MICROECONOMIC THEORY | TEK135 |

**Aim**

The aim of the course is to give the students an understanding of modern microeconomic theory, consisting of the theory of consumtion and production, the theory of oligopoly and its game theoretic foundations and parts of the theory of financial markets.

*Knowledge and understanding*

For a passing grade the student must

- have acquired the theory of individual choice, both under certainty and uncertainty, so that the student is able to explain it in an accessible manner
- be able to translate competitive situations to formalized games
- be able to separate equilibrium pricing from pricing based on the absence of arbitrage.

*Skills and abilities*

For a passing grade the student must

- be able to formulate and solve utility maximization problems for individuals as well as cost minimization problems and profit maximization problems for firms
- be able to account for the decision-making problem facing an individual when the outcome of the decision is uncertain
- be able to analyse a simple situation of oligopoly and, using game theory, identify probable outcomes
- be able to analyse basic problems of portfolio choice
- be able to calculate the arbitrage free price of European options.

*Judgement and approach*

For a passing grade the student must

- be able to apply rudimentary principles for analysing the economic consequences of different alternatives
- be able to assess arguments on probable effects of different alternatives on a market regarding competition and pricing
- be able to assess the importance of risk sharing diversification using financial instruments

**Contents**

The course starts with the basis of the theory of individual choice; choice under uncertainty is treated separately. After analyzing general equilibrium in an economy, the course also provides an application on financial and insurance problems. Firms and technologies are modelled. The dual approach to production theory is defined and applied to efficiency analysis of economic units. Game theoretic solution methods are defined and used to analyse firmsÂ’ strategic quantity and price setting problems on markets with a small number of agents. The course also contains an introduction to financial economics; among other things the theory of portfolio choice and equilibrium pricing of financial assets are discussed along with arbitrage free pricing of derivatives.

**Literature**

Varian, H.R. (2005) Intermediate Microeconomics, W.W. Norton & Company.

Lecture notes.