API 111 / ECON 2020a / HBS 4010

Microeconomic Theory I
Harvard University Fall 2017

Instructor: Maciej H. Kotowski <maciej_kotowski@hks.harvard.edu>

Oce: L-210 at Harvard Kennedy School
Oce Hours: Monday & Wednesday 16.3018.00 (or by appointment)
Faculty Assistant: Eneida Rosado <eneida_rosado@hks.harvard.edu>
Teaching Fellow: Kunal Mangal <kmangal@g.harvard.edu>

Please include ECON 2020a in the subject line of all course-related e-mails.

Class Meetings: Monday & Wednesday 08.4510.00, L-280 at Harvard Kennedy School1
Review Sections: (1) Friday 10.15-11.30 [L-382]; (2) Friday 11.45-13.00 [L-130]
Website: <https://canvas.harvard.edu/courses/33309>

Overview
This is the rst semester in a year-long course in microeconomic theory that serves as an alternative
to the microeconomics sequence of Economics 2010a and 2010b. Intended primarily for students who
anticipate doing original research employing the tools of microeconomic theory, this doctoral-level
course is designed for the dual purposes of giving students a systematic grounding in microeconomics
and preparing them to use economic models in their own research. The course sequence addresses
the broad methodological topics of consumption theory, production theory, general equilibrium,
information economics, and game theory.

Audience
The course is suitable for doctoral students in any eld and for advanced public policy students
at Harvard Kennedy School. Qualied undergraduates and other professional-school students are
welcome with the instructors permission. While the topics in this course are mathematical, the
emphasis is on economic content rather than proofs and technical details. Nevertheless, mathemat-
ical arguments are employed often. Students without a strong background in the areas mentioned
below (see prerequisites) will likely be better served by delaying the sequence until they develop the
proper background.

Prerequisites
The formal prerequisite for the course is multivariate calculus (typically 34 semesters of college-level
calculus). It is also helpful to have background in calculus-based probability theory and intermediate
microeconomics. Students who do not satisfy the prerequisites may still be able to enroll in the
course, but should consult with the instructor before doing so.
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Starting September 1, 2017, lectures will begin at 08.30 (sharp) and end around 09.50.

Date: August 28, 2017.

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Requirements and Grading
The course requirements include the completion of several problem sets, a midterm exam, and a
nal exam. Your grades on these tasks will be weighted according to Scheme A and Scheme B.
Your nal score for the course will be computed according to the most favorable (for you) of the
two weightings.
Scheme A Scheme B
Problem Sets 15 % 15 %
Midterm Exam 25 % 0%
Final Exam 60 % 85 %
Letter grades will be assigned based on your nal weighted score.

Exams
The midterm exam will be held in class. The nal exam is during the nal exam period. All exams
are closed-book.

Problem Sets
Problem sets are graded primarily for completion and only a check+/check/check/no credit will
be oered for feedback. Earning a check or better gives you full credit for the problem set.
Sloppy, half-hearted, late, or incomplete work is unlikely to receive full credit. We will drop your
lowest problem set grade in calculating your grade for this part of the class.

You are encouraged to work in small groups (four or fewer students) on the problem sets, but you
must hand in independently written-up solutions. If you choose to collaborate with others, please
identify other group members on your write-up. It will be very dicult to do well on the exams
unless you can independently complete problem-set-like questions.

Unless you make prior arrangements, you must submit completed problem sets in hardcopy to the
API 111 / Econ 2020a / HBS 4010 assignment dropbox by 12.00 on the due date. The dropbox
is located by the second oor mailboxes in the HKS Littauer Building. Do not bring assignments
to lecture. Late problem sets will not be accepted. There is no need to type up your problem set
solutions, but sloppy work will not receive credit.

Review Sections
The teaching fellows will hold weekly review sections. Formally, attendance at these sections is
optional. However, most students will benet greatly from attending one weekly review section.

Class Time
Starting on September 1, 2017, lectures will begin at 8.30 (sharp) and end around 9.50. This
adjustment is meant to help students reach classes in Harvard Yard, HBS, or elsewhere on time and
without a rush.

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Course Readings
There will be required readings from the following sources:

Microeconomic Theory [MWG] by Andreu Mas-Colell, Michael D. Whinston, and Jerry R.

Green.

Notes on Microeconomic Theory [Miller] by Nolan H. Miller.

Miscellaneous academic journals.

MWG is the standard textbook used in economics Ph.D. programs. We will also use a set of sup-
plemental notes authored by Nolan Miller. These notes are freely available online. Readings from
academic journals can be accessed online through the Harvard Librarys website.

For some lectures there are suggested/optional readings from the following sources:

Lecture Notes in Microeconomic Theory [Rubinstein] by Ariel Rubinstein.

Advanced Microeconomic Theory [Jehle and Reny] by Georey A. Jehle and Philip J. Reny.

Cooperative Microeconomics: A Game Theoretic Introduction [Moulin] by Herv Moulin.

Economics and Consumer Behavior [Deaton and Muellbauer] by Angus Deaton and John
Muellbauer.

For a dierent exposition of the course material and for more exercises, you may wish to consult
A Course in Microeconomic Theory by David M. Kreps, Microeconomic Foundations I: Choice and
Competitive Markets by David M. Kreps, or Microeconomic Analysis by Hal R. Varian. Students
seeking a math supplement may wish to consult Mathematics for Economists by Carl P. Simon and
Lawrence E. Blum or Fundamental Methods of Mathematical Economics by Alpha C. Chaing.

Optional Enrichment Lectures

This course touches many topics and regrettably some subjects cannot be covered in the depth that
they ought to be. Some students may benet from gaining exposure to more advanced topics of
particular interest. Thus, the following optional enrichment lectures are planned:

1. Discrete Exchange and Assignment Markets

2. Existence of Walrasian Equilibrium

3. General Equilibrium and Uncertainty

Optional enrichment lectures are optional. Any new concepts presented are not exam material.
Consult the course calendar for details concerning these lectures.

Audio/Video Recordings
I kindly ask you not to make audio or video recordings of the lectures.

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Advice
1. Exam questions will resemble problem set questions. Please seek out practice problems wher-
ever you can. Look beyond the assigned problem sets! Many textbooks have extra exercises.
The internet is another resource. The teaching fellows and I are more than happy to help you
solve/learn relevant material that you encounter independently.

2. Read the assigned readings before lecture and again after lecture. The excellent notes by
Nolan Miller parallel MWG and are less dense. You may wish to read them rst.

3. If pressed for time, you are better o practicing problem solving rather than memorizing the
details of an assigned text.

4. Please feel welcome to ask questions in class. Illuminating digressions are exciting. However,
I may defer your question to a later date or to oce hours if it will get us too far o track.

5. Please make use of oce hours. Even if you have no specic questions about the course
material, please feel welcome to visit, chat, ask questions, or simply say hello.

Credits
This course draws on material that I was fortunate to encounter as a student, teaching assistant,
and colleague. I am particularly indebted to David Ahn, Bob Anderson, Chris Avery, Ben Herma-
lin, Shachar Kariv, Botond Kszegi, Nolan Miller, Matthew Rabin, Martin Rotemberg, and Chris
Shannon. I also thank former teaching assistants and students whose input has improved the class.

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Important Dates
Exams are scheduled for the following dates:

Midterm Exam: October 2, 2017 [08.3009.50, in class]

Final Exam: December 13, 2017 [15.0018.00, location TBA]

Problem sets are due on the following dates:

Problem Set Date Due
1 September 11
2 September 18
3 September 25
4 October 16
5 October 30
6 November 13
7 November 27

There is a regular lecture scheduled for Friday, September 1, 2017. It will be held at 08.309.50 in
the regular location.

There are no lectures on the following dates:

Monday, September 4, 2017 (Labor Day)

Monday, October 9, 2017 (Columbus Day)

Wednesday, November 22, 2017 (Thanksgiving Recess)

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Course Calendar
The calendar may be adjusted depending on our progress. There are two types of readings. Required
readings you should attempt before class and review after class. Optional and supplemental readings may
be assigned as the course proceeds to facilitate discussion, illustrate applications, or to provide additional
context. Additional readings may be added based on class interest.

Key: = required reading. = optional/supplemental/recommended reading.

August 30
Lecture 1. Introduction / Consumer Theory 1: Preferences and Utility
MWG 1.A1.B.
Gale, David, and Lloyd S. Shapley. 1962. College Admissions and the Stability of Marriage. American
Mathematical Monthly 69(1):915.
Varian, Hal R. 1989. What Use is Economic Theory? Mimeo.
<http://people.ischool.berkeley.edu/~hal/Papers/theory.pdf>
Debreu, Gerard. 1986. Theoretical Models: Mathematical Form and Economic Content. Econometrica
54(6):12591270.
Jehle and Reny 1.11.2.
Miller Chapter 1.
Rubinstein Lecture 2.
Deaton and Muellbauer Chapter 1, 2.12.2.

September 1
Lecture 2. Consumer Theory 2: Preferences, Utility Maximization, and Walrasian Demand
MWG 3.A3.D.
Miller 3.13.3.
MWG Appendix M.K (Constrained Optimization).
Jehle and Reny 1.31.4; Appendix A2.
Rubinstein Lecture 4.

September 4
No Lecture (Labor Day)

September 6
Lecture 3. Consumer Theory 3: Walrasian Demand, Hicksian Demand, and the Slutsky Equation
MWG 3.D3.G.
Miller 3.4.
Jensen, Robert T., and Nolan H. Miller. 2008. Gien Behavior and Subsistence Consumption. Amer-
ican Economic Review 98(4):15531577.
Jehle and Reny 1.41.5.
Deaton and Muellbauer 2.32.5.

6
 Hausman, Jerry. 2003. Sources of Bias and Solutions to Bias in the Consumer Price Index. Journal
of Economic Perspectives 17(1):2344.

September 11
Lecture 4. Consumer Theory 4: Welfare, Compensating & Equivalent Variation
MWG 3.I.
Miller 3.4.
Deaton and Muellbauer 7.4.
Net Benets. The Economist, March 9, 2013.
Pennies From Heaven. The Economist, October 26, 2013.
Hausman, Jerry. 1981. Exact Consumers Surplus and Deadweight Loss. American Economic Review
71(4):662676.
Hausman, Jerry. 1997. Valuing the Eect of Regulation on New Services in Telecommunications.
Brookings Papers on Economic Activity: Microeconomics:138.
Slesnick, Daniel T. 1998. Empirical Approaches to the Measurement of Welfare. Journal of Economic
Literature 36(4):21082165.

September 13
Lecture 5. Consumer Theory 5: Revealed Preference
MWG 2.F & 3.J
Rubinstein Lectures 3 & 5.
Jehle and Reny 2.3.
Deaton and Muellbauer 2.6.
Kreps, David M. 1988. Notes on the Theory of Choice. Boulder, CO: Westview Press.
Afriat, S. N. 1967. The Construction of Utility Functions from Expenditure Data. International
Economic Review 8(1):6777.
Avery, Christopher, Mark Glickman, Caroline Hoxby, and Andrew Metrick. 2004. A Revealed Prefer-
ence Ranking of U.S. Colleges and Universities. Quarterly Journal of Economics 128(1):425467.
Choi, Syngjoo, Shachar Kariv, Wieland Mller, and Dan Silverman. 2014. Who is (More) Rational?
American Economic Review 104(6):151850.

September 18
Lecture 6. Uncertainty & Risk 1: Choice Under Uncertainty
MWG Chapter 6.
Miller Chapter 6.
Rubinstein Lectures 7 & 8.
Jehle and Reny 2.4.
Deaton and Muellbauer Chapter 14.
Ellsberg, Daniel. 1961. Risk, Ambiguity, and the Savage Axioms. Quarterly Journal of Economics
75(4):643669.

7
 Bernstein, Peter L. 1996. Against the Gods: The Remarkable Story of Risk. New York: John Wiley
& Sons.

September 20
Lecture 7. Uncertainty & Risk 2: Utility for Money
MWG Chapter 6.
Miller Chapter 6.
Jehle and Reny 2.4.
Allais, Maurice. 1953. Le comportement de lhomme rationnel devant le risque: critique des postulats
et axiomes de lcole Amricaine. Econometrica 21(4):503546.
Camerer, Colin. 1995. Individual Decision Making. Chapter 8 in The Handbook of Experimental
Economics, ed. John H. Kagel and Alvin E. Roth, 587703.
Rabin, Matthew, and Richard H. Thaler. 2001. Anomalies: Risk Aversion. Journal of Economic
Perspectives 15(1):219232.

September 25
Lecture 8. Uncertainty & Risk 3: Applications
Holt, Charles A., and Susan K. Laury. 2002. Risk Aversion and Incentive Eects. American Economic
Review 92(5):16441655.

September 27
Lecture 9. Catch-up / To Be Announced

October 2
Midterm Exam
In class, closed-book exam.
Covers all preceding lectures.
No electronics; however, non-graphing and non-programmable calculators are allowed.

October 4
Lecture 10. Theory of Production 1: Technology & Prot Maximization
MWG 5.A5.C.
Miller 5.15.2.
Jehle and Reny 3.13.2.
Coase Call. The Economist, July 29, 2017.

October 9
No Lecture (Columbus Day)

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October 11
Lecture 11. Theory of Production 2: Production Costs and Resource Allocation
MWG 5.D.
Miller 5.35.5.
Jehle and Reny 3.33.5.

October 16
Lecture 12. Exchange Economies 1: Discrete Exchange Economies and the Core
The Royal Swedish Academy of Sciences. 2012. Stable Matching: Theory, Evidence, and Practical De-
sign. <http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2012/popular-
economicsciences2012.pdf>
The Royal Swedish Academy of Sciences. 2012. Scientic Background on the Sveriges Riksbank Prize
in Economic Sciences in Memory of Alfred Nobel 2012: Stable Allocations and The Practice of Market
Design. <http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2012/
advanced-economicsciences2012.pdf>
Moulin 3.2.
Balbuzanov, Ivan, and Maciej H. Kotowski. 2017. Endowments, Exclusion, and Exchange. HKS
Faculty Research Working Paper RWP17-016.
Shapley, Lloyd S., and Herbert Scarf. 1974. On cores and indivisibility. Journal of Mathematical
Economics 1(1):2337.
Snmez, Tayfun, and M. Utku nver. 2011. Matching, allocation, and exchange of discrete resources.
2011. In Handbook of Social Economics, Volume 1A, edited Jess Benhabib, Alberto Bisin, and Matthew
O. Jackson. Amsterdam: Elsevier B.V. [Online version accessible through the Harvard Library.]
Balbuzanov, Ivan, and Maciej H. Kotowski. 2017. Endowments, Exclusion, and Exchange. HKS
Faculty Research Working Paper RWP17-016.

October 18
Lecture 13. Exchange Economies 2: The Edgeworth Box and Walrasian Equilibrium
MWG 15.A15.B.
Jehle and Reny 5.1.
Moulin 3.6.
Debreu, Gerard. 1959. Theory of Value. New Haven: Yale University Press.
<http://cowles.econ.yale.edu/P/cm/m17/m17-all.pdf>
Debreu, Gerard, and Herbert Scarf. 1963. A Limit Theorem on the Core of an Economy. International
Economic Review 4(3):235246.

9
October 20
Optional Enrichment Lecture 1. Discrete Exchange and Assignment Markets
Time & Location: 16.1518.00, Littauer L-332 (Deland Classroom) at the Kennedy School.
Abdulkadirolu, Atila, and Tayfun Snmez. 1999. House Allocation with Existing Tenants. Journal
of Economic Theory 88(2):233260.
Balbuzanov, Ivan, and Maciej H. Kotowski. 2017. Endowments, Exclusion, and Exchange. HKS
Faculty Research Working Paper RWP17-016.

October 23
Lecture 14. Exchange Economies 3: The Edgeworth Box and Walrasian Equilibrium
MWG 15.A15.B.

October 25
Lecture 15. Production Economies: The Robinson Crusoe Economy
MWG 15.C.
Jehle and Reny 5.3.
Defoe, Daniel. 1719. Robinson Crusoe.

October 30
Lecture 16. First and Second Welfare Theorems
MWG 15.B, 16.A16.C.
Jehle and Reny 5.2.

November 1
Lecture 17. Externalities and Public Goods 1
MWG 11.A11.C.
Miller 8.18.3.
Coase, Ronald. 1960. The Problem of Social Cost. Journal of Law and Economics 3:144.
Baumol, William J. 1972. On Taxation and the Control of Externalities. American Economic Review
62(3):307322.
The lives of others. The Economist, August 17, 2017.

November 3
Optional Enrichment Lecture 2. Existence of Walrasian Equilibrium
Time & Location: 16.1518.00, Littauer L-332 (Deland Classroom) at the Kennedy School.
MWG 17.A17.C.
Jehle and Reny 5.15.2.
Debreu, Gerard. 1959. Theory of Value. New Haven: Yale University Press.

10
November 6
Lecture 18. Externalities and Public Goods 2
Foley, Duncan K. 1970. Lindahls Solution and the Core of an Economy with Public Goods. Econo-
metrica 38(1):6672.

November 8
Lecture 19. Two-Sided Markets 1: One-to-one Matching
Gale, David, and Lloyd S. Shapley. 1962. College Admissions and the Stability of Marriage. American
Mathematical Monthly 69(1):915.
Moulin 3.3.
Roth, Alvin E., and Marilda A. Oliveira Sotomayor. 1990. Two-Sided Matching: A Study of Game-
Theoretic Modeling and Analysis. Cambridge: Cambridge University Press.

November 13
Lecture 20. Two-Sided Markets 2: Exchange & Quasi-linear Utility
Shapley, Lloyd S., and Martin Shubik. 1971. The Assignment Game I: The Core. International
Journal of Game Theory 1(1):111130.
Moulin 2.22.3, 3.43.5
MWG 10.A10.E, 10.G.

November 15
Lecture 21. Two-Sided Markets 3: Many-to-one Matching
Roth, Alvin E. 1985. The College Admissions Problem is Not Equivalent to the Marriage Problem.
Journal of Economic Theory 36(2):277288.
Crawford, Vincent P., and Elsie Marie Knoer. 1981. Job Matching with Heterogeneous Firms and
Workers Econometrica 49(2):437450.
Kelso, Alexander S., and Vincent P. Crawford. 1982. Job Matching, Coalition Formation, and Gross
Substitutes. Econometrica 50(6):14831504.

November 17
Optional Enrichment Lecture 3. General Equilibrium and Uncertainty
Time & Location: 16.1518.00, Littauer L-332 (Deland Classroom) at the Kennedy School.
MWG 19.A19.E.
Jehle and Reny 5.4.
Debreu, Gerard. 1959. Theory of Value. New Haven: Yale University Press.

November 20
Lecture 22. Two-Sided Markets 4: Extensions & Applications
Abdulkadirolu, Atila, and Tayfun Snmez. 2003. School choice: A mechanism design approach.
American Economic Review 93(3):729747.
Roth, Alvin E. 1984. The Evolution of the Labor Market for Medical Interns and Residents: A Case
Study in Game Theory. Journal of Political Economy 92(6):9911016.

11
 Roth, Alvin E., and Elliott Peranson. 1999. The redesign of the matching market for American
physicians: Some engineering aspects of economic design. American Economic Review 89(4):748780.
Roth, Alvin E. 2007. Market Failure and Market Design, Google Tech Talks video, 1:07:21.
<http://www.youtube.com/watch?v=4tdOY-HHC7s>
Roth, Alvin E. 2015. Who Gets WhatAnd Why: The New Economics of Matchmaking and Market
Design. New York: Houghton Miin Harcourt.

November 22
No Lecture (Thanksgiving Recess)

November 27
Lecture 23. Catch-up / To Be Announced

November 29
Lecture 24. Review & Conclusions
Debreu, Gerard. 1986. Theoretical Models: Mathematical Form and Economic Content. Econometrica
54(6):12591270.
Varian, Hal R. 1989. What Use is Economic Theory? Mimeo.
<http://people.ischool.berkeley.edu/~hal/Papers/theory.pdf>

December 13
Final Exam
Time & Location: 15.0018.00 [Location TBA]
The exam is closed book and covers the entire course.
Non-graphing and non-programmable calculators are allowed. Other electronics are not allowed.

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