Chicago. Price Theory. Ph.D. Core Examination. Summer, 1975

 

Graduate prelimary examinations for price theory at the University of Chicago for 1964 and 1969 have been transcribed and posted earlier. Economics in the Rear-view Mirror now adds the Summer quarter, 1975 exam to its stock of transcribed Chicago examinations.

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Ph.D. Core Examination
PRICE THEORY
Summer, 1975

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INSTRUCTIONS:

Write in black ink and write only on one side of each page.

Write the following information on the first page of your exam paper:

• • • Name of examination
    • Date of examination
    • Your code number and not your name

Write the following information on each page of your examination paper:

• • • Upper left: code number
    • Upper right: number of page

When you fold your paper at the end of the exam, write your code number on the back of the last page, and indicate total number of pages.

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

ANSWER ALL QUESTIONS. TIME: 3 HOURS

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1. (60 minutes, 5 per item) Indicate whether each of the following statements is TRUE, FALSE, or UNCERTAIN. In each case write a few sentences explaining your answer. Your grade will be determined by your explanation.
   1. It is immediately obvious that if the firm has any significant degree of monopoly power, sales maximization would be better for the rest of the economy than profit maximization.
   2. When a firm increases its price because its raw material costs have risen, the buyers accept the price increase more readily.
   3. If A and B are produced in fixed proportions and consumed in fixed proportions, one of the two will be free.
   4. Marshall asserts that the rents of different qualities of agricultural land will approach equality as the economy grows in population and wealth.
   5. An industry whose output is increasing cannot be making negative profits.
   6. The prohibition on environmental pollution by (say) a factory cannot increase national income.
   7. A competitive industry is more likely to cartelize when the probability of expropriation increases.
   8. Regulation of a competitive industry by the government will decrease the probability of cartelization.
   9. In the social security systems of most countries, the age of retirement after which old age pensions are “payable” is lower for women than for men (usually 60 as compared with 65 years of age), even though on the average women live significantly longer than men. This is a clear case of discrimination against men, which should be protested by the Men’s Liberation Movement.
   10. The U.S. personal income tax system allows married couples to “split” their aggregate income equally and pay tax on the results at the same rates as single people would. This is a clear case of discrimination in favor of heterosexuality that should be vigorously protested by the Gay Liberation front.
   11. If the elasticity of supply is less than unity, and the elasticity of substitution in production greater than unity, a fall in the price of a factor must increase the demand for it.
   12. Labor can be “Exploited” only if there is monopoly in the product market.
2. (25 minutes)
   In most states it is illegal for drug stores to advertise the prices of prescription drugs. A customer can find out the price of a prescription drug only by asking the pharmacist in person. In addition only pharmacists licensed by the state are allowed to dispense drugs and every drug store must employ at least one licensed pharmacist. One can become a licensed pharmacist by passing an examination administered by the state and written by a board of pharmacists. Finally, a pharmacist must fill a prescription exactly as it is written by the physician and may not substitute a generically equivalent drug.
   1. What would happen if pharmacists were allowed to advertise the prices of prescription drugs?
   2. What would happen to the price of drugs if pharmacists were allowed to substitute any drug from a specified list in place of the prescribed drug?

3. (25 minutes)
   We are presently importing considerable oil at the $10 barrel price, and producing domestically at a free price from new wells and a $5 price from “old” wells (on amounts they produced before the oil price rises).
   1. What would be the effect on domestic price of a higher tariff on imports? On what would the magnitude of the price rise depend?
   2. What would be the effect on domestic price of a removal of the price ceiling on “old” oil? On what would the magnitude of this price effect depend?
4. (25 minutes)
   Translate into the apparatus of indifference curves and budget lines the following phenomena:
   1. The individual likes good music more, the more he hears.
   2. The individual has monopsonistic power with respect to one commodity.
   3. (a) The consumption of the two commodities (however spaced) is poisonous.
      (b) The consumption of either commodity alone is poisonous.
   4. The individual cannot afford one of the commodities.
   5. (a) One of the commodities yields increasing marginal utility.
      (b) Both do.
5. (20 minutes)
   1. Assume there is an exhaustible resource that can be extracted at a constant marginal cost c. Assume there is a competitive industry that extracts this resource. Derive the behavior of the equilibrium price over time if the demand schedule for the product remains constant over time.
   2. Under the same demand and cost conditions, derive the equilibrium price if the resource is controlled by a single firm.
6. (25 minutes)
   Ontario imposes a tax of 30 percent on the sale or bequest of any land to non-Canadians. What are the effects of such a tax on:
   1. Landowners, Canadian and non-Canadian;
   2. Non-landowners, Canadian and non-Canadian.
      What will the effect be if leases are not regulated?

Source:  University of Chicago Archives. George Stigler Papers, Addenda. Box 33 (2005-16), Folder: “Exams & Prelim Questions.”

Image Source: The Quarter-Centennial Celebration of the University of Chicago (1916).