Chicago. Price Theory Core Examination. Summer 1961

 

Another gap just filled in a quarter century of University of Chicago graduate qualifying exams in price theory.

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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 1961
Summer 1962
Winter 1963
Winter 1964
Winter 1965
Winter 1969
Summer 1975

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ECONOMIC THEORY (Old Rules)
Summer 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: 4 hours.

1. Indicate whether statement is true, false, or uncertain, and briefly give your reason.
   1. A firm has a monopoly in its home market and also sells in a perfectly competitive world market; if its home-market price is 50% above the world market price, the elasticity of demand in the home market must be 3.
   2. If a multiplant firm has to produce a given quantity of output, it will never pay it to produce in more than one of its plants if that plant has decreasing marginal costs.
   3. The development of more rapid urban transport will inevitably raise the aggregate rental value of urban residential property.
   4. If the number of acceptable applicants for admission to medical schools is less than the number that could be accepted, the medical profession cannot be raising its earnings by artificially restricting entry.
   5. The rate of interest is determined by the marginal productivity of capital.
   6. If a particular commodity is subject to a special tax not imposed on other commodities, removal of that tax will always increase economic welfare.
   7. If the supply curve of a competitive industry has a positive slope, it means that the industry is subject to decreasing returns to scale.
   8. If wage rates, on the average, increase at the same rate as average product per worker, this means that the marginal return on investment declines over time.
   9. Entrepreneurs in a competitive industry may realize short term gains or profit as a result of an increase in the price of an input (due to a shift in the supply function for the input), even if the demand curve for the industry remains unchanged.

2. A. A drug manufacturer stated that the prices of drugs sold in England were priced at about one half the price of similar drugs in the United States. The reason given for the price difference was that per capita incomes were much lower in England than in the United States and the English could not afford to pay as much for the drugs.
   Accept the factual statements as valid. Discuss the statement in terms of:
   1. Demand functions for drugs in the two countries (income and price elasticities).
   2. Whether the manufacturer could be maximizing his profits.
   3. International trade restrictions on drugs in the two countries.

2. B. In a given competitive industry, both price and output increase between two time periods. Indicate why each of the following statements is consistent or inconsistent with the observed changes in price and output or is simply irrelevant:
   1. The industry has a perfectly elastic supply curve.
   2. The demand curve has shifted to the right.
   3. The factor supply curves are upward sloping.
   4. The industry is subject to diminishing returns.
   5. Total revenue has increased because the price elasticity of demand is greater than unity.
   6. Rents and quasi-rents have increased.
3. A. In the effect of union-produced wage increases on prices, one economist says,

“A competitive industry (with a horizontal long run supply curve] will eventually pass all of a wage increase on to consumers in higher product prices” but “a monopolized industry, if it maximizes profits both before and after the wage increase, will not pass on the full amount of the wage increase in prices.”

Assume that the monopolized industry, like the competitive, operates under long-run constant costs.

1. 1. Explain precisely what “pass all of a wage increase on to consumers in higher prices” means.
   2. Is the statement for the monopolized industry correct? If so, prove it. If not, state why not and indicate any additional conditions required to make it true.

3. B. This economist also says that the competitive industry “will regain its normal rate of profit”, whereas, in the monopolized industry, “the wage increase will lower monopoly profits”
   1. What does the word “profit” mean in these statements? in the phrase “maximizes profits” of the preceding question?
   2. Do the two statements imply a difference in results in the sense that the monopolized industry will not regain “its normal rate of profit”?
   3. Indicate briefly what other meaning or meanings, if any, does the term “profit” have in economic theory.
4. Discuss the relation between forward (and/or futures) prices and spot prices on commodity markets and foreign exchange markets and the role of “speculators” and “hedgers” in these markets. State some of the leading theories about this relationship and discuss the kinds of evidence used in testing them.

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