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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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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 =...
Valentine Bond's user avatar
75 votes
13 answers
26k 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 ...
Lumi's user avatar
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51 votes
10 answers
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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 '...
An old man in the sea.'s user avatar
3 votes
2 answers
8k views

Why is the short run average cost curve not a tangent to the long run average cost curve at the lowest point on the short run average cost curve?

The diagram from the Varian textbook shows that the SRAC curve is tangent to the LRAC curve at a point which is not the bottom of the SRAC curve. It would be really helpful if someone could explain ...
user2229066's user avatar
10 votes
7 answers
6k 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 mathematics whenever the author wants, but in a more ...
Taxxi's user avatar
  • 203
2 votes
1 answer
2k 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 ...
Frank Swanton's user avatar
4 votes
1 answer
756 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_{...
Stefanos Makridis's user avatar
1 vote
3 answers
722 views

Is it possible that the minimum point of a short run cost curve does not touch the long run cost curve?

In the answer to this question, the answerer said "the minimum point of a short run cost curve will be above the long run cost curve". Is it true? If so, how would it be so? I thought that if e.g. ...
Aqqqq's user avatar
  • 392
13 votes
2 answers
13k 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{\...
Stan Shunpike's user avatar
12 votes
2 answers
43k 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 = \...
user1170330's user avatar
7 votes
2 answers
12k views

Consumer surplus in case of perfectly inelastic demand

How do we define consumer surplus in the case of perfectly inelastic demand? This question was inspired by the comments following this answer. For a graph of inelastic demand please also see the ...
Giskard's user avatar
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11 votes
2 answers
1k 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, ...
Ubiquitous's user avatar
11 votes
5 answers
2k 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 ...
Bravo's user avatar
  • 1,699
9 votes
2 answers
6k views

Meaning of Additively Separable, Linear in X

Often I see both in micro and macro two common terminology : Additively separable. Linear in price or linear in probability. I understand exactly as they sound by looking at the functional form ...
Frank Swanton's user avatar
8 votes
2 answers
2k 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 ...
Bravo's user avatar
  • 1,699
7 votes
1 answer
6k 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 ...
Frank Swanton's user avatar
7 votes
2 answers
1k views

In microeconomics : is this the contradiction in the atomicity of firms ?

Let $p$ be the market demand. It is a function of the market production $Q$. Let $q_i$ be the production of firm $i$. Reading Steve Keen (in Debunking Economics, chapter II) quoting George Stigler, I ...
CecilFaux's user avatar
7 votes
2 answers
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. ...
Guest's user avatar
  • 71
6 votes
3 answers
908 views

Does returns to scale always lead to economies of scale?

I can tell the difference between returns to scale and economies of scale, but then I still don't know if returns to scale ALWAYS leads to economies of scale? Please could you help me?
Katie's user avatar
  • 117
6 votes
3 answers
3k 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 ...
JobHunter69's user avatar
4 votes
1 answer
165 views

Who is the first one to equate "rational" with "complete and transitive preference"?

MWG taught that, suppose that the menu is finite, "rational" is the same as "complete and transitive". But it seems that it does not cite any sources. Who said this first? vNM said ...
High GPA's user avatar
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4 votes
1 answer
12k views

How to derive utility function from indirect utility in this exercise [closed]

Derive the consumer’s direct utility function if his indirect utility function has the form $$v(\boldsymbol{\mathbf{p}},y)=yp_1^\alpha p_2^\beta$$ where $\beta ,\alpha$ are negative.
Andrea F.L.'s user avatar
4 votes
1 answer
335 views

Rational preferences/individual decision-making theory

I am taking advanced micro course this semester. In one of the problems we need to determine whether the preference relation is rational (i.e. complete and transitive). Since we have not really ...
user30845's user avatar
3 votes
1 answer
1k 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 ...
Bensstats's user avatar
  • 889
3 votes
1 answer
855 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 ...
user avatar
3 votes
7 answers
12k views

"Convex to origin" indifference curves

The convexity of an indifference curve results from the fact that the absolute value of its (negative) derivative, which is the marginal rate of substitution is decreasing. But why do we say that it's ...
John's user avatar
  • 286
1 vote
0 answers
154 views

Please check for payoffs which I calculated in the incomplete and imperfect game

Taxpayers may either have a high income or low income, and they may be either opportunistic or honest. The tax collector cannot observe any of these characteristics, but after receiving a report from ...
studentp's user avatar
  • 172
33 votes
6 answers
13k 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 ...
Stephan Kulla's user avatar
23 votes
4 answers
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?
Steve S's user avatar
  • 725
15 votes
12 answers
15k 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. ...
Manuel Maly's user avatar
15 votes
3 answers
1k 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 ...
Jyotirmoy Bhattacharya's user avatar
14 votes
2 answers
13k 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 ...
Arie's user avatar
  • 149
12 votes
6 answers
7k views

Why are cost functions often assumed to be convex in microeconomics?

Why are cost functions typically assumed to be convex in producer theory of (introductory) microeconomics? For me this goes against the intuition of economies of scale. There are fixed costs (FC) ...
Richard Hardy's user avatar
11 votes
5 answers
19k 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 ...
LesPaul's user avatar
  • 145
10 votes
3 answers
15k views

How to show that a homothetic utility function has demand functions which are linear in income

A homothetic utility function is one which is a monotonic transformation of a homogeneous utility function. I am asked to show that if a utility function is homothetic then the associated demand ...
MHall's user avatar
  • 326
9 votes
3 answers
3k views

Quasilinear Utility: Pareto Optimality Implies Total Utility Maximization?

I read that if we have quasilinear utility for all consumers, then any pareto optimal allocation maximizes the sum of utility levels of all consumers. That is: $\textbf{What we know:}$ $$1)\quad u^i(...
DornerA's user avatar
  • 1,568
9 votes
3 answers
4k 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 ...
Martin Van der Linden's user avatar
8 votes
4 answers
6k views

Can someone explain graphically why MRS is invariant under monotonic transformation?

Let $U(x,y)$ be a utility function. Suppose I have an indifference curve for which $U(x,y) = \bar{U}$. Then $dU = 0$ along the curve and I can rearrange to find the MRS. Suppose I have a monotonic ...
Stan Shunpike's user avatar
8 votes
4 answers
768 views

Can $u(x) = \sqrt{x_1 x_2} + \sqrt{x_3 x_4}$ be solved by Kuhn–Tucker conditions?

Consider $\max_{x_1, x_2, x_3, x_4} u(x) = \sqrt{x_1 x_2} + \sqrt{x_3 x_4}$ s.t. $\; p_1x_1 + p_2x_2 + p_3x_3 + p_4x_4 \le w$ I know we can solve the max problem through separately considering ...
Yun's user avatar
  • 101
7 votes
3 answers
2k 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,...
Keshav Srinivasan's user avatar
7 votes
2 answers
2k views

Deriving the translog production function

Ive been having difficulty deriving the translog production function defined as: $$\ln y=\alpha_0+\sum_{i=1}^n\alpha_i \ln x_i+\frac{1}{2}\sum_{i=1}^n\sum_{j=1}^n\ \beta_{ij}\ln x_i\ln x_j $$ I know ...
EconJohn's user avatar
  • 8,407
7 votes
5 answers
5k views

Is it possible to have a preference relation that is complete but not transitive?

I've been doing my own reading on non-rational preference relations. I'm currently under the impression that transitivity follows as a direct result of completeness of preferences. However my (much ...
EconJohn's user avatar
  • 8,407
7 votes
2 answers
2k views

Pure exchange economy: Given an initial endowment are multiple equilibria possible?

Consider a pure exchange economy with two goods ($x_1,x_2$) and two consumers $A,B$. Both users have an initial endowment, $(\omega_1^A,\omega_2^A)$ and $(\omega_1^B,\omega_2^B)$ respectively. A price ...
Giskard's user avatar
  • 29.4k
7 votes
2 answers
4k 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 ...
Thomas V.'s user avatar
  • 118
6 votes
2 answers
5k 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 ...
Kitsune Cavalry's user avatar
  • 6,648
6 votes
1 answer
8k 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? $$MRS (x, y) = \frac{x^2+y^2}{xy}$$...
EconDude's user avatar
  • 105
6 votes
6 answers
2k views

Why does supply equal demand?

My question is simple: in theory, why should we expect the total quantity that firms want to sell to be (at least approximately) equal to the total quantity that consumers want to buy? As I ...
user avatar
6 votes
1 answer
372 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 ...
spinkus's user avatar
  • 221
6 votes
3 answers
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 ...
user avatar
5 votes
1 answer
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 ...
Kitsune Cavalry's user avatar
  • 6,648

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