Revision Lecture

Frank Cowell: EC202 Revision Lecture

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

1st May 2014Frank Cowell

May 2014 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 2014 2


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

• Exam papers (and outline answers)• 2009 1(c) • 2010 1(a) • 2011 1(a), 3• 2012 4• 2013 1(c)

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

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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 three 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

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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

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Overview...

Styles of question



Revision lecture

How to tackle the main types of question

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2009 1(c)

Straightforward “principles” question

Just say what you need to say

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

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2010 1(a)

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

diagram… …and think

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2011 1(a)

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2013 1(c) Principles and model-solving Write down the principle Write down the basics of the model and solve

Use standard definition of expected utility and variance Define ARA Differentiate u Evaluate ARA Multiply by x to get RRA

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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

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Overview...

Styles of question



Revision lecture

How to do well in exams

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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!!!

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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

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Long questions Let’s look at examples

• taken from past papers • also from exercises in the book 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 in Ex 3.4

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Overview...

Styles of question



Revision lecture

A problem about price control

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•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

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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

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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

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Ex 5.7: Interior maximum(leisure, consumption)-spaceMax value of leisure

Non-labour incomeBudget constraint

x

1 ℓ0

Indifference curves

1

`y

Optimum

1 ℓ*

slope = w

w ≥ [1 a]`y / a 0 < ℓ* < 1

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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

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Ex 5.7: Points to noteTreat 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

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Overview...

Styles of question



Revision lecture

Modelling choice under uncertainty

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2012 Q4 (a)

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2012 Q4 (b)

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2012 Q4 (c)…

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…2012 Q4 (c)

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2012 Q4 (d)

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2012 Q4 (e)

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2012 Q4 (f)

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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

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Overview...

Styles of question



Revision lecture

Modelling choice under uncertainty

May 2014 34



Ex 3.4(1) Question

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

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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

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Ex 3.4(1): Firm’s supply curve

q q

a+bq

F0/q+a+0.5bq

p a—— bq*=

p

Average costMarginal costSupply of outputRelation between price & output

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Ex 3.4(2) Question

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

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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

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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 curvesDemand (average revenue)Marginal revenueProfit-maximising outputMC and price at q**

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Ex 3.4(3) Question

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

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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

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q

Ex 3.4(3): High price ceiling

q**

p**

c**

AC and MC curvesDemand (average revenue)Marginal revenueProfit-maximising outputMC and price at q**

high ceiling: no effect on equilibrium

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q

Ex 3.4(3): Low price ceiling

q**

p**

c**

AC and MC curvesDemand (average revenue)Marginal revenueProfit-maximising output

Low ceiling : equilibrium at reduced output q1

price = MC = price ceiling

q1

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q0


q

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

q**

p**

c**


Medium ceiling : eqm at increased output q2

q2

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q0


q

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

q**

p**

c**


Medium ceiling: eqm at increased output again

q0

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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.

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Revision Lecture

Documents

Transcript of Revision Lecture