Chicago. Price Theory Prelim Exam. Winter Quarter, 1968

Links to previously posted Chicago prelim exams.

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PRICE THEORY

Preliminary Examination
for the Ph.D. and the A.M. Degree
Winter Quarter, 1968

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 each of the following statements is True (T) or False (F), and justify your answer briefly.

1. 1. ________ Consider a competitive firm’s demand for a factor of production as a function of the factor price for given prices of other factors. In case A, also hold output fixed. In case B, instead hold the price of the product fixed. The elasticity of demand is greater for B than A.
   2. ________ Firms will devote no more resources to accident prevention when they pay the costs of employees injured by industrial accidents than they would if the employees bore the costs.
   3. ________ The demand elasticity for Ford cars is -4.2; the elasticity for Chevrolet cars is -3.0. If Ford’s market share is 1/3 and Chevrolet’s is 2/3, then the elasticity of both brands together is -3.4.
   4. ________ If Congress passes safety legislation outlawing the use of automobiles over 7 years old, in the long run, the number of automobiles on the road will be decreased but the annual purchases of new automobiles will be increased.
   5. ________ Nightclubs often have an admission or cover charge in addition to the price of food or drinks. This implies the absence of marginal cost pricing.
   6. ________ A patent usually entitles the owner of an invention to charge as much as he wishes for the right to use his invention. Hence, a patented cost-reducing invention will not affect the price of the product because the optimal royalty rate will just equal the cost reduction.
   7. ________ A rational person may gamble at unfair odds.
   8. ________ Since we observe that competitive firms operate their plants at a higher rate at business cycle peaks than at business cycle troughs, they must be operating in the range of rising short-run marginal costs.
   9. ________ The recent rise in the postage rate was accompanied by a “shortage” of stamps, providing us with an example of the Giffen paradox.
   10. ________ “Time is money,” hence an invention which decreased the hours required for sleep would lead to a rise in real income as conventionally measured.

II. —

1. 1. How is it possible for coffee beans of the same brand and same freshness to sell at a higher price per pound than the same coffee ground and canned?
   2. The same typewriter could have recently been bought at $130 from Toad Hall, $125 from Sears under its own label, and for $117 from a mail-order discount house (Monroe). Does this mean that the retail typewriter market is very imperfect?
   3. Some years back, when the Federal campaign against cigarette smoking was beginning, Time reported that “when someone offers a cigarette to pipe-puffing Surgeon General Luther Terry, he always grabs it. ‘Every one I accept I tear up,’ he says. ‘That way there’s one less cigarette.'”
      Analyze the economics of the Surgeon General’s policy. In doing so, assume, of course, that a substantial class of people with similar beliefs behave the same way, so the effect is at least potentially appreciable. Would it contribute to his objective of reducing smoking? If so, through what channels?

1. Suppose a traffic department enforcing parking regulations in the business section of a large city has a fixed force available to it which means an approximately constant probability p that an illegally parked car will be ticketed. Assume that each person has the choice of parking legally at X dollars per day or illegally, paying a fine of F dollars each time his car is ticketed.
   1. Assume first the sole aim of the traffic department is to discourage illegal parking. Assume that all drivers have constant marginal utility of income and try to maximize expected money income (i.e., minimize their expected loss from parking). What fine F should the traffic department impose on parking in order to achieve its aim?
   2. If all drivers maximized expected utility, had diminishing marginal utility of income, and experienced neither utility nor disutility from obeying the law, how would this affect your answer to a? If they had increasing marginal utility of income?
   3. Suppose the traffic department received all the fines and desired to maximize its expected revenue. How should it set the fine F? Indicate what additional information, if any, it needs in order to do so.

1. Assume that production functions are Cobb-Douglas of the first degree and that competition reigns. Let there be only two factors, say, labor (L) and capital (C).

1. 1. What is the Cobb-Douglas form?
   2. Show that the share of wages in the total output is independent of the quantity of labor, and equal to the exponent of labor, say, a.
   3. Let there be one additional worker.
      1. Because wages are equal to marginal product, he gets the whole of what he adds to output.
      2. Yet by (b), labor gets only the fraction a of the additional output.

How do you reconcile (i) and (ii)?

1. “The exemption of college students from the draft has been attacked as discrimination in favor of middle and upper income classes. Yet a cold-blooded economic analysis shows that in fact it promotes greater equality in the distribution of income, and so benefits the lower-income classes.”
   Provide the “cold-blooded economic analysis.”

Source:  Harvard University Archives. Papers of Zvi Griliches, Box 130, Folder “Preliminary Examinations, 1965-1968.”

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