Advanced MicroeconomicsII

Advanced MicroeconomicsII is the second part of a graduatelevel sequence that builds on the foundations laid in the introductory microtheory course. While the first semester typically concentrates on consumer theory, basic production theory, and the structure of competitive markets, the second semester turns to richer, more realistic environments where the standard assumptions of perfect competition, complete markets, and static equilibrium are relaxed. The course is designed for students who have already mastered the core toolboxutility maximisation, cost minimisation, duality, and general equilibriumand are ready to explore the frontiers of modern microeconomic analysis.

Core Topics

1. General Equilibrium with Incomplete Markets

One of the central questions of contemporary microeconomics is how economies function when certain statecontingent claims are missing. The syllabus covers:

• Existence and uniqueness of equilibria in economies with incomplete markets.
• Radner equilibrium and the role of financial markets in providing risksharing.
• Welfare theorems under market incompleteness and the concept of Pareto inefficiency in such settings.

2. Game Theory and Strategic Interaction

Microtheory integrates strategic behaviour through noncooperative games. Topics include:

• Extensiveform games, subgameperfect equilibrium, and the concept of backward induction.
• Repeated games and the Folk Theorem how cooperation can be sustained in infinitely repeated settings.
• Bayesian games and the role of private information in shaping equilibrium outcomes.

3. Mechanism Design and Implementation Theory

Mechanism design asks the reverse question: given a set of desired outcomes, how should a designer construct rules that induce those outcomes in equilibrium? The course examines:

• Dominantstrategy implementation and the revelation principle.
• Incentive compatibility, individual rationality, and the tradeoff between efficiency and privacy.
• Optimal auction design (firstprice, secondprice, and multiunit auctions) and revenue equivalence.

4. Information Economics

Information asymmetry is a recurring theme. Core models studied are:

• Adverse selection the classic market for lemons and its generalisations.
• Screening contractual arrangements that allow a principal to induce selfselection by agents.
• Signalling the role of costly education or warranties in transmitting private information.

5. Dynamic DecisionMaking

In many realworld settings agents face intertemporal tradeoffs. The course introduces:

• Dynamic optimisation using the HamiltonJacobiBellman equation.
• Optimal consumption and investment under uncertainty (the Merton problem).
• Dynamic games of timing, including preemptive investment and war of attrition models.

6. Behavioral and Experimental Microeconomics

While the primary focus is still on rational, utilitymaximising agents, the syllabus acknowledges deviations from the standard model:

• Prospect theory and referencedependent preferences.
• Loss aversion, mental accounting, and the endowment effect.
• Experimental evidence on fairness, reciprocity, and limited rationality.

Learning Objectives

By the end of the semester, students should be able to:

• Formulate rigorous models that incorporate market imperfections, asymmetric information, and strategic interaction.
• Prove existence and characterise the properties of equilibrium conceptsNash, subgameperfect, Bayesian, and competitive equilibriain complex environments.
• Design mechanisms that achieve desired allocation goals while respecting incentive constraints.
• Apply dynamic optimisation techniques to evaluate intertemporal choices under uncertainty.
• Critically assess empirical evidence that challenges the standard rationalagent paradigm and incorporate behavioural insights where appropriate.

Typical Course Structure

Each week is divided into two 75minute sessions: a lecture focused on theory and a discussion/tutorial where problem sets are worked through in detail. The typical weekly agenda looks like this:

1. Lecture (45min): Introduction of new concepts, formal definitions, and key theorems.
2. Short proof walkthrough (15min): Demonstration of a central proof technique (e.g., Kakutanis fixedpoint theorem, Brouwers theorem, or the envelope theorem).
3. Application showcase (15min): Realworld case studye.g., how auction design affects government revenue in spectrum sales.
4. Tutorial (75min): Guided solution of problemset questions, followed by group discussion of possible extensions.

Problem sets are released weekly and comprise a mix of analytical derivations, numerical simulations (often using MATLAB or Python), and short essays that connect theory to policy. A midterm exam tests conceptual understanding and proof skills, while the final assessment is a takehome project where students design and evaluate a mechanism for a realworld market (e.g., a matching platform for ridesharing drivers).

Key References

• MasColell, Whinston & Green Microeconomic Theory, 2nded. (1995). A comprehensive source for proofs and extensions.
• Jehle & Reny Advanced Microeconomic Theory (2011). Excellent coverage of mechanism design and information economics.
• Osborne & Rubinstein A Course in Game Theory (1994). Classic text for strategic interaction.
• Kreps, Milgrom & Roberts Selected articles on dynamic games and incomplete markets.
• Kahneman & Tversky Foundational papers on prospect theory for the behavioural module.

Typical Research Themes Emerging from the Course

Students who complete Advanced MicroeconomicsII often continue to investigate topics such as:

• Design of emissionstrading schemes that balance efficiency with political feasibility.
• Optimal regulation of platform markets where network effects generate natural monopolies.
• Dynamic contract theory for labor markets with onthejob learning.
• Experimental tests of auction formats in digital advertising.
• Behavioural extensions of general equilibrium models that incorporate bounded rationality.

Sample Course Outline (14Weeks)

Week	Topic
1	Review of static general equilibrium; introduction to market incompleteness.
2	Radner equilibrium and existence proofs.
3	Welfare analysis under incomplete markets.
4	Extensiveform games; subgame perfection.
5	Repeated games and the Folk Theorem.
6	Bayesian games and signaling.
7	Midterm exam.
8	Mechanism design fundamentals; the revelation principle.
9	Optimal auction theory; revenue equivalence.
10	Screening and contract design.
11	Dynamic optimisation basic HJB equation.
12	Dynamic games of timing; strategic investment.
13	Behavioural foundations prospect theory and experimental evidence.
14	Student presentations of final projects.

Why Study Advanced MicroeconomicsII?

Modern economies are characterised by intricate financial systems, digital platforms, and policy environments that cannot be captured by simple competitivemarket models. The tools learned in Advanced MicroeconomicsII equip students to:

• Analyse how strategic behaviour shapes market outcomes.
• Design policies and institutions that improve welfare in the presence of information problems.
• Apply rigorous mathematical methods to realworld economic problems, from environmental regulation to technology markets.
• Bridge the gap between abstract theory and empirical research, preparing students for Ph.D. programmes or analytical roles in industry.

Contact and Further Information

For detailed syllabus, reading list, and enrollment instructions, please contact the Department of Economics or visit the graduate programme website. Prospective students are encouraged to review prerequisite materialespecially the proofs of fixedpoint theorems and basic dualitybefore enrolling.

Understanding the strategic foundations of market design is not a luxury; it is a necessity in a world where policies are increasingly implemented through complex mechanisms. Professor A.N. Economist

We look forward to exploring the rich landscape of modern microeconomic theory together.