Professorial Magnificence

In order to assist the student in his preparation for the terminal examination in Microeconomics 306, the following is offered as a list from which most, if not all, examination questions are to be drawn.

1. “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 the reasoning?
   
   
2. Briefly analyze the following:
   (a) The price of cheese falls relative to the price of milk. What is implied about the rate of interest? Why?
   (b) Usually there are cheaper prices for matinee performances than evening performances. Why?
   (c) “Allowing the price of goods to rise in period when none of the good is being produced is immoral, because the higher prices do not induce a larger output. They merely give unwarranted profits to those who are lucky enough to own the goods. Either prices should be prevented from rising, or the government should take over ownership in order to prevent unjust enrichment.” Evaluate this statement using economic analysis.
   (d) Give the definition of interest rates.
   
   
3. 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) “Thou shalt have no other gods before me.”
   (e) “Thou shalt not make unto thee any graven image…thou shalt not bow down thyself to them…“
   (f) “Honor thy father and mot her….”
   (g) “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.”
   
   
4. “The advent of the one man bus involved more capital equipment: an automatically operated coin box and door control device - to name two of the capital goods that replaced the conductor.”
   (a) Is this a case of capital replacing labor? Where?
   (b) Is this a case of labor replacing labor? Where?
   
   
5. Evaluate the following statement:
   (a) Taiwanese labor is far less productive than American labor as evidenced by the fact it takes so much of it to get things done e.g., it may take three or four Taiwanese to do a job done by one American;
   (b) American agricultural land is less fertile than Taiwan land as evidenced by the lower yield per acre in the U.S. Separately evaluate both statements.
   
   
6. Assume that you are a member of a minority group in some country and have reason to doubt that your property rights would be enforced and respected in the community.
   (a) What forms of capital would you invest in?
   (b) What kinds of skills would you encourage for your children?
   (c) Do you know of any evidence of such actual behavior by minority groups?
   
   
7. Discuss the following statement: “In a competitive market the least-cost production techniques are revealed by entry and exit, while in public utility regulation they are revealed by commission rate hearings. It is easier to fool the commission than the market. Therefore whenever possible, competition should be permitted.”
   
   
8. “Debtors are exploited by creditors because a person who has to borrow is usually in distress and is willing to pay a very high price to get the loan. Unless laws were passed controlling the rate of interest, debtors would be forced to pay unreasonable rates of interest.” Is the analysis correct? Explain why or why not.
   
   
9. Both monopolists and purely competitive firms are assumed to behave as if they seek to maximize profits, yet monopoly is held to result in an inefficient allocation of resources as compared to pure competition. Explain. Marginal costs serve as a guide as to how much of a good product, while average variable costs help indicate whether to produce at all. Explain.
   
   
10. The National Teacher’s Federation, a teacher’s union, advocates a single salary scale wherein every teacher, regardless of specialty, gets the same salary his first year of teaching, with salary thereafter tied strictly to years of service. Who would suffer (why) and who would benefit (why) if that were made universal: Men or women? Negroes or whites? Superior or inferior teachers? Mathematics or physical-education teachers?
    
    
11. “On a proportional basis, there are too many Negroes and too few Jews among professional athletes. This shows that sports has finally overcome racial prejudice, it has not overcome religious prejudice.” Comment.
    
    
12. 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 per hour. This demand function can also be written W = 12 - Q/100. If there are 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 maximize total payments to plumbers?
    
    
13. How is interest rate defined? Why is there a lower present value of goods to be delivered in the future? If in New York, state bonds paying $1,000.00 at maturity (one year hence) are selling for $650.00, and in New Jersey sell for $800.00, what are their respective interest rates? Describe the adjustments that you think will ensue.
    
    
14. Taxi fares in New York recently were increased by nearly 50%. Predict the effect on the price of taxicab medallions, the earnings of taxicab drivers and congestion in New York streets.
    
    
15. In the interest of conservation it has often been argued there must be government regulation of the extraction of natural resources such as timber and government regulation to protect endangered wildlife. Explain why and how, in a free market economy, these resources are already regulated and comment on the pitfalls to either form of regulation.
    
    
16. Economists Armen Alchian and Reuben Kessel have advanced the hypothesis that monopolists choose to satisfy more of their non-pecuniary aims than do perfect competitors. Consider the following aims: (a) exercising their preferences against certain minorities, (b) enjoying the good life with lush expense accounts for executives. What theoretical arguments could support this hypothesis? How might you test this hypothesis?
    
    
17. “If every employer hired its best qualified applicants for a job at every opportunity, the phenomenon of black poverty (as distinct from poverty) could be wiped out in ten years.” Do you agree/disagree? Comment.
    
    
18. You are given the following demand function for the firm:
    Q = 20 - p. Its total cost function is TC = Q2 + 8Q + 2. Find
    (a) profit-maximizing output
    (b) equilibrium price
    (c) elasticity of demand at the equilibrium price
    (d) profits
    Is this firm a price-taker or price-searcher? Why?
    
    
19. If the price of prunes relative to the price of plums fell, what could you infer about the interest rate?
    
    
20. Is human life priceless? What evidence can you offer to support your contention?
    
    
21. Except for promotional purposes, and price wars, airfare rates to Europe are higher in the summer than in the winter. Coach class airfare from Philadelphia to Los Angeles is cheaper than coach class airfare to Des Moines. First class airfare is always higher than coach class. Moreover, airlines charge lower fares to those who book seats well ahead of time than those who wait until the last minute. Are these all examples of price discrimination? What additional information may be required before you can give a complete answer to this question? Explain.
    
    
22. Evaluate: “The fact that some airplanes collide is evidence there is ‘too little air traffic control’.” (Be sure to explain what too little might mean.)
    
    
23. Evaluate: “A bird in the hand is worth six in the bush.”
    
    
24. Explain the concept of externality. What does it have to do with the efficient allocation of resources?
    
    
25. Private property rights lead to one kind of resource allocation while communally held property rights lead to another. Explain. You may use examples.
    
    
26. Evaluate the following: The way to get people to keep future generations in mind as they make current decisions concerning scarce natural resources is to allow them to hold private property rights over these resources, which they can transfer at death to their heirs.
    
    
27. Why do market rates of interest rise whenever people expect increasing inflation in the future?
    
    
28. Why did Professor Williams invest additional resources to make this class an effective one? He could have received the same pay for doing considerably less work. Why didn’t you allocate the amount of resources necessary to earn an A in this class?
    
    
29. Give brief analysis to each of the following:
    (a) Evidence of sex discrimination lies in the fact that the median annual earnings of women are only 59 percent of male earnings.
    (b) Professor of Economics, Betty J. Watson, of the College of Notre Dame in Baltimore said, in reference to the minimum wage, “It’s more important to focus on creating jobs. Black youth have to deal with racism, and lowering the wage isn’t going to help them find jobs.” ( The Cincinnati Enquirer, November 23, 1986).
    (c) Evaluate: A jet plane can fly from New York to Los Angeles three hours faster than a propeller driven plane. Which is the more efficient? Why?
    
    
30. Evaluate the following: The laws of supply and demand cannot apply to the labor market because labor is not a commodity to be bought and sold like machines.
    
    
31. The supply curve for labor is SL = 100W, where W is the market wage. The marginal revenue product curve for the firm is DL = -50W + 450.
    (a) If the firm is a monopsonist, how many workers will it hire in order to maximize profits? What will be the wage?
    (b) If the supply of labor is monopolized, how many workers are supplied in order to maximize the wage bill? What is that wage?
    
    
32. (a) Why will a person who has transferable (saleable) property rights in a business for which he is making decisions, be more influenced by the longer run effect of his decisions than if he did not have transferable property rights in the business?
    (b) Explain the influence that transferable property rights versus non-transferable property rights, has on individual decision making.
    
    
33. “Long ago we stated the reason for labor organizations. We said that they were organized out of the necessities of the situation; that a single employee was helpless in dealing with an employer; that he was dependent ordinarily on his daily wage for the maintenance of himself and his family; that if the employer refused to pay him the wages that he thought fair, he was nevertheless unable to leave the employer and resist arbitrary and unfair treatment; that a union was essential to give laborers opportunity to deal on an equality with their employer.” This statement was made by Chief Justice Charles Hughes, of the Supreme Court of the United States in the case of United States v. Jones and Laughlin, 1937. Evaluate Chief Justice Hughes’ propositions for their meaning.
    
    
34. A large lake is stocked with excellent fish, but no one owns the fish or the lake. Only by catching the fish can you acquire ownership of the fish.
    (a) What do you think will be the average age of fish caught as compared to the age of fish in a privately owned lake?
    (b) Which system will induce over fishing in the sense that more resources will be devoted to catching fish than the extra fish caught are worth? Why?
    
    
35. Evaluate the following quote from USA Today, March 22, 1988:
    “Raising the minimum wage wouldn’t result in fewer jobs because businesses would absorb the costs as they have absorbed other costs, according to Robert McGlotten, director of legislation for the AFL-CIO.”
    
    ‘Business doesn’t hire people on the basis of wage,’ he says, ‘but on the basis of need.’
    ‘If an individual with a particular kind of occupation is needed, then that occupation and the skill levels of the individuals would be matched with a wage rate,’ he says.
    
    And the lost-job claim? McGlotten says critics made that argument when the minimum wage was 25 cents an hour. And ‘that’s never been true at all.’”
    
    
36. Give brief answers to each of the following:
    (a) “Since a monopolist is the only supplier of a well-defined product, there is no limit to the price it may charge.” Is this statement true or false?
    (b) Explain why a monopolist will never set a price (and produce the corresponding output) at which the demand is price-inelastic.
    (c) “The ultimate monopoly product would be one whose cross elasticity of demand, with respect to any and all other products, was zero.” Comment.
    (d) “The reason movie theaters charge youngsters and oldsters less than the rest of us is because theater owners want to help these two low-income groups.”
    
    
37. Why might the existing firms in a cartelized industry prefer to be regulated by the government?
    
    
38. What is the problem with common property resources?
    
    
39. “Public policy is necessary to protect the average citizen from the power of vested interest groups. In the absence of government intervention, regulated industries, such as airlines, railroads, and trucking, would charge excessive prices. Products would be unsafe, and the rich would oppress the poor. Government curbs the power of special interest groups.” Comment saying why you agree or disagree with the accuracy of that statement.
    
    
40. In the “absence of unions, employers would be able to pay workers whatever they wanted.” True or false? Why?
    
    
41. Suppose that Florida migrant farm workers are effectively unionized. What will be the impact of the unionization on (a) the price of Florida oranges, (b) the profits of Florida fruit growers in the short run and in the long run, (c) the mechanization of the fruit picking industry and (d) the employment of fruit pickers?
    
    
42. Suppose you are contemplating the purchase of a mini computer at a cost of $1,000.00. The expected lifetime of the asset is three years. You expect to lease the asset to a business for $400.00 annually (payable at the end of each year) for three years. If you can borrow (and lend) money at an interest rate of 8 percent, will the investment be a profitable undertaking? Is the project profitable at an interest rate of 12 per cent? Provide numerical calculations in support of your answers.
    
    
43. A television newscaster said, “Janet Jones is $20 million richer today. She just won the Florida lottery, which will pay her $1 million per year for each of the next twenty years.” Is she really $20 million richer?
    
    
44. Some time ago, most of the major airlines issued student travel cards at a nominal price. These cards permitted college students to fly “space available” (that is, no reservations allowed) at substantial discounts. When this practice was in effect, some older non students were using the cards, and some students were insuring themselves available space by reserving seats for fictitious passengers who then do not show up for the flight.
    (a) Did the discount represent price discrimination?
    (b) Did the conditions necessary for a successful price discrimination exist?
    
    
45. Assume that the soft coal industry is a competitive industry and it is in long run equilibrium. Now assume that the firms in the industry form a cartel.
    (a) What will happen to the equilibrium output and price of coal, and why?
    (b) After the cartel is operating, are there incentives for the individual firms to cheat? Why?
    (c) Does the possibility of entry by all the firms make a difference in the behavior of the cartel?
    
    
46. Assume that an industrial union’s primary purpose is to raise the wages of its members above the competitive level.
    (a) Explain on a theoretical level how this increase might be accomplished.
    (b) What conditions would make the union’s job easier?
    
    
47. Suppose a frost kills a large portion of an orange crop, with a resulting higher price of oranges. It has been said that such an increase in price benefits no one since it cannot elicit a supply response; the higher price, it is said, simply “lines the pockets of profiteers.” Analyze this proposition. (Hint: be sure to focus on the rationing function of market price.)
    
    
48. The average wage rate of women is only 59% of that of men. This shows that women are paid just 59% as much as men for doing the same work. Evaluate this statement.
    
    
49. What is wrong with this way of thinking?

“Higher wages help everybody. Workers are helped because they can now purchase more of the things they need. Business is helped because the increase in workers’ purchasing power will increase the demand for products. Taxpayers are helped because workers will now pay more taxes. Union activities and legislation mandating higher wages for workers will promote economic progress.”

1. “Jobs are the key to economic progress. Unless we create more jobs, our standard of living will fall.” (True or false? Explain.)
   
   
2. State the law of diminishing returns. Then explain why you agree or disagree with the following statements. (You may use a graph with your answer.)
   (a) If the marginal product of labor is decreasing, the average product of labor is decreasing.
   (b) If the marginal product of labor is increasing, the total product of labor is increasing at an increasing rate.
   (c) When the marginal product and the average product are equal the average product is at a maximum.
   
   
3. Give brief answers to each of the following:
   (a) “Since a monopolist is the only supplier of a well- defined product, there is no limit to the price it may charge.” Is this statement true or false?
   (b) Explain why a monopolist will never set a price (and produce the corresponding output) at which the demand is price-inelastic.
   (c) “The ultimate monopoly product would be one whose cross elasticity of demand, with respect to any and all other products, was zero.” Comment.
   (d) “The reason movie theaters charge youngsters and oldsters less than the rest of us is because theater owners want to help these two low-income groups.”
   
   
4. Assume that the soft coal industry is a competitive industry and it is in long run equilibrium. Now assume that the firms in the industry form a cartel.
   (a) What will happen to the equilibrium output and price of coal, and why?
   (b) After the cartel is operating, are there incentives for the individual firms to cheat? Why?
   (c) Does the possibility of entry by all potential firms make a difference in the behavior of the cartel?
   
   
5. Suppose that Florida migrant workers are effectively unionized. What will be the impact of the unionization on (a) the price of Florida oranges, (b) the profits of Florida fruit growers in the short run and in the long run, (c) the mechanization of the fruit picking industry and (d) the employment of fruit pickers? Explain each answer.
   
   
6. Do the following comments reflect sound economic reasoning? Explain why or why not. (a) “I paid $200.00 for this economics course. Therefore, I am going to attend the lectures even if they are useless and boring.” (b) “Since we own rather than rent, housing does not cost us anything.” (c) I own 100 shares of stock that I can’t afford to sell until the price goes up enough for me to get back at least my original investment.” (d) “It costs to produce private education, whereas public schooling is free.”