference in price elasticities of demand due to different bases

Source: pp 91-92, Principles of Microeconomics, 7 Ed, 2014, by N Gregory Mankiw If you try calculating the price elasticity of demand between two points on a demand curve, you will quickly ...
3
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1answer
674 views

Showing that production technology exhibits decreasing returns to Scale

The Question Suppose a firm has a production function given by $$y=F(L,K)=L^{1/4}K^{1/4}$$ where L and K denote inputs used in the production of y units of output. (a) Determine whether marginal ...
29
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6answers
10k views

Why do celebrities get high wages?

In the youtube video Why We Look down on Low Wage Earners the author argued: "economics states that wages are determined [...] by the number of people willing and being able to do a given job that ...
14
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12answers
12k views

If I gain, then someone else loses. Correct?

On a very small scale, it's certainly true that if I gain, somebody else might lose. If I take away my brother's chocolate, then he will lose it, and will most probably not get anything comparable. ...
6
votes
2answers
2k views

Local Non-Satiation Proof

I have been having trouble with how to go forward with a proof for about three days now. I know the basic structure of the proof, but can't seem to construct it. Basically, I am trying to do a proof ...
23
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4answers
2k views

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?
8
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2answers
920 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, ...
5
votes
3answers
996 views

Question about the Ellsberg Paradox in Expected Utility Theory

The von Neumann-Morgenstern theorem states that, assuming a person's preferences under risk satisfy certain rationality axioms, then there exists a utility function u, the von Neumann utility function,...
5
votes
1answer
169 views

What types of 'market mechanisms' are said to exist besides auctions?

The book Understanding Auctions states: The term auction covers a wide range of market mechanisms that are used to exchange products and services by determining who receives an item and how much is ...
3
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2answers
421 views

Subgame Perfect Nash equilibrium: two stage game

Charitable organizations are ranked according to the proportion of their total budget that is spend on programs(what directly goes to the recipients of their services) relative to money spent on ...
2
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1answer
198 views

Kuhn-Tucker and optimization (continue)

This is a question related to the question: Kuhn-Tucker optimization problem and game theory .The question is: Some cultures emphasize more social interaction more than others. Is there a role for ...
9
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3answers
2k views

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 ...
6
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2answers
3k views

Which utility function yields a constant price elasticity of demand function?

How do I know which utility function I can use to find an isoelastic demand function, e.g., $x(p)=Ap^a$? And similarly, which cost function can I use to find an isoelastic supply function? Does it ...
6
votes
3answers
1k views

Intuition behind Comparative Advantange

I already read and ask NOT about pp 52-54, Principles of Microeconomics, 7 Ed, 2014, by N Gregory Mankiw. I understand such numerical examples that corroborate Comparative Advantage, but how can I ...
5
votes
3answers
777 views

Why is elasticity not defined simply as the slope of the graph?

It makes more intuitive sense to me: as I increase the quantity, this is how much the price changes. Why is a much more complex formula used that takes into consideration the current quantity and ...
5
votes
1answer
3k views

Linear Expenditure System of Demands, Derivation Help

This problem I am working on comes out of--surprise--the Mas-Colell book for graduate micro (3.D.6). I think I have correctly used the FOC of the Lagrangian of the utility maximization problem to ...
5
votes
1answer
4k views

What is a homothetic function?

Suppose we have the following equations for the MRS of a utility function. $$U(x, y)$$ Which of the following corresponds to a homothetic utility function? $$MRS (x, y) = \frac{x^2+y^2}{xy}$$...
4
votes
3answers
15k views

Taxes levied on sellers = Taxes levied on buyers

All page numbers refer to Principles of Microeconomics, 7 Ed, 2014, by NG Mankiw. [p 125:] Taxes levied on sellers and taxes levied on buyers are equivalent. [p 156:] ... When a tax is levied on ...
4
votes
1answer
482 views

Bertrand game - Nash equilibrium

The quantity is limited to 300 but the monopoly quantity is equal to 400 and gives a monopoly price of 600. But if we plug the quantity of 300 into the demand function we get a price of 700.But I am ...
3
votes
1answer
5k views

Monotone transformation of utility

We have learned that any "strictly positive monotonous transformation" of utility functions is okay, as long as they preserve the ranking of choices implied by the underlying preferences. Consider $U(...
2
votes
4answers
553 views

Why are second price auctions preferred if they don't maximize expected revenue?

The reasoning usually given for why you would use a second price auction (SPA) as opposed to a first price auction (FPA) is that FPA encourage underbidding while SPA encourage truthful bidding. That ...
1
vote
4answers
11k views

Will price increase as demand increase?

I know the law of demand which states that if price of a product increases then the demand will decrease In this, I think we assume that price is a function of demand. But I feel otherwise i.e. ...
1
vote
1answer
5k views

What is the difference between average cost and marginal cost?

$$AC(q) = \frac {C(q)}{q}$$ $$MC(q) = \frac{\partial C(q)}{\partial q}$$ These are the definitions. But I don't understand what the difference is. Is the average cost the cost per unit while the ...
0
votes
1answer
65 views

The law of supply and demand - How does it work?

I've learned what the principle of supply and demand says, and would paraphrase it like this: The price of a good is at equilibrium when supply and demand are equal. Or with other words: The ...
23
votes
4answers
75k views

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 ...
16
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5answers
3k views

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 ...
14
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2answers
11k views

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 ...
8
votes
3answers
983 views

Does risk aversion cause diminishing marginal utility, or vice versa?

Let $A$ be the set of possible states of the world, or possible preferences a person could have. Let $G(A)$ be the set of "gambles" or "lotteries", i.e. the set of probability distributions over $A$. ...
5
votes
3answers
1k 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 ...
17
votes
1answer
15k views

What do supply-demand curves really look like?

In my basic high school economics course, we've always used supply-demand curves that are lines to simplify calculations. In real markets for real goods, what do the supply and demand curves look like?...
5
votes
6answers
14k views

Why does quantity supplied increase with price in economics?

The Law of Supply is my worst enemy in economics because I could never truly understand it, and as a result, the stuff I learned after that was built on a weak foundation. The Law of Demand is totally ...
15
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3answers
2k views

Are monotonic and continuous preferences necessarily rational?

Let $\succsim$ be a strictly monotonic and continuous preference relation, and let $X=\mathbb{R}^{n}$ be the consumption set. Is rationality of $\succsim$ implied by these conditions? I think ...
12
votes
3answers
810 views

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 ...
10
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5answers
17k views

When do supply and demand curves shift?

Let's assume that the price of apples has risen and that the quantity of apples sold during the last couple of weeks has decreased. From that, we can infer that the supply curve must've shifted to the ...
9
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5answers
1k views

Are terrorists rational?

Terrorism in general, and suicidal terrorism in particular, is popularly seen as “irrational,” but many economists and political scientists argue otherwise. This quote is from Terrorism: The ...
6
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1answer
322 views

Does vNM rationality depend on the good chosen?

The von Neumann-Morgenstern theorem states that, assuming a person's preferences under risk satisfy certain rationality axioms, then there exists a utility function u, the von Neumann utility function,...
4
votes
2answers
1k views

Risk Premium in the Expected Utility Theory

Consider an agent with utility function $u$, initial wealth $\omega$, and a random variable $x$. By definition of the risk premium $R$, we have $$ Eu(w+x) = u(w+E(x)-R). $$ The classical derivation ...
3
votes
1answer
16k views

Deriving Equation for Engel Curve

I have a utility function of $U = B^{.67}Z^{.33}$ with Income $Y$, Price of Good B is $P_b$ and price of Z is $P_z$ I now need to derive an engel curve for this. I have no idea where to start.
2
votes
1answer
354 views

When action and strategy differ in game theory

It looks like in a static, simultaneous move game, action is used interchangeably with strategy. But when do they differ, say in a more complicated game structure? I am trying to understand the ...