The first cohort of students to receive their graduate price theory training from Milton Friedman during the autumn quarter of 1946 at the University of Chicago (Economics 300A ) included a future Nobel prize winner (James Buchanan), a future labor economist and Chicago/Princeton professor (Albert Rees), a future textbook author (Richard Leftwich, whose text incidentally was the text used in the early concentration freshman economics course I took at Yale in the Fall semester of 1969), and Army Air Corps Silver-Star recipient and the future head of C.I.A. Soviet economics research (Rush V. Greenslade).
Interestingly enough, Milton Friedman is listed as a member of the faculty in the Announcement for the Sessions of 1946-1947 but the courses 300A, B were not yet in included in the May 15, 1946 Announcements. The readings and basic structure of the course were slightly modified from the course he offered at Columbia in 1939-40.
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[Course Description]
300A,B. Price Theory. A systematic study of the pricing of final products and factors of production under essentially stationary conditions. Covers both perfect competition and such imperfectly competitive conditions as monopolistic competition, oligopoly, and monopoly. 300A deals primarily with the pricing of final products; 300B, with the pricing of factors of production. Prereq: Econ 209 or equiv. and Econ 213 or equiv or consent of instructor.
300A. Aut: MWF 9:30; Win: MWF 10:30; Friedman.
300B. Win: MWF 9:30; Spr: MWF 9:30; Friedman.
Source: University of Chicago, Announcements. Vol. XLVII, No. 4 (May 15, 1947), The College and the Divisions. Sessions of 1947-1948, p. 224.
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Econ 300 A. Autumn Quarter [1946]
Record of Meetings
[Handwritten notes by Milton Friedman]
| Wed | Oct 2 | Qualifying exam. |
| Fri | Oct 4 | a) Marshall a la Memorials, pp. 47, 86. |
| b) Defn of the economic problem[,] Economics | ||
| c) Distnctn betw. positive & normative | ||
| Mon | Oct 7 | Knight[‘]s fcns of econ organization |
| Wed | Oct 9 | [ditto] completed |
| Fri | Oct 11 | Reln betw wants & activities |
| Mon | Oct 14 | a) Initial discussion of d. c. |
| Wed | Oct 16 | [ditto] completed |
| b) [Initial discussn ] of s. c. | ||
| Fri | Oct 18 | No meeting (to be held later |
| Mon | Oct 21 | Equil of d & s. |
| Wed | Oct 23 | Elast. of Dem |
| Fri | Oct 25 | Elast completed & assumptns ind. demand |
| Mon | Oct 28 | Ass. and dem. c. completed; stat. d.c. |
| Wed | Oct 30 | Complete statistical demand curves |
| Fri | Nov 1 | Stochastic dem. curve. d.c. of ind cons. throu m. u. |
| Mon | Nov 4 | Eqn of ind cons; math & graph. demontratn |
| Wed | Nov 6 | Dervatn of d & eng curves |
| Fri | Nov 8 | Diff with utility theory |
| Mon | Nov 11 | Indiff curve theory |
| Wed | Nov 13 | [ditto] |
| Fri | Nov 15 | Examination |
| Mon | Nov 18 | Discussion of exam: Income vs. substitution effects |
| Wed | Nov 20 | Diff with indifference theory; dem curve for prod of an indiv prod. |
| Fri | Nov 22 | Dem curve for prod of ind prod; Econ of Ind firm |
| Mon | Nov 25 | Relat of cost curves of ind foirm to supply curve of industry |
| Wed | Nov 27 | (extra meeting to make up for Oct. 18) |
| Reading period | ||
| Mon | Dec 9 | Diff kinds of monopolistic conditions |
| Wed | Dec 11 | |
| Fri | Dec 13 | |
| Mon | Dec 16 | |
| Wed | Dec 18 | examination |
| Fri | Dec 20 | examination |
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Qualifying Examination, Economics 300A
Autumn Quarter, 1946
1. Comment briefly on the following two sentences, taken from newspaper stories:
a. “Demand went up and therefore price went up.”
b. “Price went up and therefore demand declined.”
2. Indicate which of the following statements are true (T) and which false (F):
[T] If a one per cent increase in price will cause more than a one per cent reduction in amount demanded, the demand for the commodity is elastic.
[F] Cost of production affects price only through its effect on the rate of production.
[F] If production of a commodity is completely monopolized, and if the monopolist takes full advantage of his position, no changes in the cost of production will have any effect upon price.
[F] A fixed tax (say, a license tax of $10,000) would operate to increase the price at which a monopolist would make the largest net return (or largest net earnings).
[blank] An individual firm will undertake to equalize marginal revenue and marginal cost.
[F] An excise tax is likely to increase the price of a competitively produced commodity by the full amount of the tax.
[T] If price exceeds the competitive producer’s average expense it will therefore be advantageous for him to increase his rate of production.
[T] A monopoly will never operate at a price at which the demand of its product is inelastic.
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[undated copy of a class handout, ca. 1946-47]
An arithmetical example of the effects of changes in tastes and the distribution of income on the distribution of commodities.
1. Descriptive data:
a. Population. There are three classes in the community—rich, middle-class, and poor. Their numbers are fixed throughout the example, but their incomes vary. The numbers and original family incomes are:
Rich: 1,000 families, $10,000 income
Middle-class: 10,000 families, $3,000 income
Poor: 1,000 families, $1,000 income
b. Commodities. There are two commodities: housing; and all other, which will be treated as a single commodity.
c. Tastes. In the original position the tastes of all income classes are identical. The tastes are described by the following schedules of marginal utilities, which, it will be noticed, follow the Bernoulli hypothesis. (It will be observed also that the analysis is independent of the measurability of utility. Marginal utilities are used only for simplicity of exposition. If the student will triple the marginal utilities for one income class and carry through the analysis, he will reach the same answers, assuming he does not make arithmetical mistakes.)
|
Housing |
Other |
||
|
Quantity |
Marginal Utility | Quantity |
Marginal Utility |
|
1 |
1.00 | 1 |
1.00 |
|
2 |
0.50 | 2 |
0.50 |
|
3 |
0.33 | 3 |
0.33 |
|
4 |
0.25 | 4 |
0.25 |
|
5 |
0.20 | 5 |
0.20 |
Additional values can be found for either schedule from the formula, marginal utility = 1/quantity.
2. The Original Distribution of Goods.
a. Each family will seek maximum utility, and this entails buying housing and other commodities in such quantities that
marginal utility of housing = marginal utility of other
price of housing price of other
In addition each family is faced by the budget limitation that the amount spent on housing plus the amount spent on other equal income.
b. We can construct a demand curve for (say) housing by (say) the poor, using arithmetical procedures.
i. First divide the marginal utilities of housing and other by their unit prices. Let these prices be $2 per unit and $1 per unit, respectively. We secure schedules:
|
Housing |
Other |
||
|
Quantity |
Marginal Utility Per Dollar |
Quantity |
Marginal Utility |
|
1 |
0.500 | 1 |
1.00 |
|
2 |
0.250 | 2 |
0.50 |
|
3 |
0.167 | 3 |
0.33 |
|
4 |
0.125 | 4 |
0.25 |
|
5 |
0.100 | 5 |
0.20 |
ii. Then find the combinations such that the marginal utility per dollar is equal. For example, 1 housing unit and 2 other units; 2 housing units and 4 other units. Only one of these many combinations meets our budget limitation, that the poor family spend $1,000. Continuing the table or the logic, the family will buy 250 housing units if the prices are as given.
iii. Carry this procedure through for all possible prices of housing and other, for each income class.
iv. Add the demand schedules so secured, compare with the given supplies, read off prices, and then the quantities received by each type of family.
v. Since steps iii and iv will require several years, it is more economical to take a course in sub-freshman algebra and proceed as follows:
c. Our two conditions of proportionality of marginal utilities to prices and the budget limitation can be written as
1/(q1p1) = 1/(q2p2)
q1p1 + q2p2 = R,
where q1 is the quantity of housing, p1 its price, the corresponding symbols with subscript 2 refer to other, and R is income.
We then proceed deftly as follows:
i. The demand curve for housing by a family is the quantity that will be purchased at various prices, so we wish to find how q1 varies with p1. If we substitute the proportionality-of-marginal-utilities equation into the budget equation, we secure
q1p1 + q1p1 = R,
or q1=R/(2p1).
By symmetry the same demand curve holds for other, using subscript 2.
ii. We now add up the demand curves of all families. The aggregate demand of the 1,000 rich families is
1,000 x 10,000/(2p1) = 5,000,000/p1
that of the middle class,
10,000 x 3,000/(2p1) = 15,000,000/p1
and that of the poor, starving families is
1,000 x 1,000/(2p1) = 500,000/p1.
iii. The fixed supply of both housing other is 205,000 units. The price is set where quantity supplied equals quantity demanded, i.e.,
205,000 = 20,500,000/ p1
so the price of housing (and of other) will be $100.
iv. And now by going back to demand curves, in i above, we can find the quantity each family secures of each commodity.
d. The final answers are:
i. The rich family secures $10,000/(2x$100) = 50 units of housing and 50 units of other.
ii. The middle class family secures $3,000/(2x$100) = 15 units of housing and 15 units of other.
iii. The poor family secures $1,000/(2x$100) = 5 units of housing and 5 units of other.
3. After the War: Larger Money Incomes and a More Equal Distribution of these Incomes.
a. Let us assume that after a highly successful war, this community now has the following income structure:
Rich: 1,000 families, $18,000 income
Middle-class: 10,000 families, $6,000 income
Poor: 1,000 families, $4,000 income
Thus the aggregate money income of the community has doubled, but is now more equally distributed by any reasonable measure.
b. We proceed to the solution exactly as before. Indeed nothing has changed but the incomes of individual families so we may use the same demand equations.
c. The final answers are:
i. The rich family secures 45 units of housing and 15 units of other.
ii. The middle-class family secures 15 units of housing and 15 units of other.
iii. The poor family secures 10 units of housing and 10 units of other.
The price per unit of either commodity has risen to $200.
4. Still After the War: The Rich get House-Conscious
a. For various reasons best left unexplored, the rich acquire a greater desire for housing. In terms of our example, the marginal utility of any quantity of housing doubles for them (so marginal utility = 2/q). We proceed as usual.
b. The final results are:
The price of a unit of housing soars to $214.63; that of a unit of other commodities crashes to $185.37.
i. The rich family secures 55.91 units of housing and 32.37 units of other commodities.
ii. The middle-class family secures 13.98 units of housing and 16.18 units of other commodities.
iii. The poor family secures 9.32 units of housing and 10.79 units of other commodities.
5. The Final Comparison
|
Original |
Greater Equality |
||
|
Same Tastes |
Rich-roof-ravenous |
||
|
Housing |
|||
|
Rich |
50,000 | 45,000 |
55,000 |
|
Middle-class |
150,000 | 150,000 |
139,800 |
|
Poor |
5,000 | 10,000 |
9,300 |
|
Other Commodities |
|||
|
Rich |
50,000 | 45,000 |
32,400 |
|
Middle-class |
150,000 | 150,000 |
161,800 |
|
Poor |
5,000 | 10,000 |
10,800 |
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MIDQUARTER EXAMINATION IN ECONOMICS 300A
Autumn, 1946
1. Descriptive data:
a. Population: a community consists of three classes—rich, middle-class, and poor. The numbers and family incomes are:
Rich: 1,000 families, $10,000 income per family.
Middle-class: 10,000 families, $3,000 income per family.
Poor: 1,000 families, $1,000 income per family.
b. Commodities: There are two commodities: housing and food, considered as single composite commodities.
c. Demand curves: All individuals in the community have the following demand curves:
h = I/(2 ph)
f = I/(2 pf)
where
h= number of housing units per time unit.
ph = price per housing unit.
f = number of food units per time unit.
pf = price per food unit.
I = income of the family per time unit.
d. Supplies available.
There are available 205,000 housing units, and 205,000 food units. These amounts are available regardless of price and cannot be increased in the period considered.
Questions:
Determine:
a. The aggregate demand curve for the entire community for (1) housing, (2) food.
b. The prices that will prevail, assuming a free market.
c. The quantity of food and housing consumed by a family of each class.
d. The elasticity of the market demand curve for each product at a quantity of 205,000 units.
2. Appraise the following quotation from A. C. Pigou: “Since elasticity measures variations in quantity (demanded or offered) divided by variations in a price, the elasticity of demand for anything will be seven times as large for seven similar demanders as it is for one.”
3. “As Sir R. Giffen has pointed out, rise in the price of bread makes so large a drain on the resources of the poorer laboring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.” Marshall, p. 132.
a. Give your own verbal explanation of how such a positively sloping demand schedule can arise.
b. Draw an indifference curve diagram that will display this phenomenon.
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Final Examination for Economics 300A
Autumn, 1946
Part I
1. Define briefly the following terms:
a. Income elasticity of demand
b. Demand curve for the product of an individual firm
c. Supply curve
d. Marginal revenue
e. Cross elasticity of demand
f. Oligopoly
2. Discuss critically the following quotation from Stigler:
“The principle of an increasing Syx [the marginal rate of substitution of y for x] corresponds to the older theory of diminishing marginal utility of a commodity as its quantity increases. More precisely: if Syx is increasing, then the marginal utilities of y and x must be decreasing; if the marginal utilities of y and x are decreasing, then Syx is probably, but not necessarily, increasing.”
3. Assume that the demand curve for complete flashlights of a standardized type is known; that the case and bulb are produced separately from the batteries; that the cost of putting the batteries in the case can be neglected; that the number and type of batteries put in each flashlight is fixed and unchangeable; that the supply curves of (1) case and bulb assembly and (2) batteries are known; and that the markets for complete flashlights, case and bulb assemblies, and batteries are reasonably competitive.
a. Indicate how to derive the demand curve for batteries alone. Under what assumptions is this demand curve valid; and for what kinds of problems is it relevant?
b. Suppose the supply curve of case and bulb assembly shifts to the right (i.e., supply increases). What effect will this have on the price of batteries?
c. Under what conditions would you expect the derived demand curve for batteries to be extremely inelastic?
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Final Examination for Economics 300A
Autumn, 1946
Part II
4. Statistical demand curves for fluid milk are derived by two different procedures.
(1) Data for a particular year for the 48 states of the United States are used to obtain a correlation equation expressing (a) the price of fluid milk in a state as a function of (b) per capita consumption of fluid milk in that state and (c) per capita income in that state.
(2) Data for a period of years for the United States are used to obtain a correlation equation expressing (a) the price of milk in the United States as a function of (b) the per capita consumption of fluid milk in the United States and (c) the per capita income in the United States.
Under what conditions, if any, would you expect the results to be identical? If the results are not identical, discuss the relative advantages and disadvantages of each. Indicate the conditions under which you would expect (1) to give a better estimate of “the” demand curve for milk and, the conditions under which you would expect (2) to give a better estimate. How, if at all, could one determine which set of conditions prevails.
5. “In conversations with gold mining engineers a phrase glibly and frequently repeated is ‘sweetening the ore.’ By this phrase reference is made to the practice of diverting production in profitable periods to the poorer ores and perhaps restricting output in the richer fields. Under this practice the better ores are preserved for periods in which mining costs have risen so that over a long period of time output can be held more steady. Contributing also to a policy of sweetening the ores is the reluctance of producers to install capital equipment in a period in which the tendency is for mining expenses to increase with the general advance of wages and living costs. By the time the equipment is installed it might be expected that wages and price levels would be adjusted to the increased price of gold.”
Discuss the wisdom of the policy described in this quotation from the point of view of the individual producer. Assume that the individual producer seeks to maximize the present net capital value of his mining properties. Discuss separately (a) the alleged policy of “diverting production in profitable periods to the poorer ores and perhaps restricting output in the richer fields”; (b) the alleged policy of postponing the installation of capital equipment.
6. Assume a change in the laws so that less stringent conditions are imposed for bankruptcy and reorganization in a particular field (say the production of steel). As a consequence, a number of steel firms reorganize, wiping out a large part of their bonded debt. What would you expect to be the short- and long-run effects of these events on (a) the output and prices of the reorganized firms; (b) the amount of investment in the industry; (c) the rate of interest paid by the industry for new loans; (d) the output and prices of the industry? In each case, give the basis for your answer.
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Source: Hoover Institution Archive. Milton Friedman Papers, Box 76, Folder 9 University of Chicago Econ. 300A.
Image Source: Columbia University, Columbia 250 Celebrates Columbians Ahead of Their Time.