Teacher(s)
Prof. Luigi Luini, Prof. Fabio Petri

Objectives
To learn the theoretical and mathematical tools of modern advanced microeconomics, in particular, theory of choice under certainty and uncertainty, consumer theory, duality, risk aversion, production, information, elements of general equilibrium theory and of alternative approaches to income distribution and employment

Recommended prerequisites
Contents of a normal course of intermediate microeconomics, for example Varian, Intermediate Microeconomics, or Besanko and Braeutigam, Microeconomics.

Contents
First Half (Petri)
1. Constrained optimization. Kuhn-Tucker conditions, with application to consumer and producer theory. Second order conditions.
2. Envelope theorem, with applications: Indirect utility and Roy’s Identity; expediture and cost functions and Shephard’s Lemma; profit function and Hotelling’s Lemma; Slutsky’s substitution effect compared with Hicks’.
3. Aggregation: of goods, of consumers, of firms. Introduction to integrability and recoverability of demand functions.
4. Quasilinear utility and consumer surplus. Equivalent variation, compensating variation.
5. Perfect competition and free competition. Long-period vs. short-period pricing. Full cost.
6. General equilibrium of production and exchange. How to derive the demand curve for labour. Difficulties with introduction of capital.
7. Theories of income distribution. Comparison between classicals and neoclassicals.
8. Wage theories. Efficiency wages.
9. Microfoundations of macroeconomics. Degree of utilization of capacity. Investment.
10. Welfare economics.
11. Externalities, public goods, role of the state.

Second Half (Luini)
1. Intertemporal choice
Consumption and intertemporal budget constraint. Discount rate. Inflation. Two examples: the true cost of a credit cards; installment loans. Test your own delay attitude.
2. The discounted utility model
The basic model. Changes in the interest rate, changes in income. Effects of a higher discounte rate. The logarithmic utility function.
3. Capital markets
3.a Anomalies: single-period (one-shot) and multi-period (intertemporal) choice
4. Risk aversion
Comparative risk aversion. Certainty equivalent and risk premium. The Arrow-Pratt approximation. Decreasing absolute risk aversion (DARA). Some classical utility functions. Two examples. Test your own risk attitude.
5. The expected utility model
Linear probabilities (and hyperplane separation theorem). Diffidence theorem (and Jensen inequality). Applications. Comparative diffidence. Central risk aversion, central riskiness
5.a Anomalies in risky behaviour
6. Risk aversion and background risk
Multiple risks and DARA preservation. Risk vulnerability. Aversion to risk on wealth
7. Ambiguity attitude: models of non-expected utility
Definition of ambiguity-uncertainty aversion. Sharing ambiguity
8. Information (I)
Active-passive, costly-free, symmetric-asymmetric. Message (and noise), research (and accuracy), signal (and trustworthiness)
9. Information (II)
Informational structures, diffusion processes, diffuse and non-diffuse structures

Reading
Varian, H.R., Intermediate Microeconomics - A Modern Approach, 7th ed., Norton, 2007
Cowell, F.A., Microeconomics. Principles and Analysis, Oxford UP, 2006
Gollier, C., The Economics of Risk and Time, MIT Press, 2001
Bowles, S. Microeconomics: Behavior, Institutions and Evolution, Princeton UP, 2004
Lecture Notes by the teachers, available on their web pages

Type of exams
Written final examination, integrated by evaluation of exercises during the lecture course and of presentation of a reading.

Instruction language
English