Module Identifier EC30230  
Academic Year 2001/2002  
Co-ordinator Ms Susan Charles  
Semester Semester 1  
Pre-Requisite EC10120 , MA13610  
Mutually Exclusive EC31310 , EC31410  
Course delivery Lecture   22 Hours  
  Seminars / Tutorials   6 Hours  
Assessment Course work   3 pieces of coursework   30%  
  Exam   3 Hours   70%  


This module builds on the foundation provided in EC10120 Introductory Microeconomics, extending and deepening your knowledge of the concepts and techniques of neoclassical microeconomics. Our particular concern will be the analysis of rational individual and firm choice under conditions of certainty and independence of action. Having gained a deeper understanding of the rational choice model in these basic conditions, you will then be in a position to proceed, in your third year, to the study of choice under uncertainty (in EC30610: Uncertainty and Asymmetric Information) and strategic choice under conditions of interdependence (in EC30110: Oligopoly and Game Theory).

Learning outcomes

By the end of this module you should:

1. Have a detailed understanding of the theory of rational choice and be able to apply it to questions of: consumer demand; labour supply; saving behaviour; producer demand for factors of production; producer supply of goods.

2. Be adept at analysing questions of rational choice using the Lagrangian technique of constrained optimisation you first met in MA13610: Mathematics for Economics and Accounting & Finance II.

3. Have an appreciation of how the theory underpins some common tools of applied microeconomic analysis such as price indices.

You are advised that:

1. The applied topics in the tutorial assignments may crop up in exam questions; the particular applications used in the coursework assignments will not (at least directly) form the basis of exam questions - there is no point in assessing you on the same topic twice.

2. Lecture handouts, answers to tutorial assignments and answers to coursework assignments will be distributed only to those who attend the relevant sessions.

In addition to attending lectures and tutorials, you should spend an appropriate amount of time reviewing your lecture notes, extending them through reading, testing your understanding using the study guide and preparing the tutorial and coursework assignments. Remember that this is a 30-credit module ? i.e. it is designed to constitute a half of your workload for this semester. Assuming a 36 hour working week that implies that you are expected to spend about 18 hours per week studying for this module, of which only 2.5 hours is formally timetabled.



Lectures 2-6: Utility maximisation, consumer choice and the Marshallian demand function

Eaton et al. Chs 2-4
Katz & Rosen, Chs 2 & 3 (plus appendix)
Mankiw, Principles of Economics, Ch 21
I Crawford, Z Smith and S Tanner, `Alcohol taxes, tax revenues and the single European Market?, Fiscal Studies, 20, (1999), pp.287-304
S Connolly & A Munro, Economics of the Public Sector, Chs 10, 11, 24, pp.499-502

Lecture 7: Price Changes and Consumer Welfare

Eaton et al. Ch 4.5 & 4.6
Katz & Rosen, Ch 4
S Hope, Applied Microeconomics, Ch 2.1-2.3
Economic Journal, 111 (2001), No.472 (June)
Feature: The Measurement of Inflation. Read ed. note (Silver) and papers by Triplett (311-334) and Blow and Crawford (357-382)

Lecture 8: Income-leisure choice and labour supply

Eaton et al. Ch 11.4
Katz & Rosen, Ch 5.1
Connolly & Munro, Ch 13
S Hope, Applied Microeconomics, Ch 3

Lectures 9-12: Intertemporal choice and individual saving and investment behaviour

Eaton et al. Ch 5
Katz & Rosen, Ch 5.2
Connolly & Munro, Ch 18
B Atkinson, F Livesey & B Milward, Applied Economics, Ch 17.
J Banks & S Tanner, Household Savings in the UK, (IFS Report Oct. 1999)
R O Zerbe & D D Dively, Benefit Cost Analysis in the Theory and Practice, Chs 4 & 9


Lectures 13-16: Production, Cost and Cost Minimisation

Eaton et al. Chs 6 & 7
Katz & Rosen, Chs 7.1, 8, 9 (plus appendix)
A Griffiths & S Wall, Intermediate Microeconomics, Theory and Applications, Ch 4 (particularly pp.184-196)
R Shone, Applications in Intermediate Microeconomics, Ch 6 & 7
N Crafts, `Britain?s productivity problem?, Economic Review, No 3, (Feb 2000), pp.16-20
S Holloway, `Productivity Measurement in the UK? Economic Trends, March 1999
R Griffiths, S Redding and J van Reenan, `Bridging the productivity gap?, Centre Piece, 4 (1999), No 3, (Winter), pp.14-19

Lecture 17-18: Profit Maximisation in a Competitive Environment

Eaton et al. Chs 8 & 9
Katz & Rosen, Chs 7, 10 & 11

Lectures 19-22: Profit Maximisation with Market Power   

Eaton et al. Chs 10 & 14
Katz & Rosen, Ch 13
Griffith & Wall, Chs 7 & 13
Connolly & Munro, Ch 22
D Helm, `British Utility Regulation?, Oxford Review of Economic Policy, 10, No.3, pp 17-39.

EC30230: Intermediate Microeconomics

Coursework Assignments

These essays should be thought of as mini-projects in that they are on applied subjects not specifically covered in lectures, though they will require the use of theoretical concepts which have been developed there. The objective is to develop both your ability to apply theory to real issues and your ability to work on your own. It follows, therefore, that you will not be able to gain good marks simply by reproducing lecture or textbook material: use more than one source, to include non-textbook material; use theoretical tools to analyse the issue in the essay; include factual/empirical material to support or question the theoretical analysis.

The text of the essays should be typed and double-spaced. Diagrams and algebra may be by hand.

Because they constitute, in effect, 10 credits-worth of your degree, the coursework rules are necessarily strict:

1. The work you submit for assessment must be your own.

you should not copy the work of others, be it an author or a fellow student.   
neither should you submit as your own, work which has been done jointly with others

Evidence of plagiarism will be investigated and, if substantiated, will be penalised.

2. Your work must be submitted on time.

Assignment 1 3.00 pm Monday, 5 November
Assignment 2 3.00 pm Monday 26 December
Assignment 3 3.00 pm Monday, 14 January

Completed assignments must be submitted to the Undergraduate Office (F11). Complete 2 copies of the cover sheet (obtainable from the Undergraduate Office), attach one to the assignment and keep the second (dated) copy as your proof of submissions. Failure to follow this procedure could result in your being penalised for late submission.   

Work submitted up to and including 4 days late will be docked a 25 mark penalty. Work submitted 5 or more working days late will not be marked and therefore a mark of zero will be recorded.

Extension will be granted only if there is good cause, supported by appropriate evidence. Requests for an extension must be made in writing and must be received in advance of the submission date. The response will be made in writing. Note: unless you have it in writing, you do not have permission for an extension.

3. Your work will be marked and then returned through tutorials within three weeks of the submission deadline. You should then take a photocopy of it and return the original to the undergraduate office (F11). In any event, the work must be re-submitted by the start of the examining period. This is because external examiners may ask to see your work ? it is your responsibility to ensure it is available to him if he does so.


Write a short essay on the following topic:

Assess the argument that the high level of taxation of alcohol in the UK is detrimental to the national interest, both in terms of tax revenue and trade. Do you think the rate of taxation on alcohol should be reduced?

Specific references (to start you off)

Crawford, Z Smith and S Tanner, `Alcohol taxes, tax revenues and the Single European Market?, Fiscal Studies, 20 (1999) pp.287-304.
for a shorter version see: Briefing note no.4,
Z Smith: The Revenue effects of changing alcohol duties
S Connolly & A Munro, Economics of the Public Sector, Chs 10 & 11, see also Ch 24, pp.499-502.


Write a short essay on the following topic:

Assess the argument that the state can no longer afford to provide a decent state pension and that, therefore, individuals must save more if they are to have a financially comfortable old age. Consider the factors which determine how much an individual, such as yourself, will need to accumulate to provide a reasonable income in old age and comment on any issues they raise.

Specific references (to start you off)

H Glennerster, `The Elderly: A Burden on the Economy?? CentrePiece, Summer 1999, pp.7-12
B Atkinson, F Livesey & R Milward, Applied Economics, Ch 17
S Connolly & A Munro, Economics of the Public Sector, Ch 18


Write a short essay on the following topic:

Give a microeconomic analysis of the practice of price discrimination, paying particular attention to its effects on consumer welfare. To what extent is the high price of cars in the UK, relative to much of the rest of the EU, due to discriminatory behaviour? Offer policy advice.

Specific references (to start you off)

Eaton, Eaton & Allen, Ch 14
G Stewart, `Driving Force?, Economic Review, 16 No.1, (September 1998), pp 22-23
New cars: a report on the supply of new motor cars within the UK (July 2000)
use the alphabetical index, select 'c' and then 'competition' and finally 'car sector' to get to a regular report on Car price differentials in the European Union

EC30230: Intermediate Microeconomics

Tutorial Assignment 1

For this tutorial you should have read at least:

Eaton, Eaton & Allen, Ch 2 & Ch 3, sections 1-5
Katz & Rosen, Ch 2

You should have a good understanding of the following:

the utility function (indifference map) as a way of representing preferences
the axioms of completeness and transitivity and the assumption of non-satiation
the marginal rate of substitution and the assumption of diminishing MRS
the budget constraint
utility maximisation

Now come to the tutorial prepared to discuss the following:

1. Eaton, Eaton & Allen (EEA) Ch 2, end-of-chapter exercise question 5.

2. Sketch indifference curves for the following utility functions. In each case, say whether the underlying preference ordering conforms to the axioms and assumptions of consumer theory.

a)   U(X,Y) = X + 5Y
b)   U(X,Y) = 10 + 2X.5.Y.5
c)   U(X,Y) = min{X, 2Y}

3. Sketch appropriate constraints on consumer choice for the following situations:

a) to purchase good X, the consumer must pay a quarterly ?standing charge? plus a price per unit (X could be gas, electric or terrestrial phone calls)
b) X and Y are leisure activities (eg, playing golf and visiting the cinema) and the consumer is busy as well as not particularly rich (ie, time is a constraint on choice as well).

4. Katz & Rosen (KR) Ch 2 end-of-chapter discussion question 2.7.

Tutorial Assignment 2

For this tutorial you should have read at least:

Eaton, Eaton & Allen, Ch 3 (+ appendix) & Ch 4 sections 1-2
Katz & Rosen, Ch 3 (+ appendix) & Ch 4 sections 1-3

You should have an understanding of the following:

Engel curves, normal and inferior goods, and the income elasticity of demand
demand curves, income and substitution effects, and the own-price elasticity of demand
cross-price elasticity of demand, substitute and complement goods
Marshallian demand functions

1. Application

Consider alternative methods of raising the standard of living of a target group of consumers. The policy objective is assumed to be that of improving the welfare of ?poor children?. The policy instruments under consideration are assumed to be:

a) a cash transfer to parents (eg, child benefit)
b) a subsidy on the price of a relevant commodity (eg, subsidised food)
c) free provision of a basic quantity of a relevant commodity (eg, free school meals)

Using diagrammatic methods (let X be food and Y the composition commodity, construct an indifferences map and budget constraint for a representative poor family) assess the alternative policy instrument: for the same expenditure of public money, which one yields the greatest improvement in standard of living? (Alternatively, for any given improvement in standard of living, which is cheapest?) Are there any other issues of relevance in the choice of instrument?

NB this question is a combination of EEA Ch 3 question 4 and KR Ch 3.2 in-kind transfers and Ch 4.3 evaluating price subsidies.

2. Exercise

For a utility function of the form: U (X,Y) = X.Y
With a budget constraint: I = PxX + PyY

a) Using the Lagrange method, derive the Marshallian demand functions for X and Y
b) What happens to the demands for X and Y if I, Px and Py all rise by 10%. Comment.
c) Calculate the income elasticity of demand for either one of these goods. Interpret and comment.
d) Calculate the price elasticity of demand for either one of these goods. On a graph, draw the price-consumption curve. Interpret and comment upon your result.
e) Calculate the cross price elasticity of demand. Interpret and comment upon your result.
You have been working with an example of a Cobb-Douglas (or linear logarithmic) functional form.
f) Comment on the appropriateness of this type of functional form for empirical demand analysis.

Tutorial Assignment 3

For this tutorial you should have read at least:

Eaton, Eaton & Allen, Ch 5 & Ch 11 sections 4
Katz & Rosen, Ch 5

You should have an understanding of the following:

the income (or consumption) ?leisure model
income and substitution effects in the context of the income-leisure model, and the backward bending labour supply curve
the life-cycle model of intertemporal choice
income and substitution effects in the context of the life-cycle model
present value, the separation theorem and the demand for capital goods

1. Application

Consider the effects on work incentives of the tax and social security systems. Using the simple income/leisure model and the diagrammatic method analyse the following:

a.i) Unemployment benefit is payable at a rate of B per time period T. Illustrate the individual?s choice opportunities on a diagram, and comment on the effect of B on his incentive to work:

a) when he has unrestricted choice over hours of work, at a constant wage rate of W; and
b) when he is restricted to working H hours per T.

(NB unemployment benefit is paid only if the individual does not work)

   ii) Comment on the proposition that unemployment benefit constitutes a disincentive to work and should therefore be cut.

b) Introduce income taxation into your model. The tax system consists of a tax-free allowance of #A of the individual?s total income and a tax rate of t (0 < t < 1) for any taxable income. (NB the earnings of other family members would be taxed separately.)

   i) On a diagram, illustrate the effect of this income tax regime on the individual?s choice opportunities when he has unrestricted choice over hours of work, at a constant (gross) wage rate of W.

2. Exercise

In the wake of foot and mouth, agricultural practices ? and in particular agricultural subsidies ? are being questioned. So

a) In general, what determines the price of agricultural land?

b) Give a discursive analysis of the effect of removing agricultural subsidies, in both the short and the long run. Pay particular attention to what we might expect to happen to the price of land.

Tutorial Assignment 4

For this tutorial you should have read at least:

Eaton, Eaton & Allen, Ch 6 & 7
Katz & Rosen, Ch 7 section 1, Ch 8, Ch 9 (+ appendix), Ch 10 section 2

but the textbooks are not really sufficient for this tutorial, so you need to consult the other references listed in the reading list for lectures 13-16.

You should have an understanding of the following:

the production function (isoquant map) as a way of representing technically efficient production possibilities
the marginal and average product of an input and the assumption of diminishing marginal returns to any one input
input substitutability and the assumption of diminishing marginal rates of technical substitution
returns to scale (technical and non-technical)
cost minimisation, input demand functions and the cost function
short and long run costs of production

Come to the tutorial prepared to discuss the following:

1. Application

a) There is much talk about the desirability of firms being highly productive and/or efficient ? but much confusion over what these terms mean, and how to measure them. So, what do economists understand by the following, how are they measured, how useful are they and how do they relate to one another?
labour productivity
total factor productivity
technical efficiency
cost (or price) efficiency
allocation efficiency
Pareto efficiency

b) Concentrate now on cost efficiency. Discursively analyse the incentives on firms to be cost efficient and the factors which may lead them to be cost inefficient.

c) Assume you are in the employment of a multinational multi-plant volume car manufacturer. You are instructed to take the world demand for model Z and the capital stock as given; your task is to determine how to apportion the total annual production required between the 3 plants capable of making it, one each in Britain, Germany and Poland. How do you do it? Discuss the implications. (Hint: look at EEA, Ch 6.6)

d) Assume you are in the employment of the NHS and your task is to identify which (if any) of its hospitals is ?potentially is inefficient? so that they may be targeted for action. You are given ?performance indicator? date on average cost per patient treated. The AC figure in hospital Y is greater than that in hospital Z. Can you conclude that Y is therefore inefficient? If not, why not, what other information would you need?

2. Exercise

KR Ch 9, end-of-chapter questions 9.6 and 9.7.

Tutorial Assignment 5

For this tutorial you should have read at least:

Eaton, Eaton & Allen, Ch 8 & 9
Katz & Rosen, Chs 7, 10 & 11

You should have an understanding of the following:

economic profit and the profit function
profit maximisation
the price taking firm and its supply function
short and long run equilibrium in the competitive market
the efficiency of perfect competition

Come to the tutorial prepared to discuss the following:

1. Application

a) Assume that, in the absence of any form of government intervention, the wholesale market for beef within the EU would be competitive. (Is this a reasonable assumption, do you think?) Analyse the effect of a per unit (ie, per carcass) subsidy on market and firm equilibrium and comment on the efficiency implications.

b) In general terms, assuming that agricultural markets are capable of being reasonably competitive, what would be the effects of removing EU agricultural subsidies?

2. Exercise

a) KR Ch 10, end-of-chapter question 10.9.

b) Suppose there are a fixed number of 1,000 identical firms in the perfectly competitive concrete pipe industry. Each firm produces the same fraction of total market output, and each firm?s production function for pipe is given by

Suppose also that the market demand for concrete pipe is given by

   Q = 400,000 ? 100,000 P

Where Q is total concrete pipe.

i) If w = v = $1, in what ratio will the typical firm use K and L? What will be the long-run average and marginal cost of pipe?
ii) In long-run equilibrium what will be the market equilibrium price and quantity for concrete pipe? How much will each firm produce? How much labour will be hired by each firm and in the market as a whole?
iii) Suppose the market wage, w, rose to $2 while the price of capital, v, remained constant at $1. How will this change the capital-labour ratio for the typical firm, and how will it affect its marginal costs?
iv) Under the conditions of part (iii), what will the long-run market equilibrium be? How much labour will now be hired by the concrete pipe industry?
v) How much of the change in total labour demand from part (ii) to part (iv) represented the substitution effect resulting from the change in wage and how much represented the output effect?   (taken from Nicholson)

Reading Lists

** Recommended Text
B C Eaton, D F Eaton and D W Allen. (1999) Microeconomics. 4th. Prentice Hall ISBN 013 911108 5
R A Devlin & N T Gallini. (2000) Problem Solving in Microeconomics. 4th. Prentice Hall ISBN 013 011019 1
M L Katz & H S Rosen. (1998) Microeconomics (International ed.). Irwin ISBN 007 115354 3