Chicago. Preliminary Graduate Examination in Economic Theory. Winter Quarter, 1961

Two things perhaps worth noting for this post. (1) The winter 1961 examination is for Economic Theory. The title of the prelim exam only morphs to Price Theory in the 1962-63 academic year, coinciding with the publication of Milton Friedman’s text “Price Theory: A Provisional Text”; (2) this exam has one, and only one, equation:

q = 100 – p.

Sputnik was lauched less than four years before these questions were written. While economic theory had not yet attained the status of “rocket-science” in 1961, let’s not fool ourselves, this is an exam designed to make or break character!

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Chicago Price Theory
Preliminary/Core Exams
Previously Posted

Summer 1949
Summer 1951
Summer 1952
Winter 1955
Summer 1955
Winter 1957
Winter 1958
Summer 1960
Winter 1963
Winter 1964
Winter 1965
Winter 1969
Summer 1975

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CORE EXAMINATION
ECONOMIC THEORY
Winter 1961

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. (1 hour) Answer each question “true” or “false” and explain your answer very briefly.

1. 1. It is a tautology that the average costs of all firms are equal in equilibrium in a competitive industry.
   2. A cartel which allows its members to buy and sell output quotas will have a larger net profit for all firms combined than one which does not.
   3. Since all firms in a competitive industry have the same marginal costs, it is meaningless to speak of more and less efficient firms.
   4. A fall in the price of houses will increase the sales of doorbells; a fall in the price of doorbells will not increase the sales of houses; therefore Slutsky’s equation is wrong.
   5. The average size of farm has risen in recent decades in the United States and Canada. This shows that the farm enterprise is typically subject to increasing returns to scale.
   6. A specialized machine has a life of 5 years. Total returns to it in periods of less than 5 years are quasi-rents.
   7. Assume that the world demand elasticity for tin is -2, and that Bolivia produces 1/3 of the world’s tin. Therefore, the elasticity of demand for Bolivia tin is at most -6. 0.
   8. If factors of production are used in absolutely fixed proportion in the production of a particular product, the demand for each of the factors by the producers of the product will be completely inelastic with respect to price.
   9. A supply curve is a curve displaying the quantities which will be supplied at all possible prices. It follows that there is no supply curve under monopoly.
   10. If a firm is operating in the region of falling marginal costs, it must be making losses because marginal cost is then less than average cost.

2. (40 minutes)

1. 1. The long run demand function for a commodity is
      q = 100 – p. The price has been $30 for several years; it now drops to $20. Half the consumers react to the new price immediately; the other half (due to habit, etc.) do not adapt until a year later. Calculate the elasticity of demand at a price of $20 (1) the first year, and (2) the second year after the price reduction.
   2. A consumer assures you that his indifference curves intersect each other. You have an unlimited number of observations on his purchases at various incomes and prices. What tests can you make of the alleged intersections?

III. (40 minutes)

1. 1. It has often been suggested that the demand for a durable good could be increased if “something were done about the large number of used items on the market” The practical suggestions usually are (1) a government regulation forbidding the use of items older than some specified age, e.g. declaring all pre-1950 cars as “unsafe” and withholding license plates from them or (2) “the manufacturers should buy up the used items and destroy them or export them at a loss. [sic, closing quotation marks missing in original] Discuss the consequences of these two types of policies on (a) the demand for new durable equipment and (b) the profitability to the industry of the two policies.

IV. (40 minutes)

1. 1. “The first impact of this policy (tight money) is the higher interest rate. Plainly the impact of this will be very different on a firm that has control over its prices and hence can pass along this higher cost as compared with the firm whose prices are given and which, accordingly, must bear the cost itself. The point need not be labored.
      “The U.S. Steel Corporation justified its price increase of 2 weeks ago by the contention that its cost had risen. In doing so it not only conceded its ability to pass higher costs, including higher interest charges, to the consumer but based its policy on the need to do so. But no such opportunity is open to the farmer or to the smaller businessman. They cannot raise their prices, for they are market-determined. They shoulder themselves the costs of this policy.”
      Analyze and evaluate this statement. Disregard the peculiar problems of monetary policy. Treat it as a question about the differential impact of a change in any factor price on a competitive firm or industry as against the impact on a monopolistic firm. Does a change in factor cost “hurt” less in one case than in the other? What do you understand by “passing the cost on to the consumer” and how does the distinction between a monopoly and a competitive industry affect this? Assume the same cost curves and the same shifts in both cases.

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

Image Source: Roger Vaughan’s classic drawing “The School of Chicago 1972”.