Economics 811 Questions
- (a) Is it possible to have a situation of general equilibrium without having all individual optimality conditions fulfilled? Explain.
(b) Is it possible to have all individual optimality conditions fulfilled without the state of the system as a whole being Pareto optimal? Explain.
- The concept of marginal utility is subject to the objection that it implies a numerical measurement of total utility. How can we overcome this difficulty? Translate into terms which do not involve the cardinal measurement of utility:
(a) The law of diminishing marginal utility.
(b) The Pareto optimality condition that the ratio of the marginal utilities of two goods must equal for all individuals in a free-exchange economy.
- Sketch the indifference curve mappings implied by each of the following. Show the preference directions in each case:
(a) “I like to spend hours at the beach. I’d like it even more if I remembered to bring my suntan oil.”
(b) “I don’t care whether I eat steak or lobsters.”
(c) “I’d pay anything not to take this test.”
- Soviet planners do use open markets to permit relative prices to influence resource allocation. Briefly explain the role of prices in an economic system and the possible effects of restricting the role of prices.
- In a situation with two commodities, X and Y, and starting with an individual’s interior (non-corner) endowment, derive his demand curve for commodity X. Is the demand curve derived one with real income constant in the Hicksian or Slutsky sense? First, however, explain the Hicksian versus Slutsky demand curves.
- In the present real world we seldom observe “market clearing” prices. Sometimes we even observe zero prices. How can you account for these two phenomena that appear to contradict economic theory?
- Imagine a community of individuals engaging in private production but where the idea of market exchange had not yet been discovered. Explain analytically the nature of the gains available after the discovery of exchange possibilities. Would every member of the community benefit, or might some be harmed as a result of the discovery?
- What is an income-compensated demand curve? Carefully derive one graphically. How does it differ from an ordinary demand curve? For a normal good, which of the two curves is more elastic? Why? What might be an empirical use of an income-compensated demand curve?
- Imagine a community of two individuals. Individual A’s endowment shows him rich in good X and relatively poor in good Y. Individual B’s endowment is just the opposite. Heretofore unknown exchange opportunities become available and known and the exchange rate for good X and Y that appears (it matters none to you from whence this exchange rate come) is equal to neither A nor B’s subjective exchange rate. Explain analytically the nature of the gains from exchange. Would each member of the community benefit from exchange or is there a possibility that a lose might be incurred? Why?
- “Since 1900 real income has increased tremendously, yet the average number of children per family has decreased.” Consider the following possible explanations, and graphically illustrate in terms of market opportunities and indifference curves between the number of children (x) and all other goods (y). Children are inferior goods; since we are richer we want fewer of them. (b) Children are not inferior goods; however, it has become more expensive to bear and raise children. (c) Children are not inferior goods, nor have they become relatively more expensive. What has happened is that tastes have changed.
- Evaluate. “Chinese labor is far less productive than American labor as evidenced by the fact that it takes so of it to get jobs done. One the other hand, American wheat land is less fertile than wheat land in Europe (e.g., France) as evidenced by the lower yield per acre in the United States.”
- Explain the following accurate statement: The gain from search activity is related to the dispersion of prices charged by different sellers. The gain is also related to the fraction of the individual’s income spent of the good and its income elasticity. Give a real world example of a good whereby the buyer searches a little and another good whereby the buyer searches a lot. Explain why.
- Gresham’s law states: “Bad goods drive out the good (goods).” However, we see good wine and bad wine, bad books and good books, bad women and good women; and bad economics professors and good ones. Reconcile Gresham’s law with the evidence above.
- What are the essential characteristics of exchange opportunities and production opportunities, on the social levels?
- (a) Is it possible to have a situation of general equilibrium without having all individual optimality conditions fulfilled? Explain.
(b) Is it possible to have all individual optimality conditions fulfilled without the state of the system as a whole also being Pareto Optimal? Explain.
- (a) Explain the meaning of the statement: “In the theory of demand, a demand function, such as Qa=F(Pa,Pb,I), is linearly homogenous of degree zero.”
(b) Demand curves are relatively more elastic in the long run than in the short-run. Explain.
(c) Explain the concepts of cardinal and ordinal utility. Discuss how the shortcoming of cardinal utility are resolved in ordinal utility, e.g., diminishing marginal utility.
- What does it mean if an indifference curve between goods X and Y (a) becomes parallel to the X axis, (b) is positively sloped and has higher indifference curves to its right, (c) is positively sloped and has higher indifference curves to its left, (d) is negatively sloped and has higher indifference curves to its left?
- Assume that the cost of a unit of search is the same for all goods and all have the same price variability in the absence of search.
(a) Show that if the cost of search is proportional to income, the rich will search more and thus pay less for goods with income elasticities greater than unity and search less and pay more for goods with income elasticities less than unity.
(b) On the basis of these results, do you expect the poor to pay more for good? Are there policy implications in your findings which may increase the welfare of the poor?
- What are the four essential properties of indifference curves between two goods? Explain the justification for each property.
- What is the meaning of the expression “The optimum of the consumer”?
- Characterize (graphically) a normal good, an inferior good, and an ultra-superior good. Give examples of each. For two goods X and Y, which of the above must they be if the Income Expansion Path (IEP) has a positive slope? What can you say if the (IEP) has a negative slope?
- Demand curves tend to be more elastic in the long run than in the short run. Explain.
- Which good will have a greater fall in its price as the crop is more fully harvested: one that will store more readily or one that is more perishable? Why?
- What is an income-compensated demand curve? How does it differ from the ordinary demand curve? For a normal good (positive income elasticity), which of the two curves is the more elastic? Why?
- Gresham’s Law states: “Bad goods drive out the good (goods)”. However, we see good wine and bad wine, bad books and good books, bad professors and good professors. Reconcile Gresham’s Law with the empirical evidence cited above. Does the evidence tend to refute Gresham’s Law? Why?
- Exchange consists of acts which allow the possibility of trading endowment elements with other members of society– exchange opportunities only arise in a social context. Production opportunities represent alternative combinations attainable by transformation or dealing with nature. In exchange, the quantity supplied of a commodity must equal quantity taken –i.e., algebraic sum of supply and demand must equal zero for every commodity. Exchange conserves the social totals of commodities. Production alters the social totals, i.e., less of some goods, more of others.
- In a situation with two commodities, x1 and x2, starting with an individual’s interior (non-corner) endowment, derive his demand curve for commodity x2. Is the demand curve derived one with real income constant in the Hicksian or Slutsky sense? First explain the Hicksian vs Slutsky demand curves.
- Many shopping centers provide zero price parking for their clients. Some have argued that such policy leads to inefficient location of resources since to insure sufficient parking for center clientele space must be provided for “freeloaders” who shop at stores near the center. Who gains from the zero price parkings? How? Would it be economically more efficient for centers to allocate parking space by price?
- Give brief (a sentence or two) comments to the following:
(a) Demand curves tend to be more elastic in the long run than in the short run.
(b) Men (persons) do not differ significantly from roaches.
(c) Unemployment means that there are not enough jobs to go around.
(d) The tendency for mechanics to charge women higher prices for a given emergency repair than that charged men.
- Give brief (a sentence or two) comments to the following:
(a) Is life priceless? What evidence can you offer to support your contention?
(b) What do the concepts of externality and property rights have to do with allocation of resources?
(c) A jet plan can fly across the U.S. three hours faster than a propeller plane. Which is more efficient?
- Give brief answers to the following:
(a) “Fishing in the ocean leads to too many resources being devoted to fishing.” Evaluate, but first explain what is meant by “too many.”
(b) The tendency for married couples with small children (who require baby-sitting) to spend more on entertainment when they do go out than married couples without children. Why?
(c) Laissez-faire capitalism encourages deceitful advertising, dishonesty and faithlessness. Comment.
(d) The function of assigned property rights is that of internalizing externalities. Comment.
- (a) Is it possible to have a situation of general equilibrium without having all individual optimality condiions fulfilled? Explain.
(b) Is it possible to have all individual optimality conditions fulfilled without the state of the system as a whole being Pareto optimal. Explain telling what you mean by Pareto optimal.
- What are the four essential property of indifference curves between two goods? Explain the justification for each property.
- Assume a simple competitive economy with J individuals and 2 goods X and Y. Both production and exchange can take place. Every individual has identical tastes and opportunities (so that the single-individual solution will be a miniature representation of the social solution). Assume, further, that all endowments consist only of the numeraire commodity, Y.
(a) Illustrate verbally and diagrammatically the determination of:
1. The production optimum, the amount produced, the total cost.
2. The consumptive optimum and the volume of trade.
3. The price, the marginal cost, and the marginal value in use.
4. The individual’s wealth.
(b)
1. Assume that a technological change has made it possible to produce twice as much X for any given sacrifice of Y. If both X and Y are superior goods, modify the analysis above to show the effect on the price of X, the amount of X produced, and the amount of Y sacrificed.
2. Returning to the conditions of a above, suppose the various individuals’ endowments occur at differing points along the given productive opportunity locus. Would the optimum production and consumption points be different? Would any trade take place? Explain.
- Economists sometimes say that monopoly is “inefficient”. Explain the meaning of “inefficiency” in this context. Show analytically how this inefficiency comes about.
- (a) In a situation with two commodities X and Y, starting with an individual’s interior (non-corner) endowment derive his demand curve for commodity X. Is this an “excess-demand” curve or a “full-demand” curve?
(b) Explain Friedman’s concept of the “real-income-constant” demand curve. Is the demand curve just derived one with real-income-constant in his sense?
- What are the essential characteristics of exchange opportunities and productive opportunities, on the individual and on the social levels?
- It has been said that exchange makes possible new types ofproductive opportunities as well, through the institution of the firm. Analyze.
- Assuming an ordinary-shaped long-run average-cost curve in advance of any “fixed-cost” commitment (a so-called “planning curve”), indicate the shape of the relevant average-cost after such a commitment:
(a) If the “fixed costs” were expended to purchase durable inputs that were perfectly unspecialized to the firm.
(b) If they were expended to purchase inputs that were perfectly specialized. Justify and explain. Do not consider Alchian “volume-effects”, or transition and costs (haste premiums).
- Give very brief (one paragraph) answers to the following:
(a) Collusions have the natural tendency to break down.
(b) Cost minimization is the general criterion of economic behavior.
(c)Laissez faire capitalism encourages deceitful advertising, dishonesty, and faithlessness. Comment.
(d) Is a person who loses his job through no fault of his own also unemployed thereafter through no fault of his own? Explain.
- Demonstrate the solution for the standard Fisherian 2-period model for the individual with both productive and credit market exchange opportunities. The individual here is assumed to have an interior endowment which does not coincide with his productive and consumptive optima. Carefully label your graph to show the amounts consumed, produced, borrowed or lent (if applicable), invested or disinvested, and wealth. Having shown the foregoing, show the effects of a fall in the interest rate. Briefly account for your results.
- An urban rapid-transit line runs crowded trains (200 passengers per car) at rush hours, but very empty trains (ten passengers per car) at off peak hours. A management consultant makes the following argument:
“The cost of running a car for one trip on this line is about $50 regardless of the number of passengers. So the per passenger cost is about 25¢ at rush hour but rises to $5 per passenger in off peak hours. Consequently, we had better discourage off-peak hour business.”
Explain the fallacy. “Commutation tickets” sold by some transit systems (reduced-price, multiple-ride tickets) are predominantly used in rush hours. Are such tickets a good idea?
- A number of techniques are available to cope with increased scarcity and higher world prices of petroleum. Analyze the following in terms of supply-demand responses in the short run and long run:
(a) Price freeze and “rationing by queue” (waiting lines for gasoline).
(b) Price freeze and rationing by coupon (non-salable).
(c) Rationing by coupon (non-salable) without a price freeze.
(d) A tax on all petroleum used.
(e) A tariff on imports of petroleum.
- Atomistic markets are supposed to permit the achievement of Pareto optimality where externalities are absent. Explain the meaning of this statement. Do externalities offer unambiguous proof of market inefficiency or is it possible for externalities to be consistent with market efficiency? Explain.
- The literature on the behavior of the firm poses it as a profit maximizer, a wealth maximizer, a growth maximizer, a sales maximizer, a sales maximizer subject to a prescribed profit rate. Which of these do you use (why?) and how do you manage to allow for these other assertions of firm behavior?
- Perfect (pure or price-takers) markets is supposed to permit achievement of Pareto Optimality, where externalities are absent. Explain the meaning of this statement. Do externalities offer unambiguous proof of market inefficiency or is it possible for externalities to be consistent with market efficiency?
- The marginal productivity basis of the demand for labor is inapplicable to cases in which the labor is doing research, teaching or in other cases where there is no identifiable measurable product or in situations where there is non-market allocation of services. Evaluate.
- If two people work jointly in production, it is impossible to tell who produced how much. What then is the meaning of the statement: that each gets what he produces?
- Construct a model of an individual who has an interior endowment of intertemporal receipts and an associated intertemporal consumption plan. Imagine that there is a fall in the interest rate.
(1) Under what conditions will the person’s planned consumption rise?
(2) Under what conditions will planned savings rise?
(3) Is it possible for both to rise? Explain.
b. Explain how the following imply that a change in the rate of interest may have occurred and note the direction of change.
(1) A rise in the price of raisins relative to the price of grapes.
(2) An increase in the “spot” price of soybeans on the Chicago futures market.
(3) Young people are better off relative to old people.
- What economic forces explain each of the following phenomena? Give a logically complete discussion in each case.
(1) The tendency for married couples with small children to spend relatively more on entertainment when they go out than do married couples without small children. (Note: this does not mean that couples with small children go out more often!).
(2) The tendency for non-poor persons to transfer income or goods-in-kind to poor persons. (Avoid making interpersonal utility comparisons.) State the assumptions that underlay the choice to make money income transfers versus goods-in-kind transfers and which is more efficient?
(3) The lessened tendency for physical attributes such as race and sex to be used as criteria for choice for higher level positions of employment (managers, executives, etc.) than for lower level positions of employment (janitors, dishwashers, etc.). Does the same reasoning explain why nepotism is virtually absent in professional sports?
(4) The virtual absence of manual labor operating elevators, picking cotton, picking tomatoes and theater ushers in the United States.
- Oysters settle and grow in shallow water in areas known as oyster beds. In some states (private property states), most oyster beds are privately owned and can only be exploited with the permission of the owner. In other states (common property states), most oyster beds are the common property of all and may be exploited by anyone. Investigators found that (1) prices of oysters were lower in common property states than in otherwise similar private property states, (2) oysters were marketed earlier (oysters were smaller) in common property states. Explain why. Which arrangement is preferable and why?
- Price-takers markets are supposed to permit the achievement of Pareto Optimality where externalities are absent. Explain the meaning of this statement. If externalities exist will optimality necessarily be denied? Why?
- Give very brief answers to the following:
(a) Collusions have a natural tendency to break down.
(b) “Bad money tends to drive out good money.”
(c) To incur a cost is equivalent to saying that one has sacrificed an opportunity.
(d) On a television interview a famous theatrical producer expressed delight that tickets to his performance were sold out for the next five months. Explain why he might have cause to be sad instead.
- The Cobb-Douglas production function has the following form:
q = f(x,y) = Axαy1-α
Show that such a function is linearly homogeneous to degree one and state two other characteristics of such a production function. Also prove mathematically that with a production function such as a Cobb-Douglas that if factors are paid according to their marginal products the total product is “exhausted”.
- Evaluate the following: The way to get people to keep future generations in mind as they make current decision concerning the use of scarce natural resources is to allow them to hold private property rights over these resources which they can transfer. How would your answer differ if transfer rights were denied?
- Most cities and towns that allow the sale of alcoholic beverages require all seller of liquor to have a license. Not only is the number of licenses strictly limited, but the prices of such a procedure on: (a) liquor prices; (b) the profits to sellers of liquor at the retail level? What would happen to prices and profits if cities and towns limited the number of licenses and auctioned them to the highest bidder? What are the effects on the distribution of wealth of the price-regulated method versus the market method of allotting licenses?
- Discuss the following statement: “In a competitive market the least cost production techniques are revealed through entry and exit, while in public utility regulation they are revealed by commission rate hearing. It is easier to fool the commission than the market. Therefore, whenever possible competition should be permitted.”
- You are the absolute czar and head of a union of 1,000 plumbers in Austin, Texas. You have the absolute power to set the wage at which the plumbers will work. The economist that you have hired tells you that the demand for plumbers in Austin is Q = 1,200 - 100W, where Q is the number of plumbers employed and W is their wage. If there were no other plumbers in Austin, what wage would you set if (a) you wished to achieve full employment at the highest possible wage, (b) you wished to achieve maximum total payments to plumbers? Get the elasticities of demand for plumbers at the wages identified in (a and b) both answers.
- Armen Alchian’s definition of costs differs from the standard textbook definition. What is the difference? Explain how his definition may be better. Why does he use capital values in his measurement of costs?
- “The distinction between the long run and the short run is a fiction with no counterpart in the real world.” Evaluate this criticism, explaining why one might make the statements, but show how this fictional distinction might be defended.
- Suppose you were in a country where the charging of interest was prohibited by law. How could you tell whether the present price of future goods changed? What kind of evidence would you look for. Justify your choice of evidence and indicate the direction of the change in the present price of future goods.
- Why is most productive activity carried out by firms rather than by individuals who contract mutually with one another?
- Show how behavior of its own members may threaten the survival of a cartel. Show how the behavior of outsiders may threaten it.
- With the advent of the women’s liberation movement, there is reason to believe that women’s preferences may be changing so as to make the reservation uses of their time less attractive than before in comparison to market employment. What effect would such a taste change have upon the supply curve of female labor? Upon the relative market wages of male and female workers?
- Assume that men and women are equally productive in a certain occupation but the conditions of supply between men and women differ is not numerically different). Produce an argument showing that the profit maximizing firm will engage in wage discrimination between men and women. Make sure you explain the supply differences.
- “If the minimum wage law is eliminated, it will only shift the burden of unemployment from sons to fathers.” Evaluate.
- Write a very short comment on each of the following questions:
(a) “Fishing in the ocean leads to too many resources being devoted to fishing.” First explain what is meant by “too many.”
(b) Tourists in foreign countries pay higher prices for a given item than do the indigenous residents.
(c) Mechanics tend to charge women higher prices for a given emergency repair than that charged men.
(d) Why might it be legal for anyone to give free medical advice but if he is going to charge for medical advice he needs a license.
(e) “Thou shalt not plow with an ox and an ass together.”
- Formulate a high quality question (not one found in the handout). Answer this question.
- “A rise in the rate of interest will generally tend to make young people better off and old people worse off.” Would you regard this as a decent generalization? Discuss. Explain what assumptions are relevant to appraising the statement.
- “The wage rate is determined by the marginal productivity of labor.” If someone offers this statement as a formulation of the marginal productivity theory of wages, what corrections or amendments will you insist upon? Explain.
- D.H. Robertson divides the effects which “an artificial raising of wages” is apt to have on employment into “two analytically separable reactions”–first, “A movement along the existing marginal productivity curve,” and second, “a cumulative lowering of the curve.” Explain the two reactions and indicate what assumptions concerning the other factors of production are involved.
- Prove that for a monopolist faced with a straight lined demand curve and forced to charge a uniform price to all buyers, total revenue will be at a maximum if the quantity sold is exactly half the quantity which buyers would take at a price of zero. Nota bene: Mathematical exposition will help you here thought not necessary for the answer.
- “Perfect (price-takers’) markets is supposed to permit achievement of Pareto Optimality, where externalities are absent.” Explain the meaning of this statement. If externalities exist will the optimality be denied? Why?
- “Monopolistic competition is inefficient.” Explain and evaluate that assertion. Then defend the proposition that neither Pareto optimality nor efficient allocation is a relevant criteria for real decision making in the honest-to-god world.
- Alchian’s definition of cost differs from the standard textbook definition. What is the difference? Explain how his definition may be better.
- Explain how cost curves are “monetized” values of product curves.
- Using elementary economic theory, write short explanations to the following statements:
(a) Tourists must be more careful buying Maine lobsters in Maine than buying Maine lobsters in Philadelphia.
(b) There are proportionally fewer members of minority groups employed in regulated industries than in unregulated industries.
(c) Fishing in the ocean leads to too many resources being devoted to fishing. (First explain what is meant by too many.)
- Gasoline price “wars” have induced many gasoline-station owners to propose a regulatory agency to establish orderly marketing conditions in gasoline markets. Also they proposed that no service station be allowed to charge a price loss than cost, and further that no new stations be opened unless the convenience and necessity of the area warrants more stations.
(a) Who would benefit and who would be hurt by these proposals, if carried out?
(b) If the proposals were carried out, how should the commission decide who got to open a new station?
(c) Is it possible that a gentleman’s agreement could be formed among gasoline station owners in lieu of statutes? Explain why or why not.
- (a) In a competitive (atomistic) industry, suppose that a maximum wage law lower than the equilibrium wage is imposed and enforced. Indicate graphically the implication for employment in the industry, the areas representing distributive transfer(s) and those areas representing social gains or losses.
(b) Do the same, but assume now that the industry is empowered to conscript laborers at the specified maximum wage.
- “A rise in the interest rate tends to moderate aggregate demand and so is anti-inflationary. But interest is a cost of business and the increase in cost tends to raise prices. Hence on balance it is not clear whether w rise in the interest rates tends to counter inflation.” Analyze.
- “Human life is priceless.” Analyze.
- The Marxist doctrine of distribution is “to each according to his needs and from each according to his ability” while the capitalist doctrine is “. . . to each according to what he produces.” Explain the meaning of each statement.
- Why do shopping center developers try to purchase as much of the adjacent land as possible?
- “A substantial number of relatively unskilled persons reported that they cannot find work. At the same time there are many unfilled jobs for relatively skilled people. Apparently, the problem is that there are more unskilled people than unskilled jobs.” What is wrong with that reasoning?
- “On a proportional basis, there are too many Negroes and too few Jews among professional athletes. This shows that sports have overcome racial discrimination but not religious discrimination.” Comment.
- Give economic interpretation of the following excerpts from Exodus and Deuteronomy: Nonsense is forbidden!
(a) “The woman shall not wear that which pertaineth unto man, neither shall a man put on a woman’s garment: for all that do so are an abomination unto the Lord thy God.”
(b) “Thou shalt not plow with an ox and an ass together.”
(c) “He that is wounded in the stones, or hath his privy member cut off shall not enter into the congregation of the Lord.”
(d) “Honor thy father and mother. . . .” (How come honoring of children is not required by the Commandments?)
(e) “Thou shalt have no other gods before me.”
(f) “And if a man entice a maid that is not betrothed, and lie with her, he shall surely endow her to be his wife. If her father utterly refuses to give her unto him, he shall pay money according to the dowry of virgins.”
(g) “A bird in the hand is worth six in the bush.”
- Explain what is meant by “Pareto optimal.” Why is it used so widely? (Do not state all the conditions that must hold for it to exist.) Is it consistent with compulsory licensing of doctors, prescriptions for drugs, approval by the Securities and Exchange Commission before securities are sold, tariffs, franchises for public transportation, minimum wage laws, non-exchangeable rights to be a U.S. citizen, anti-discrimination laws and anti-murder laws? Explain.
- “Rent is price-determined, not price determining.” Explain why this statement is both true and false. In your answer explain what is meant by rent.
<br. - In macroeconomic analysis, the possibility of economic equilibrium with a degree of unemployment is ordinarily assumed. But in microeconomic analysis, we generally postulate that prices must be such to clear markets. Is it possible to give a microeconomic explanation for unemployment, without calling upon wage rigidities due to government or union action to keep wage rates from falling: Show how it is, if it is.
- It is sometimes argued that since future generations are not in any position to cast dollar votes (or for that matter any other vote) in influencing the saving-investment decisions of the current generation, there will be under-provision of the needs of the future because of “selfishness” on the part of the current generation. The rapid exploitation and even destruction of may of our natural resources are often cited as evidence for this contention. On the other hand, there is the indisputable evidence from modern history that each successive generation had been left richer than its predecessor. Comment and include the reason why present generations enrich future generations; what is the quid pro quo? (Remember that in this exchange future generations have not done anything for present generations.)
- What is the difference between collusion, cooperation and competition? How would you define collusion between two people so as to exclude partnerships and corporate joint ownership from the concept of collusion? Why is collusion considered undesirable? How can you differentiate between an effective collusion and an ineffective collusion?
- Give short, but complete, answers to the following:
(a) “Automation is destroying 300,000 jobs a month.” Is destroying jobs socially good or bad? Does automation mean that people will be left without jobs. Why?
(b) If in some town the minimum wage rate for taxi-driver employees were raised to $5.00 an hour, what would happen to the ratio of cabs driven by the owners to cabs driven by employees of cab owners? Why?
(c) If you were a visitor in some underdeveloped country in which all lending and borrowing are effectively prohibited, is there an interest rate; if so, where could you get date to compute it; how could you tell when it changes?
(d) Why do you think that the commandments: “Thou shalt have no other Gods before me” and “Thou shalt not make unto thee any graven image. . . .” are the two most important among the Ten Commandments, in the eyes of God?
- Given an interior endowment explain how the possibility of trade can lead individuals to consumptive benefits (preferred allocations of given social totals over different individuals and productive benefits (larger social totals of desired goods). Make your case using either graphical and/or algebraic analysis.
- Is it possible to have a situation of general equilibrium without having all individual optimality conditions fulfilled? Explain. Is it possible to have all individual optimality conditions fulfilled without the state of the system as a whole being Pareto optimal?
- Give very brief (one paragraph) answers to the following:
(a) Collusions have the natural tendency to break down.
(b) Cost minimization is the general criterion of economic behavior.
(c) Laissez faire capitalism encourages deceitful advertising, dishonesty, and faithlessness. Comment.
(d) Is a person who loses his job through no fault of his own also unemployed thereafter through no fault of his own? Explain.
- Evaluate the following: The most effective way to get people to keep future users of scarce natural resources in mind as they make their current decisions on use is to allow them to hold private property rights over these resources which they can transfer. How would your answer differ if transfer rights were denied?
- Write brief answers explaining each of the following:
(a) Explain what Hayek might mean when he asserts that: “The most significant fact about the price system is the economy of knowledge with which it operates.”
(b) Why does specialization lead to a larger output? What is meant by specialization in this context?
(c) If two people work jointly in production, it is impossible to tell who produced how much. What then is the meaning of the statement that each gets paid according to what he produces?
(d) Give at least three reasons why the observation of a negative rate of interest is highly improbable.
- Economists sometimes say that monopoly is “inefficient.” Explain the meaning of “inefficiency” in this context. Show analytically how this inefficiency comes about.
- Explain Friedman’s concept of the “real-income-constant” demand curve. Is the demand curve just derived one with real-income-constant in his sense?
- What are the essential characteristics of exchange opportunities and productive opportunities, on the individual and on the social levels?
- Imagine a community of individuals engaging in private production, but where the idea of market exchange had not yet been discovered. Explain analytically the nature of the gains available after the discovery of the possibilities of exchange. Would every member of the community benefit, or might some lose as a result of the discovery?
- It has been said that exchange makes possible new types of productive opportunities as well, through the institution of the firm. Analyze.
- Assuming an ordinary-shaped long-run average-cost curve in advance of any “fixed-cost” commitment (a so-called “planning curve”), indicate the shape of the relevant average-cost curve after such a commitment:
(a) If the “fixed costs” were expended to purchase durable inputs that were perfectly unspecialized to the firm.
(b) If they were expended to purchase inputs that were perfectly specialized. Justify and explain. Do not consider Alchian “volume-effects”, or transition costs (haste premiums).
- Explain how cost curves are monetized values of product curves.
- Construct a model of the price discriminating monopolist who sells in two markets. Show the quantities and prices for both markets that will maximize profits. What are the necessary conditions for price discrimination? Does price discrimination lead to a more “socially desirable” outcome? Explain.
- Unemployment means that there are not enough jobs to go around. Apply economic analysis to this statement.
- Given two isolated markets supplied by a single monopolist, let the two corresponding demand functions be:
P1 = 12 - Q1 and P2 = 20 - 3Q2
The monopolist’s total cost function is:
C = 3 + 2(Q1 + Q2)
(a) What will the prices be in each market?
(b) What will be the quantity sold in each market?
(c) What will be the total profits earned by the monopolist?
- “Since 1900 real income has increased tremendously, yet the average number of children per family has decreased.” Consider the following possible explanations, and illustrate in terms of market opportunities and family indifference curves between the number of children (x) and all other goods (y). (a) Children are inferior goods; since we are richer we want fewer of them. (b) Children are not inferior goods; however, it has become more expensive to bear and raise children. (c) Children are not inferior goods, nor have they become relatively more expensive to raise. What has happened is that tastes have changed.
- Price discrimination may lead to more efficient allocation of resources. Do you agree or disagree? Explain first what you mean by efficient allocation of resources.
- “The wage rate is determined by the marginal productivity of labor.” If someone offers this statement as a formulation of the “marginal Productivity theory of wages,” what corrections or amendments will you insist on? Explain.
- With the advent of the women’s liberation movement, there is reason to believe that women’s preferences may be hanging so as to make the reservation uses of their time less attractive than before in comparison to market employment. What effect would such a taste change have upon the supply curve of female labor” Upon the relative market wages of male and female workers? If employees perceived the differences between sexes it would lead to a decrease in wages relative to wages.