This is an archived course. A more recent version may be available at ocw.mit.edu.
Lectures: 2 sessions / week, 1.5 hours / session
Recitations: 1 session / week, 1 hour / session
Microeconomic Theory III is a half-semester course. This course covers the topics in Microeconomic Theory that everybody with a Ph.D. from MIT Economics Department should know but have not yet been covered in the Micro sequence. Hence, it covers several unrelated topics. I will try my best to put them in a coherent narrative, but there will be inherent jumps from topic to topic. More importantly for you, it is not possible to use a single textbook. To alleviate the problem, I will refer to the textbooks that are used in other parts of the sequence as much as it is possible, and I will fill the remaining gaps with lecture notes and few articles.
14.121, 14.122, and permission of instructor.
There are three main texts used in this course:
Mas-Colell, Andreu, Michael Whinston, and Jerry Green. Microeconomic Theory. New York, NY: Oxford University Press, 1995. ISBN: 9780195073409.
Kreps, David. A Course in Microeconomic Theory. Princeton, NJ: Princeton University Press, 1990. ISBN: 9780745007625.
Fudenberg, Drew, and Jean Tirole. Game Theory. Cambridge, MA: MIT Press, 1991. ISBN: 9780262061414.
The topics come from three general areas:
Behavioral Economics involves both single-person decision problems, as in Decision Theory, and multi-person decision problems as in Game Theory. Accordingly, I will present the behavioral economics topics under the other two topics. Given the length of the course, I will be able to present these topics only as examples of how one can enrich the theory by incorporating behavioral issues.
The Decision Theory section is based on Chapter 6 of Microeconomic Theory. Since this text does not do any justice to subjective expected utility maximization, I will also provide lecture notes on that subject. Savage’s own book (The Foundations of Statistics) is probably the best and clearest source available in the topic. I will conclude with three topics from Behavioral Decision Theory: Rabin’s critique of Expected Utility Theory, Prospect Theory, and Hyperbolic Discounting.
The Game Theory section is more eclectic. In that part I will introduce some important ideas in theory, such as reputation formation, as well as important applications of Game Theory, such as collusion and bargaining. As examples of application of important behavioral ideas in Game Theory, I will present optimism and hyperbolic discounting in bargaining.
| ACTIVITIES | PERCENTAGES |
|---|---|
| Problem sets | 40% |
| Final exam | 60% |
| LEC # | TOPICS | KEY DATES |
|---|---|---|
| Part I: Decision theory | ||
| 1 | Choice theory: a synopsis | |
| 2 | Decision making under risk | |
| 3 | Decision making under uncertainty | Problem set 1 due |
| 4 | Attitudes towards risk | |
| 5 | Attitudes towards risk: applications, stochastic dominance | |
| 6 | Critiques of expected utility theory | Problem set 2 due |
| Part II: Game theory | ||
| 7 | Rationalizability | |
| 8 | Correlated and sequential equilibria | Problem set 3 due |
| 9 | Reputation formation | |
| 10 | Collusion under imperfect price information | Problem set 4 due |
| 11 | Final exam | |
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