Economics 4111

Professor: John Nachbar

Spring 2014

Optimization and Economic Theory

Syllabus
1

Introduction.

Two mathematical topics, optimization and equilibrium, lie at the foundation of

much of modern economic research. Econ 4111 provides an introduction to optimization.
Econ 4111 covers material from Econ 508 (a three week intensive course on finite
dimensional optimization and related topics taught to incoming economics graduate
students), Econ 511 (a course in analysis tailored to incoming economics graduate
students), and from the first-year graduate core microeconomics theory courses.
Obviously, I cannot compress all of these graduate courses into one undergraduate
course. Instead, Econ 4111 picks and chooses topics, generally focusing on topics
that are foundational. I discuss the organization of the course in greater detail
below.
One aspect of the course bears emphasis: the course is rigorous in a definitiontheorem-proof sense. Almost without exception, if I need a mathematical result,
then I prove it, if not in class (because of time constraints), then in the notes. If
you have not taken Math 4111 then you may not have seen sustained, rigorous
mathematical argument at this level of abstraction before. My experience is that
students come to like it, even love it, but it may be very dierent from what you
are used to.
A related comment is that on a spectrum that has economics at one end and
mathematics at the other, this course lies very close to the mathematics end of
the spectrum. There will be some economics but weeks may pass where the material
is almost entirely mathematical. This is intrinsic to the basic nature of the material.
Econ 4111 is intended to make first year graduate school easier. But it wont
make graduate school easy. Graduate courses are fast paced, homework can be
burdensome, the material can be challenging even if you already know the math,
tests can be difficult, competition is keen, and grading is exacting.
Finally, while Econ 4111 has some overlap with Math 310, 4111, and 4121, the
Math Departments set theory and analysis sequence, Econ 4111 is a complement to,
not a substitute for, these courses. Students applying to economics PhD programs,
especially top programs, should take analysis from the Math Department. You may,
however, find that this course makes the analysis sequence easier.

Prerequisites.

Econ 4111 requires three semesters of calculus, a semester of matrix algebra, and
Econ 4011 (intermediate micro). Note that this level of math is the minimum
required for nearly any PhD program. Although not officially a prereq, Math 318
is (depending on how it is taught) probably the ideal prereq. In general, the more
math you have, the easier this course will be. On the other hand, if you already
have a great deal of math then parts of this class, especially the first quarter, will
be review.

Requirements.

There will be homework, more or less weekly, and two exams, a midterm and a final.
Your grade will be a weighted average of the midterm and the final and homework. Homework will count for 10% of your grade. For the exams, I use more than
one weighting scale. Roughly put, if you ace the final you ace the course, regardless
of how you did on the midterm; if you bomb the final but ace the midterm then the
midterm will help your overall grade but I do not drop the final.
Tentatively, the date for the midterm is Wednesday, March 5, in class, before
spring break. The final will be at the place, date, and time assigned by Brookings:
May 5, 10:30-12:30, probably in this room.
Homework will typically be due in class on Monday.

4
4.1

Texts.
The Main Text.

There is no required text. I have made Mas-Colell, Whinston, and Green (1995)
the main text, but it is optional. It is the standard text for first year graduate
micro classes. But this course will focus more on tools than applications, and so the
overlap will be mostly with the appendices of MWG rather than its body. Students
have told me that they would rather have Mas-Colell, Whinston, and Green (1995)
than no text at all. I have my own notes for most of this material, and I will post
these online.

4.2

Supplemental Texts.

I am including the following texts by way of reference. There is no expectation that

you will look at any of them this semester. But I will have a few of them put on
reserve.

4.2.1

Graduate Microeconomic Theory.

The main competitor for Mas-Colell, Whinston, and Green (1995) is now Kreps
(2012). The latter is actually just the first volume of a multivolume text. The first
volume covers topics in decision theory and competitive demand. Other standard
texts are Jehle and Reny (2000) and Varian (1992). All of these books have their
pluses and minuses. Mas-Colell, Whinston, and Green (1995) is comprehensive but
it can be just too much: too much material, too concise, and too technical. It seems
to work better as a reference than as a text. So you may find the other books
useful on a first pass. Kreps (2012) is particularly good for its rigorous development
of decision theory. Varian (1992) is good for basic consumer and producer theory.
Jehle and Reny (2000) is good for game theory (irrelevant, however, for Econ 4111).
4.2.2

Mathematics for Economists.

Within the last 15 years, a number of analysis for economists texts, written by
economists for courses more or less like this one, have appeared. These include
Corbae, Stinchcombe, and Zeman (2009), Ok (2007), Carter (2001), and de la Fuente
(2000). In addition, there are online notes. One particularly comprehensive and
ambitious set of online notes, from Truman Bewley at Yale is,
http://www.econ.yale.edu/graduate/mathcamp/index.htm
These notes cover far more material than I do. Chris Shannon (Berkeley) has a nice
set of notes, available here
http://elsa.berkeley.edu/users/cshannon/e204_11.html
And Leo Simon (also Berkeley) has nice notes here
http://are.berkeley.edu/courses/ARE211/currentYear/
These texts and notes are in addition to the more traditional, optimization
centric, math for economists texts, such as Simon and Blume (1994), Sundaram
(1996), and Novshek (1993). Intriligator (2002) is older and more elementary but I
find it useful. And Takayama (1985) is an encyclopedic tour of a very large number
of topics in classical mathematical economics.
Texts such as de la Fuente (2000) and Sundaram (1996) devote considerable
space to dynamic optimization. An older text on dynamic optimization is Kamien
and Schwartz (1991). Chiang (1992) is popular with students but has some technical
problems. Stokey, Lucas Jr. , and Prescott (1989) is the classic reference for dynamic
optimization in discrete settings.

4.3

Other Texts.

There are a number of basic analysis texts. I tend to rely on Rudin (1976), which
is the book used in my analysis course years ago and still seems to be the modal
choice for analysis courses today. My favorite introduction to general topology is
Munkres (1999).
On convexity, the classic reference is Rockafellar (1970). It is also a classic cite
for finite dimensional optimization. But you may find it difficult.
For optimization, both finite and infinite dimensional, the classic (but advanced)
text is Luenberger (1969).

Outline.
1. Existence of an Optimum. The basic existence result is that a continuous
real-valued function with a compact domain has a maximum. To understand
this statement, let alone prove it, you need to know quite a bit about metric
spaces. I will develop the required mathematical machinery in detail, both
to handle the existence theorem and because the machinery itself has wide
application. There is substantial overlap between this part of the course and
Math 4111.
2. Finite Dimensional Optimization. The principal results are the Karush-KuhnTucker Theorem and the Envelope Theorem. In the course of covering this
material, I cover material on vector analysis, and some material on convexity,
including the basic (finite dimensional) support and separation theorems. The
vector analysis material will be review if you have taken Math 318. You will
have seen Lagrange multipliers in Math 233, Econ 4011, and (if you took it)
Econ 493. Otherwise, however, this material will be largely new.
3. Applications. I will decide later in the semester what material to plug into
this section. In the past, I have covered material drawn from basic decision
theory (MWG Chapter 1), basic utility theory and competitive consumer theory (MWG Chapters 1-3), competitive producer theory (MWG Chapter 5),
efficiency and competitive equilibrium (MWG Chapter 10, 16), and simple
agency and screening models (MWG Chapter 14). We cannot do all of this.
There may be some overlap between some of this material and Econ 4011, but
most of it, and perhaps all of it, will be new to you.
4. Dynamic Optimization. I discuss optimization for both finite horizon and
infinite horizon dynamic optimization problems. This subject could merit a
course on its own; I will provide only an introduction. This material is likely
to be almost entirely new to you.

Help.

My office hours (subject to change) are Tuesdays and Thursdays, 1:30-3 PM in

Seigle 386. Ill also probably be available right after class, although that will vary
from day to day. We can also meet by appointment. To arrange a time, e-mail me
at: [email protected].
I stress that I want to meet with you if you are having difficulty, or if you simply
want to talk about some aspect of the course, or about anything else (e.g., applying
to graduate school).
Our TA is Mushegh (Mush) Harutyunyan. His office hours are TBD.

References
Carter, M. (2001): Mathematical Economics. MIT, Cambridge, MA.
Chiang, A. (1992): Elements of Dynamic Optimization. McGraw-Hill, New York,
NY.
Corbae, D., M. B. Stinchcombe, and J. Zeman (2009): An Introduction to
Mathematical Analysis for Economic Theory and Econometrics. Princeton University Press.
de la Fuente, A. (2000): Mathematical Methods and Models for Economists.
Cambridge University Press, Cambridge, UK.
Intriligator, M. (2002): Mathematical Optimization and Economic Theory.
SIAM, .
Jehle, G. A., and P. J. Reny (2000): Advanced Microeconomic Theory. Adison
Wesley, Boston, 2d edn.
Kamien, M., and N. Schwartz (1991): Dynamic Optimization: The Calculus of
Variations and Optimal Control in Economics and Management. Elsevier Science,
New York, NY.
Kreps, D. M. (2012): Microeconomic Foundations I: Choice and Competitive Markets. Princeton University Press.
Luenberger, D. G. (1969): Optimization by Vector Space Methods. Wiley, New
York.
Mas-Colell, A., M. Whinston, and J. Green (1995): Microeconomic Theory.
Oxford University Press, New York.
Munkres, J. R. (1999): Topology. Prentice Hall, Englewood Clis, NJ, 2d edn.

Novshek, W. (1993): Mathematics for Economists. Norton, New York, NY.

Ok, E. A. (2007): Real Analysis with Economic Applications. Princeton University
Press.
Rockafellar, T. (1970): Convex Analysis. Princeton University Press, Princeton,
NJ.
Rudin, W. (1976): Principles of Mathematical Analysis. McGraw-Hill, New York,
third edn.
Simon, C. P., and L. Blume (1994): Mathematics for Economists. W. W. Norton,
New York.
Stokey, N., R. Lucas Jr. , and E. Prescott (1989): Recursive Methods in
Economic Dynamics. Harvard University Press, Cambridge, MA.
Sundaram, R. K. (1996): A First Course in Optimization Theory. Cambridge
University Press, Cambridge, UK.
Takayama, A. (1985): Mathematical Economics. Cambridge University Press,
Cambridge, UK, second edn.
Varian, H. R. (1992): Microeconomic Analysis. Norton, New York, third edition
edn.