MICROECONOMICS 2

This core course serves as a critical component of the advanced study of economics within the QEM Master’s program, equipping students with the knowledge and skills necessary to analyze complex issues in microeconomics. The course is divided into two parts: the first introduces graduate-level formal strategic reasoning, emphasizing the ability to model and analyze strategic interactions, which are essential for understanding competitive and cooperative behaviors. The second part explores economic situations characterized by asymmetric information, examining its implications in market transactions and contractual relationships, and highlighting the role of information in economic decision-making.

The course offers both an introduction to game theory, regarded as the scientific framework for analyzing strategic interactions, and an exploration of key economic concepts such as the theory of insurance, agency theory, adverse selection, and moral hazard. Unlike the university-wide policy that equates 1 ECTS with 3.75 hours of direct instruction, this 7-ECTS course follows a different structure, with 1 ECTS corresponding to 6.43 hours of frontal instruction.

a) Knowledge and Understanding:
a.1) Demonstrate the ability to construct formal models of strategic interactions.
a.2) Understand and articulate different equilibrium solution concepts.
a.3) Conceptualize the role of randomization in strategic decision-making.
a.4) Develop formal models of decision-making under uncertainty.
a.5) Understand and articulate the significance of information in economic analysis.

b) Applying Knowledge and Understanding:
b.1) Compute various equilibrium solution concepts in different strategic settings.
b.2) Formulate and apply formal models of strategic interactions.
b.3) Integrate randomization techniques into strategic decision-making models.
b.4) Solve optimization problems under uncertainty.
b.5) Construct formal models of equilibrium across different market structures.

c) Making Judgments:
c.1) Identify and critically evaluate trade-offs in strategic decision-making.
c.2) Assess and rank the plausibility of different predictions regarding strategic interactions.
c.3) Recognize and analyze trade-offs in decision-making under risk and in markets with asymmetric information.

d) Lifelong Learning Skills:
d.1) Develop the ability to analyze issues from the perspective of different stakeholders.
d.2) Reformulate economic problems by considering alternative initial assumptions.
d.3) Adapt to new analytical tools and continuously refine problem-solving competencies.

This course emphasizes both the formal representation of economic problems and the practical applications of theoretical concepts. While there are no formal prerequisites, students are strongly encouraged to have successfully completed standard undergraduate courses in microeconomics, optimization, and probability to maximize their understanding and engagement with the material.

PART A: Game Theory
The first part of the course provides a comprehensive introduction to game theory. Students will be introduced to key solution concepts, fundamental results, and the methodological principles that have shaped the development of the field. The course is structured around three primary game representations:
- Games in normal form.
- Games in extensive form (with perfect and imperfect information).
- Games with incomplete information.

A selected set of solution concepts will be covered, including:
- Strategic dominance.
- Nash equilibrium.
- Subgame perfect Nash equilibrium.
- Bayesian equilibrium.
- (Weak) perfect Bayesian equilibrium.

PART B: Information Economics
The second part of the course focuses on selected topics in the economics of information. Key topics include:
- Adverse selection.
- Signaling.
- Competitive screening.
- Principal-agent models with hidden actions (moral hazard) and hidden characteristics (monopolistic screening).

Depending on time constraints, additional topics such as an introduction to Auction theory and Cheap-talk models may also be explored.

PART A: Game Theory
- Analysis of Conflict by Roger B. Myerson (1991), Harvard University Press.
- Microeconomic Theory by Mas-Colell, Whinston and Green (1995), Oxford University Press.
- Game Theory by Michael Maschler, Eilon Solan, and Shmuel Zamir (2013), Cambridge University Press.

Part A does not strictly follow any one of these three textbooks; rather, it combines presentation elements from all of them. However, for students looking to purchase a book to complement their lecture preparation, *Game Theory* by Eilon et al. (2013) offers an appealing mix of rigor and illustrative examples.

PART B: Information Economics
- Geoffrey Jehle, and Phil Reny (2010), Advanced Microeconomic Theory, Prentice Hall.
- Krishna, Vijay (2010), Auction Theory, Academic Press. Second Edition.
- Mas-Colell, A., M. Whinston and J. Green (1995), Microeconomic Theory, Oxford University Press (henceforth, MWG).
- Salanie, Bernard (2005), The Economics of Contracts: A Primer, 2nd Edition, MIT Press

The first exam session will consist of two 90-minute midterm exams, each corresponding to one part of the course (Part A or Part B). The final grade will be determined by the simple average of the scores obtained in both midterm exams. Each exam will assess both general comprehension of the theory through theoretical questions and the ability to solve practical problems. All exams are closed-notes and closed-book. Failure to register for the exam will result in denial of admission to the session.

Subsequent exam sessions will involve a two-hour exam that covers the entire course content. Each exam will test general comprehension of the theory through theoretical questions and the ability to solve practical problems. These exams are also closed-notes and closed-book. Failure to register for the exam will result in denial of admission to the session.

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Grades are assigned on a scale from 0 to 30, with a minimum passing grade of 18. Grades between 18 and 22 indicate a satisfactory but basic understanding of the course content, while grades between 23 and 26 reflect a good understanding of the material. Grades between 27 and 30 demonstrate a very good to excellent grasp of the material. A grade of 30L may be awarded at the instructor's discretion for exceptional performance by the student.

Teaching will be delivered through fifteen lectures for each of the two parts of the course. Additionally, students will have the opportunity to attend five supplementary lessons for each part, where a teaching assistant will assist in solving selected exercises that are distributed in advance.

The course is attended by both QEM students and first-year doctoral students. Lectures are shared by both groups. However, doctoral students may be required to independently study more advanced material on selected topics.