Optimisation and Microeconomic Theory

ECO401 Optimisation and Microeconomic Theory

  • Topics

    Topics

    Part 1: Linear algebra, vectors and matrices. Lagrange´s multiplier method. Extension of Lagrange´s technique to non-negativity constraints and inequality constraints: the Kuhn-Tucker conditions. Shadow prices and maximum value functions. Linear approximations. The second order conditions to an optimisation problem.

    Part 2: Introduction to microeconomic theory. Preference and consumer demand. Derived concepts (indirect utility, expenditure). Comparative statics (Slutsky). Measurement of welfare and welfare changes. Aggregation of demand. Production theory, cost minimisation and profit maximisation. General equilibrium and decentralisation of resource allocation decisions.

  • Learning outcome

    Learning outcome

    The main topic of the first part is the theory and practice of constrained optimisation. After rehearsing the necessary mathematical tools, we focus on Lagrange's technique to solve a maximisation (or minimisation) problem when side constraints need to be respected. We pay attention to the so called first and second order conditions of the problem, and a number of very useful by-products of Lagrange's technique, such as maximal value functions, shadow prices and comparative statics.

    The second part gives a solid introduction to the standard microeconomic theory. Equipped with Lagrange's technique, we first study the behaviour of individual agents (consumers, business firms, investors) in the economy, and later their interaction through markets. This will give us an understanding of the main results in microeconomics, and a feeling for the methodology used in economic theory.

    Almost every scientific article or paper in economics makes use of the technique of constrained optimisation and uses a microeconomic model to describe individual and market behaviour. This course will therefore enable students to read and understand the recent economic literature, as well as to engage in economic model building. But it will also teach how to formulate a well-defined problem and how to solve it. In that sense it is of interest to the applied economist whether he or she will work as an analyst in a firm, as a consultant, or as a researcher.

    At the end of the course, the student

    - will have advanced knowledge of the main optimization techniques used in management and economics;

    - will have advance knowledge of the standard microeconomic price theory, in particular the notions of individual and aggregate market behavior, general equilibrium and efficiency properties of market allocations;

    - will be able to apply optimization techniques to formulate, analyse and solve problems met in economics and management;

    - will be able to formulate those problems with the required degree of formalism;

    - will be able to communicate this knowledge, both in written form and orally, with accuracy and intuition.

  • Teaching

    Teaching

    Regular lectures and assignment classes.

  • Required prerequisites

    Required prerequisites

    Students should be familiar with the material covered in the undergraduate mathematics course MET020/MET1

  • Assessment

    Assessment

    There is a three hour written exam consisting of problems related to both parts of the course. The final evaluation will for 70% be based on the exam and for 15% on each of the compulsory exercise sets. The two exercise sets have to be taken in the same semester. Both the exam and the compulsory assignments should be written in English.

  • Grading Scale

    Grading Scale

    Grading scale A - F.

  • Computer tools

    Computer tools

     

  • Semester

    Semester

    Autumn.

  • Literature

    Literature

    Part 1: Avinish Dixit (1990) Optimization in economic theory - 2nd ed (Oxford: Oxford University Press).

    Part 2: Frank Cowell (2005) Microeconomics: Principles and Analysis (Oxford: Oxford University Press).

Overview

ECTS Credits
7.5
Teaching language
English
Semester
Autumn

Course responsible

Thomas de Haan and Fred Schroyen, Department of Economics.