Category: Microeconomics

Another specimen of the Chicago price theory exam featuring True/False/Uncertain questions. This copy found in the Zvi Griliches’ papers in the Harvard Archives.

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Chicago Price Theory
Preliminary/Core Exams
Previously Posted

Summer 1949
Summer 1951
Summer 1952
Winter 1955
Summer 1955
Winter 1957
Summer 1960
Winter 1964
Winter 1969
Summer 1975

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CORE EXAMINATION
Price Theory
Winter, 1965

Preliminary Examination for the Ph.D. and A.M. Degrees

WRITE THE FOLLOWING INFORMATION ON YOUR EXAMINATION PAPER:

Your Code Number and NOT your name
Name of Examination
Date of Examination

Results of the examination will be sent to you by letter.

Answer all questions. Time: 3 hours

1. Indicate whether you believe each of the following statements to be true, false, or uncertain. In each case write a few sentences explaining your answer. Your grade will depend heavily on your explanation.

1. 1. A monopolist can always get more revenue from a consumer by a fixed sum plus price-per-unit system of charging than by the price-per-unit alone.
   2. A flat sum tax on the firms in an industry will never have an effect upon output in the short-run.
   3. If a demand curve is defined as the relationship between price and quantity of X, the real income and the prices and quantities of other goods held constant, it will have an elasticity of -1.
   4. If a cartel assigns quotas to its member firms on the basis of their “capacity” there will be more than the profit-maximizing amount of investment in the industry.
   5. If all commodities had positive income elasticities, there would be no merit in the present distinction between substitution and income effects.
   6. The elasticity of demand for X with respect to the price of Y never equals the elasticity of demand of Y with respect to the price of X.
   7. The short-run price elasticity of the supply of beef can be negative.
   8. The assumptions of competition, constant returns to scale, and equilibrium are inconsistent.
   9. A competitive firm will increase its output as a result of a fall in the price of one of its inputs.
   10. The own-price elasticity of demand for a commodity is no smaller, in absolute value, than the marginal propensity to consume that commodity.
   11. “The price paid for water is no indication of its true value in use because the water makes the production of additional wealth possible. Thus a farmer may pay his irrigation district $8.00 for water per acre of land, but the value of the crops grown might be in the neighborhood of $100 per acre.”
   12. “A central planning authority may or may not decide to weight equally the welfare of the future generation and the welfare of the present generation. This is essentially an ethical question. But if equal weights are to be applied, the appropriate rate of discount (interest) to use in comparing the costs and benefits from alternative public investments is a zero rate.”
   13. In equilibrium, a competitive firm has all the business (sales) it wants. Hence advertising is incompatible with either competition or equilibrium.
   14. The fact that a consumer, in equilibrium, is not consuming all of the possible commodities, implies that he gets increasing marginal utilities from the commodities that he does consume.
   15. A tax on American citizens who go abroad will reduce tourist expenditures and hence improve the U.S. balance of payments only if the demand for foreign trips is elastic.

1. “Exploration for natural gas or oil is a form of investment. As such, like all investments, it depends on the expected level of future output (demand). Thus, a rise in the governmentally fixed (regulated) price of natural gas will decrease consumption and hence curb exploration. Conversely, lowering the price of gas will stimulate both consumption and exploration.” Appraise.
2. Assume the following simple world, in which you are asked to determine the optimum rate of automobile accidents.

1. 1. The only type of accident which occurs is that a car may run into a house. The damage is then always $200.
   2. The probability of an accident will be greater,
      1. …the faster automobiles are driven
      2. …the closer houses are set to the highway.

Assume explicitly any additional information you need to define the socially optimum accident rate. What mechanism, if any, could you design to achieve it?

1. The competitive private enterprise form of economic organization is regarded by some economists as a sort of ideal which it would be desirable to approximate in practice.
   1. On a purely theoretical level, use the tools of economic analysis to explain to a skeptic precisely in what way(s) and why the competitive private enterprise form is optimal.
State whatever assumptions and define whatever terms you require, and state explicitly the criteria of excellence that you are using.
   2. Are there any conditions under which the competitive organization form may fail to produce the results promised above?
   3. What other important economic problems of a modern state, if any, may still be unsolved despite the fact that perfect competition has been achieved? Explain in each case why the problem is important and why perfect competition does not solve it, or explain why there are no unsolved problems.

Source: Harvard University Archives. Papers of Zvi Griliches. Box 129. Folder “Preliminary Examinations, 1957-1965”.