Advanced Microeconomics

URL study guide

https://studiegids.vu.nl/en/courses/2024-2025/E_EC_ADVMIE

Course Objective

Advanced Microeconomics builds upon Intermediate Microeconomics. Together these courses equip the student with the microeconomics tools needed for the subsequent policy-oriented courses in the Master. Hence, policy applications in themselves are not subject of the current course, but rather their preparation. The course adds to the body of knowledge necessary for reaching the master goals:
• The student can draw economic hypotheses and draw policy conclusions using his/her knowledge of state-of-the-art microeconomic theories.(Academic and research skills)
• The student understands the academic literature and recognizes important puzzles addressed by the field of microeconomics. (Bridging theory and practice
- knowledge)
• The student can address real-life societal and market challenges by applying relevant theories and methodologies. (Bridging theory and practice
- application)
• The student can critically assess the methods and answers used to address social and economic problems. (Broadening your horizon)

Course Content

The course is aimed at the understanding of the causes and consequences of market failure, and the usual policies or strategies to mitigate it, or possibly eliminate it. We start by exploring a first source or market inefficiency: market power. We explore the (mal)-functioning of markets in which firms have the ability to influence the price. Then we delve into the inefficiency caused by the existence of asymmetric information in markets, and provide ways in which market efficiency can be mitigated or even fully restored. Finally, we study two more common and important situations in which the market does not deliver efficient outcomes: externalities and public goods. Here we explore approaches to restore the efficiency of the market equilibrium: the use of markets for the internalisation of externalities and tax-cum-subsidy policies. Topic 1: Monopoly Concepts: monopoly pricing, quality choice, price discrimination; natural monopoly. Textbook chapter 14 and 18. Topic 2: Game Theory Concepts: Extensive and strategic representations of games; basic notions of noncooperative games and solution concepts: dominant strategies; simple dynamics and prisoner’s dilemma; Nash equilibria in pure and mixed strategies. Games with complete and incomplete information. Extensions and refinements of Nash equilibrium: subgame perfectness, and Bayesian games. Textbook chapter 8. Topic 3: Oligopoly Concepts: Bertrand paradox, Cournot competition, Product differentiation, consumer search and the Diamond paradox, price dispersion, tacit collusion, strategic commitment (Stacklelberg) Textbook chapter 15. Topic 4: Auctions Concepts: first-price and second-price auctions, revenue equivalence, winner’s curse. Textbook chapter 18. Topic 5: Asymmetric Information and design Concepts: adverse selection; moral hazard; principal-agent relations; wage contracts. Textbook chapter 18. Topic 6: Externalities and public goods Concepts: types of externalities; rivalry and excludability; internalizing externalities. Pure public goods; efficient allocation of public goods. Textbook chapter 19.

Teaching Methods

This is a 3 weeks course, totalling 18 student/teacher contact hours: 12 for lectures, 6 for tutorial sessions. Each week, there are 2 theory sessions of 2 hours each, and a practice session of 2 hours. Students are expected to attend the sessions.

Method of Assessment

The course is good for 3 ECTS credits. The final grade will be awarded based on two grades:
• Weekly problem sets
• Final written exam To pass the course, students need to get at least a 5.0 in each if these two items.

Literature

Snyder and Nicholson, Microeconomic Theory: Basic Principles and Extensions, 12th ed., CENGAGE Learning.

Target Audience

MSc Economics and MSc Econometrics students

Additional Information

The arguments in this course are provided using mathematical models. Mainstream microeconomics has used mathematics for at least 60-70 years already. Mathematics serves to make economic insights accesible, understandable and verifiable to the average student. By using mathematical models, arguments are made precise and can then be distinguished from speculations. The majority of the people make intuitive arguments that apply only to a limited extent, or are simply wrong.

Entry Requirements

Intermediate Microeconomics

Recommended background knowledge

Microeconomics at the level of Varian, H. R.
IntermediateMicroeconomics. 8th edition. W. W. Norton, 2010.

Mathematics at the level of Sydsaeter, Knut and
Hammond, EssentialMathematics for Economic Analysis, Prentice Hall, 3rd
ed., 2008

Explanation Canvas

All the relevant information about the course will be published in the CANVAS site of the course.