M.I.T. General Exams, Micro and Macro. Feb 1967

Here we have another example of the sharing that goes on among leading economics departments. For some reason Zvi Griliches at Harvard had a copy of the general examination questions for both microeconomics and macroeconomics at M.I.T.  that he kept in his files of Harvard prelim exams. Since anybody looking for M.I.T. economics exams would unlikely get all the way to Griliches’ papers (a goldmine for Chicago and Harvard exams by the way), Economics in the Rear-view Mirror has transcribed them for the digital historical record of the M.I.T. economics department.

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[Handwritten note:] MIT Prelim            Return to Z.G.

February 8, 1967

General Examination
Micro Theory — Two Hours

Answer any THREE questions (40 minutes each).

1. In a two-factor, two-product economy with fixed stocks of L and T, both industries use L and T in the same proportion when facing the same pair of factor prices. One industry is purely competitive, with constant returns to scale; but the other is a “natural monopoly,” with moderately increasing returns to scale. Every household always divides its income equally between the two goods.
   1. What kind of transformation curve will the economy have?
   2. If the monopoly is regulated so that price equals average cost, what will this imply as to the economy’s general equilibrium? Comment on the relationships among the prices and quantities of the two goods, the real wages and rents in terms of both goods, and the labor and land quantities allocated to the two industries.
   3. Is there then any way in which the allocation of resources can then be improved? Explain.
2. An individual has an income from property of Y₀ per year. If he faces a given wage rate, at which he chooses to work t₁ hours for total wages of Y₁ what will be the comparative revenues of the following alternative taxes, when each would have the same effect on the individual’s own welfare:
   1. a lump-sum tax
   2. a proportional tax on his wage income
   3. a progressive tax on his wage income?
3. A monopolist faces a linear demand for his product, which is produced with just L and T subject to fixed coefficients. What can you say about his demand for L
   1. in a short run when T is fixed in quantity, and
   2. in the long run when T is available at a fixed price? Explain fully.
4. Discuss the welfare economics doctrines associated with at least three of the following economists:
   1. Bergson
   2. Arrow
   3. Pigou
   4. Hicks-Kaldor-Scitovsky
5. Discuss the similarities and differences between the problems of duopoly and bilateral monopoly. You may limit your discussion to the simpler standard instances of each.

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General Examination in Macroeconomics
February 3, 1967

Answer three questions.

1. Suppose i) Net Saving is proportional to NNP; ii) Net Investment is an increasing function of NNP and a decreasing function of the interest rate, r, with the shape illustrated.

1. 1. What justification is there for an investment function of this general shape?
   2. Plot the implied IS curve.
   3. Plot a conventional LM curve and discuss the determination and stability of macroeconomic equilibrium and the consequences of an increase in the money supply.
2. “The capitalist investor is fundamentally a friend of the worker, but the technical inventor can quite often be his enemy.” (Wicksell) Discuss.
3. Why has the average propensity to save not fallen as income per head has increased in the U.S.?
4. Suppose investment behavior is such that all investment opportunities which offer a rate of return equal to or greater than some fixed target rate R are instantly adopted. Labor and capital are the only factors of production; constant returns to scale and diminishing returns prevail. The labor force grows exogenously at a fixed annual rate g.
   1. What saving rate, relative to national product will just maintain full employment in the steady state?
   2. How does that saving rate vary with g?
   3. What do you make of the common notion that a rapidly-increasing labor force makes it harder to maintain full employment?
5. Suppose that scientific inventory control methods reduce the desired inventory/sales ratio. Construct a simple model of inventory cycles which will tell you the effect of this development on the damping of inventory fluctuations.

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

Image Source: The MIT beaver from the cover of the 1949 yearbook Technique.