Chicago. First quarter price theory exams. Rees, 1960

Happy to add another round of first quarter price theory exams from the University of Chicago to the collection. Always nice to have a picture from the early professional years of the economists featured here. Distinguished old farts were once rising stars after all. (A general wisecrack made with the qualification, “present company excluded”.)

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Posted earlier

Reading list and exams from the Autumn quarter of 1962.

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Economics 300
Mr. Albert Rees

Midterm Examination
Autumn 1960

1. (16 points) State whether each of the following statements about the U. S. economy is true, false, or uncertain, and explain your answers briefly.
   1. Consumers decide what will be produced.
   2. All consumers participate equally in determining what will be produced.
   3. The government influences the composition of output in the private consumer goods sector.
   4. The government determines the level of investment for the economy as a whole.

2. (10 points) Comment briefly on the following statement:
   “When equilibrium prices in competitive markets are disturbed, they tend to be re-established. Thus the first effect of an increased supply of eggs is to lower the price. At this lower price, consumption is increased, and the increase in demand tends to drive the price back up again.”
3. (16 points) Increased costs cause manufacturers to reduce the size of 5 cent chocolate bars from 2-1/2 ounces to 2 ounces. Because the bars are smaller, people eat more of them and consumption rises from 10, 000 bars a week to 11,000.
   1. Can these events be shown on an ordinary supply and demand diagram? If so, show them. If not, explain why.
   2. Can the elasticity of demand for chocolate be computed? If so, compute it. If not, explain.

4. (24 Points) The following table gives hypothetical prices of pork and beef per pound in two years, and quantities consumed in a certain town.

	Price per pound		Pounds consumed
	1959	1960	1959	1960
Pork	40 cents	50 cents	1000	800
Beef	60 cents	60 cents	1000	1200

1. 1. Compute the elasticity of demand for pork and the cross-elasticity of demand for beef in terms of the price of pork.
   2. Compute the Laspeyres price index for the price of meat from 1959 to 1960 (assuming that pork and beef are the only kinds of meat).
   3. Draw an indifference map for pork and beef for a typical consumer and illustrate the changes shown in the table on his indifference map. Derive two points on his demand curve for pork.
   4. Assume that the consumer’s money income is increased by an amount equal to his original income times the Laspeyres price index computed in (b). Demonstrate that he has been overcompensated for the price rise. Under what condition if any would this increase in income fail to overcompensate him?
2. (16 points) Jones lives in a rented house for which he pays $150 a month. He has the opportunity of buying an identical house for $25,000, of which $15,000 will be paid in cash and $10,000 can be borrowed on a mortgage. He has figured that his monthly expenses would be $100 if he bought: $50 for interest on the mortgage, $20 for local taxes, and $30 for maintenance and depreciation. His income tax and expenses for fuel and utilities will not be affected by the purchase. He argues that it will cost him less to live if he buy the house; his wife argues that it will not.
   1. Under what conditions is Jones right? Under what conditions is Mrs. Jones right?
   2. Is there any divergence between the “right answer” to this problem from the private standpoint of the Jones family and from the standpoint of society? Explain.

6. (18 points) The GJS corporation, manufacturers of gadgets, have determined that for every 10 per cent increase in the capacity of a gadget factory, minimum short-run average total cost falls by 1 per cent throughout the relevant range of capacities.
   1. What can you say about the production function for gadgets over the relevant range?
   2. Suppose that the company hires two factors of production, labor and capital, and pays each its marginal product. Will anything be left over for the owners of the company who contribute no services? Explain.
   3. Suppose that the company wants to build a plant to produce 10,000 gadget per week. What can you say about the size of the plant that will produce these most efficiently?

Economics 300
Mr. Rees
Fall. 1960

Final Examination
December 14, 1960

1. (21 points) Show each of the following events on an indifference map:
   1. The change in the consumption of margarine following an increase in income (axes: butter and margarine. Assume that the income elasticity of demand is positive for butter and negative for margarine.)
   2. The change in the consumption of bread following a rise in its price. (axes: bread and all other commodities.) Identify the income and substitution effects of the price change.
   3. Do part (b) over using Friedman’s “Marshallian demand curve” concept and explain the difference between the diagrams for (b) and (c).
2. (19 points) In the United States, about one-fifth to one-fourth of all income is property income. State briefly (a) the advantages of having private income from property in our economy (b) the costs or disadvantages. You may judge these according to any values you care to use, making the values as explicit as possible.
3. (20 points) In a certain isolated area there are 50 farms of each of two types, A farms and B farms (100 farms in all). Within each type, all farms are identical. All farms are worked by identical workers. The marginal product schedules of one farm of each type are given below, in bushels of wheat per year.

	A Farm	B Farm
No. of workers
1	100	95
2	90	84
3	80	73
4	70	62
5	60	51

1. If there are 260 workers in the area, how many will be employed on each kind of farm? What is the total product of each kind of farm? The rent of each kind of farm? The wages of workers on each type of farm in bushels per year? (Assume that farmers compete freely for labor, and labor can move within the area.)
2. By means of an irrigation project, the owners of twenty B farms transform them into A farms. Recompute the answers to (a), counting the transformed farms as A farms. Who gained and who lost from the project, and why?
   1. (20 points) By means of appropriate diagrams and/or explanations, show the short-run effect of each of the following taxes on the output and profits of a monopolist.
   2. An excise tax of 10 cents per unit of product.
   3. An excise tax of 10 percent of the price of the product.
   4. A corporate profit tax equal to 50 percent of net profits.

1. (20 points) The Edgeworth Box Company is the only employer in the town of Yarmouth. Its supply schedule of labor is given by W = 40 + 1/4 q, where W is the wage in cents per hour and q is the number of manhours supplied per week. The company sells boxes in a competitive market. The value of the marginal product of labor is given by
   V = 100 – 1/2 q for values of q greater than zero.
2. How many man-hours of labor will the company employ, and at what wage?
3. Show diagramatically for part (a) first, the wage bill and second, the sum of monopoly profits and the return to factors of production other than labor.
4. What will be the effect on employment of a legal minimum wage of 60 cents an hour? of 80 cents an hour?

This problem may be solved algebraically or graphically. The following table gives numerically some points on the schedules whose equations are given above:

Supply		Marginal Product
q (Man-hours)	W (cents)	q (man-hours)	W (cents)
1	40.25	1	99.5
2	40.50	2	99.0
3	40.75	3	98.5
4	41.00	4	98.0
etc.		etc.

Source: Duke University. David M. Rubenstein Rare Book & Manuscript Library. Economists’ Papers Archive. Albert Rees Papers, Box 1, Folder “Economics 300”.

Image Source: University of Chicago Photographic Archive, apf1-07002, Hanna Holborn Gray Special Collections Research Center, University of Chicago Library. Colorized by Economics in the Rear-View Mirror.