Frank Cowell: EC202 Revision Lecture REVISION LECTURE EC202 9 th May 2013 Frank Cowell May 2013 1.

Frank Cowell: EC202 Revision Lecture

REVISION LECTUREEC202http://darp.lse.ac.uk/ec202

9th May 2013Frank Cowell

May 2013 1

http://darp.lse.ac.uk/ec202


Overview...

Styles of question

Doing short questions

Doing long questions

Revision lecture

How to see what you need to do

May 2013 2


Objectives of the lecture A look back at Term 1 Exam preparation Reference materials used (1)

• Exam papers (and outline answers)• 2008 1(b) • 2009 1(c) • 2010 1(a) • 2011 1(a), 3• 2012 4

Reference materials used (2) • CfD presentations 3.4, 5.7• Related to past exam questions

May 2013 3


The exam paper Scope of exam material

• what’s covered in the lectures…• … is definitive for the exam

Structure and format of paper• same as that of last two years• (there was a change from 2010 to 2011)• only 3 long questions in each of parts B and C

Mark scheme• 40 marks for question 1 (8 marks for each of the five parts)• 20 marks for each of the other three questions• multipart questions: marks per part shown on the exam paper

May 2013 4


Question style – three types 1 Principles

• reason on standard results and arguments• can use verbal and/or mathematical reasoning

2 Model solving• a standard framework• you just turn the wheels

3 Model building• usually get guidance in the question• longer question sometimes easier?

One type not necessarily “easier” or “harder” than another • part A (question 1) usually gets you to do both types 1 and 2• type 3 is usually only in parts B and C of paper

Examples from past question 1

Examples from past question 1

May 2013 5


Overview...

Styles of question



Revision lecture

How to tackle the main types of question

May 2013 6


2009 1(c)

Straightforward “principles” question

Just say what you need to say

May 2013 7


2010 1(a) Straight “principles” Be sure to read the question carefully Be sure to give your reasons

May 2013 8


2010 1(a)

May 2013 9


2011 1(a) A simple model Be sure to draw a

diagram… …and think

May 2013 10


2011 1(a)

May 2013 11


2008 1(b) Principles and model-solving Write down the principle Write down the basics of the model

WARP can be stated simply in terms of “affordability” To check whether week 2’s bundle can be afforded at week 1’s

prices (etc. etc.) we need to write down the costs Check the on-line answers for the (short) detailed reasoning…

May 2013 12


2011 3

Stating principles can come up in long questions Don’t ignore them in a rush to get to the model! There are sometimes easy marks just writing down the definition… …and then you can apply it to the problem

May 2013 13


Overview...

Styles of question



Revision lecture

How to do well in exams

May 2013 14


Planning Answers What’s the point?

• take a moment or two...• …make notes to yourself • what is the main point of the question?• and the subpoints?

See the big picture• balance out the answer• imagine that you’re drawing a picture• if pressed for time, don’t rush to put in extra detail…• …you can go back

Be an economist with your own time• don’t solve things twice!• reuse results• answer the right number of questions!!!

May 2013 15


Tips Follow the leads

• examiners may be on your side!• so if you’re pointed in the right direction, follow it…

Pix• help you to see the solution• help you to explain your solution to examiner

What should the answer be?• take a moment before each part of the question• check the “shape” of the problem• use your intuition

Does it make sense?• again take a moment to check after each part• we all make silly slips

May 2013 16


Long questions Let’s look at examples

• taken from exercises in the book• but of “exam type” difficulty• covered in CfD

Illustrates two types of question• Ex 3.4, 5.7 is straight model solving• 2012 Q4 incorporates some model building

Look out for tips• use pictures to clarify solution• following hints inEx 3.4

May 2013 17


Overview...

Styles of question



Revision lecture

A problem about price control

May 2013 18

•Preparing and planning•CfD 5.7•2012 Q4•CfD 3.4


Ex 5.7: Question

purpose: Illustration of labour supply model with very simple preferences

method: Consumer optimisation with endogenous budget constraint

May 2013 19


Ex 5.7: Worker’s problem

Basic constraints on worker are

• x is consumption• `y is non-labour income• w is wage rate• ℓ is labour supply

Worker’s problem can therefore be written as

• found by substituting from above into utility function

May 2013 20


Ex 5.7: Worker’s optimum

Take log of maximand to get• a log(wℓ +`y) + [1 a] log(1 ℓ)

Differentiate with respect to ℓ

This is zero if• wℓ + aw + [a 1]`y = 0• which implies ℓ = a + [a 1]`y / w

But this only makes sense if ℓ is non-negative• requires w ≥ [1 a]`y / a• so optimal labour supply is

May 2013 21


Ex 5.7: Interior maximum(leisure, consumption)-space

Max value of leisure

Non-labour income

Budget constraint

x

1 ℓ0

Indifference curves

1

`y

Optimum

1 ℓ*

slope = w

w ≥ [1 a]`y / a 0 < ℓ* < 1

May 2013 22


Ex 5.7: Corner solution

Non-labour income

Budget constraint

x

1 ℓ0

Indifference curves as before

1

`y

Optimum

•

w < [1 a]`y / a ℓ* = 0

May 2013 23


Ex 5.7: Points to note

Treat leisure as a conventional goodHas a natural upper bound

• where labour is zeroHave to allow for corner solution

• where person chooses not to workType of equilibrium depends on

• wage rate• non-labour income

May 2013 24


Overview...

Styles of question



Revision lecture

Modelling choice under uncertainty

May 2013 25



2012 Q4 (a)

May 2013 26


2012 Q4 (b)

May 2013 27


2012 Q4 (c)…

May 2013 28


…2012 Q4 (c)

May 2013 29


2012 Q4 (d)

May 2013 30


2012 Q4 (e)

May 2013 31


2012 Q4 (f)

May 2013 32


2012 Q4 assessment

It seems like a long question• broken into digestible pieces• makes model-building easier• shows you exactly what to do, stage by stage• important message….

“long” “difficult” Core of problem involves elementary things

• carefully specify budget constraint in each part of the Q• plug into simple utility function• use FOC to get result• applies to parts (b)—(e)

Finishing off• final part just involves simple differentiation of the solution• don’t forget the “explain why” in part (e)• see also Ex 8.12

May 2013 33


Overview...

Styles of question



Revision lecture

Modelling choice under uncertainty

May 2013 34



Ex 3.4(1) Question

purpose: to derive competitive supply function method: derive AC, MC

May 2013 35


Ex 3.4(1) Costs

Integrate MC to get total cost

Divide by q to get average costs

Differentiate to find minimum AC at

Average costs at this point are

If price is above this level find equilibrium where price = MC:

Solving this we get

May 2013 36


Ex 3.4(1): Firm’s supply curve

q q

a+bq

F0/q+a+0.5bq

p a—— bq*=

p

Average cost

Marginal costSupply of output

Relation between price & output

May 2013 37


Ex 3.4(2) Question

purpose: to derive monopolist’s solution method: derive AR, MR

May 2013 38


Ex 3.4(2) Monopolist’s equilibrium

Given the demand curve total revenue is Aq ½Bq2

So, MR is

Monopolist’s FOC (MR=MC)

Solving for q we get

And from this we have

May 2013 39


q

Ex 3.4(2): Monopoly output and price

A 0.5bq

P

q**

p**

c**

A bq

a+bq

F0/q+a+0.5bq

AC and MC curves

Demand (average revenue)Marginal revenue

Profit-maximising outputMC and price at q**

May 2013 40


Ex 3.4(3) Question

purpose: to derive modified monopoly solution method: derive modified AR, MR – watch for discontinuity!

May 2013 41


Ex 3.4(3) Regulated monopolist

Price ceiling alters the effective demand curve So AR is now:

Multiply by q and then differentiate to get MR:

MR is discontinuous, exactly where AR is kinked Effect of price ceiling depends on position of MC relative

to this discontinuity

May 2013 42


q

Ex 3.4(3): High price ceiling

q**

p**

c**

AC and MC curves


Profit-maximising outputMC and price at q**

high ceiling: no effect on equilibrium

May 2013 43


q

Ex 3.4(3): Low price ceiling

q**

p**

c**

AC and MC curves


Profit-maximising output

Low ceiling : equilibrium at reduced output q0

price = MC = price ceiling

q0

May 2013 44


q

Ex 3.4(3): Medium price ceiling (i)

q**

p**

c**

AC and MC curves



Medium ceiling : eqm at increased output q0

q0

May 2013 45


q

Ex 3.4(3): Medium price ceiling (ii)

q**

p**

c**

AC and MC curves



Medium ceiling: eqm at increased output again

q0

May 2013 46


Ex 3.4: Points to remember

Make good use of a diagram to “see” the problemRe-use the solutions

• one part of the problem… • …helps to build the next.

Don’t be fazed by the presence of a discontinuity• everything is nice and regular either side of it.

May 2013 47

Frank Cowell: EC202 Revision Lecture REVISION LECTURE EC202 9 th May 2013 Frank Cowell May 2013 1.

Documents

Transcript of Frank Cowell: EC202 Revision Lecture REVISION LECTURE EC202 9 th May 2013 Frank Cowell May 2013 1.