Interfield Ph.D. Microeconomics Qualification Examination
Examiners: Borcherding, Tasoff and Ha
May 28, 2014
100 points/ Five hours
Please spend the first hour outlining your exam and the next four hours writing it up. Please
write legibly and with a dark pencil if you do not use ink. Don’t make your examiners guess.
Don’t ignore the 10 point bonus-Section D. Good luck.
Part A- Simple & Short Econ 313 Microeconomics Questions (15 points)
Please answer three, but only three, of the five questions below:
1. If sellers always face ignorant buyers, say as in the funeral business where bereaved
customers can't bear to shop around, describe the competitive equilibrium. Explain in words
too.
2. If there are only three goods, X,Y, and Leisure, describe and explain the tax scheme that is
likely to minimize inefficiency when Leisure is non-taxable.
3. If a firm has a legalized monopoly in a local market, it faces competition in exports,
(where w is “world”), describe the effects of the imposition of a consumption tax on , but
where
is exempt.
4. Why do we empirically observe that demand and supply behavior is always more price
inelastic in the short run than in the longer run?
5. People who earn high incomes from selling their services don't shop much at Costco and
Walmart, but people whose incomes from work are low, do.
Part A'- Analytic Section of Econ 313 Microeconomics (25 points)
Choose any one, and only one, of the following three "f of x"-type problems.
1. Public versus Private Goods
Elroy and Prudence are enjoying a getaway weekend at an exclusive spa resort. Part of the spa
services is a jazz trio that can be hired for a private concert (at an hourly rate), which Elroy and
Prudence both can enjoy (non-rivalrously).
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Elroy has a marginal valuation of PE = 80 - 20Q, where Q is in hours of concert, and PE is in ($)
he is willing to pay. Similarly, Prudence’s marginal valuation is PP = 60 - 10Q. (It is worth
noting that they have maintained separate bank accounts, and each has access to private
discretionary funds for this trip.)
a. Keeping in mind their non-rivalrous consumption, what is Elroy & Prudence’s combined
demand for hours of jazz concert? Solve this analytically and show it graphically. If the
price per hour is $50, how long of a concert will they hire?
b. At this spa, a masseuse can also be hired by the hour. Coincidentally, Elroy and
Prudence both have the same demand for massage as they have for the jazz concert.
What is their combined demand for hours of massage? Solve this analytically and show
it graphically. How much will each consume if the masseuse charges $50/hr.? [Note
that massages are rivalrous goods; only one of them may enjoy it at a time.]
2. Price Discrimination
Suppose a monopolist can produce any level of output it wishes at a constant marginal cost of
$10 per unit. Assume the monopolist sells its output in two different markets separated by
some distance. The demand curves in these two markets are giving by:
Market (1):
–
and
–
Market (2):
a. If the monopolist can maintain the separation between the two markets, what price
should she choose for each market? What are the total profits in this situation?
b. How would those prices change if transportation costs were zero and the monopolist
was forced to follow a single-price policy? What would be the monopolist’s new profit
level in this situation?
c. What level of output would prevail in each market if both markets were perfectly
competitive? Use your answer to calculate the total deadweight losses under price
discrimination, the situation described in part (a).
d. Calculate the total deadweight losses under the single-price policy, the situation
described in part (b). Is price discrimination more efficient than the single-price
monopoly? Why?
3. Uncertainty and Risk Aversion
Suppose a Ellen’s utility is ( )
, where W represents wealth
a. Calculate the coefficient of absolute risk aversion. What does this coefficient indicate
about Ellen’s attitude towards risk?
b. Suppose that Ellen’s initial wealth is $100 and now she is offered to flip an unbalanced
coin that promises to pay her $300 if she wins and she will have to pay $91 if she loses.
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The probability of winning is 1/2 or 0.50. What is the maximum Ellen is willing to pay to
avoid the bet?
B. Essay Section on Political Economy (25 points)
Write a long essay on one of the seven topics below which demonstrates your mastery of some
important parts of the political economy literature. Be sure to cite references:
1. According to Arrow, it is not possible to construct a social welfare function that does not
violate conditions such as aggregation transitivity or democracy. Yet all societies must make
collective choices. Does this mean political economists have nothing to say about the wisdom
and value of the various mechanisms of social choice? Write an essay on the predictive power
of constitutional economics.
2. Without transaction costs, most scholars would argue, institutions would never have to be
considered. Show the introduction of transaction costs guides our understanding of analyzing
one of the following: the behavior of the authoritarian state, the democratic political party,
public bureaucracies, the for-profit corporation, the international NGO, the Western university,
the family, and religion.
3. The Invisible Hand suggests that competitive markets generate a maximum of joint rents to
participants, and casual impression suggests that the wealthiest societies use them extensively,
though supplemented with selective interventions to treat problems from “market failures” as
well as to address distributional inequities. (The First and Second Fundamental Theorems of
Welfare Economics treat of these). Why is the notion that the Invisible Hand not invoked so
much for the public sector? A couple of economists actually do, Donald Whitman and Ronald
Wintrobe, but most seem to view the public sector as a necessary but extremely flawed
institution. Write an essay where you address the possibility of efficient public choice and
dwell on conditions that make this more or less likely.
4. Two giants of early 20th century economics, J.M.Keynes and F. Hayek, agreed that
information was at the heart of understanding how an economy worked and how well it
performed. Eight decades later most economists concur with these men, but are still not agreed
how exactly information is processed, the particular institutions that help to do so, and the role
of culture and social capital in conditioning it all. Both Keynes and Hayek believed that formal
economics tended to ignore human weaknesses in reason, competition, coordination, and
conflict. Write an essay reflecting on the Keynes-Hayek notion that people are not so rational
but their institutions- those bottom-up ones that evolve glacially and those top-downers that
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are more consciously developed- affect the economic life of any group. (Behavioral economics
has much to offer in any good answer, as well as transaction costs economics).
5. Constitutions are the rule books of political choice making. Some, such as the First
Amendment to the U.S. Constitution or the rule-of-law forces in British statute and common
law, are pretty well acknowledged. But much of the constitutions of any people is based on
practices that are unconsciously accepted either by long-standing usage or because alternatives
seem not to exist. It appears today that formal and implicit constitutions which drove most of
the prosperous international order from the end of World War Two is in serious
difficulty. Globalization has enshrined a level of free trade undreamed of in 1945, but although
the tension between the West and Marxist-Leninist Communism has dramatically lessened,
international tensions are still fraught. Furthermore, distributional issues have severely
questioned the notion that the Economic Everyman in the West has still skin in the game-often
called The Washington Consensus, i.e., the belief that free markets and limited governments
yield the best outcomes for the median citizen. Many current writers, popular and scholarly,
are seriously questioning the efficacy of the American-British system and are pressing for a
more interventionistic Scandinavian-Northern European social-democratic approach. Many
others think that without more supra-national institutions with real power to tax, spend and
regulate the level of world-wide externalities in terms of the financial system, the macroenvironment, and delivery of acceptable median incomes will lead to huge tensions and even
catastrophic outcomes. Using political economy theory and evidence, what is your professional
take on the future of the Washington Consensus?
6. Neo-classical economics fixates on static Paretian conditions, the old price-should-equalmarginal cost idea, where everything seems to focus on the "margins". Modern institutional
economists feel this misses the "dynamic" guarantors of embettering outcomes. To these
modern institutionalists, monopolies are generally bad, but controlled monopolies with limited
durations are considered absolutely key to driving innovations. Write an essay comparing
welfare economics of the old Marginalists with that of the New Institutionalists and NeoSchumpeterians of today. Be sure to point out specific examples of differences. Alternatively,
write an essay comparing the political economy of the Scottish Enlightment (e.g., Hume and
Smith) with modern Neo-Institutionalism analysis today.
7. Write an essay how behavioral economics has affected current New Institutional Economics.
Section C - Interfield Game Theory Section (35 points)
Answer either question 1 or 2, but not both, in this section.
1. Refer to the following:
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CAMPAIGN STYLE SCENARIO: Two candidates, Incumbent and Challenger, are competing for the same
office. Each faces a choice of whether to run a positive campaign emphasizing their own
accomplishments or a negative campaign emphasizing their opponents’ short-comings. If one runs a
negative campaign and the other runs a positive campaign, the one that ran the negative campaign will
win. If they both run a positive campaign, Incumbent will win. You will be asked below to consider
different possibilities for the case where both run negative campaigns. Winning the election is worth 5
units of utility to either candidate. Both candidates find running a negative campaign unpleasant, and
possibly damaging to their own long-run reputations. Each candidate loses 1 unit of utility if they run a
negative campaign.
1. Suppose that if both candidates run negative campaigns, Challenger wins. Suppose also that
Incumbent decides her campaign style first, and Challenger can observe Incumbent’s choice before
making his own choice.
a.
b.
c.
d.
For each player, list all of his or her possible strategies in this game.
Draw the game tree and indicate the rollback equilibrium by highlighting the optimal
choice at each decision node.
What happens on the equilibrium path? That is, who wins the election and what kind of
campaigns are run by each candidate?
Is this outcome in this game Pareto Efficient? Explain.
2. Now suppose that if both candidates run negative campaigns, Incumbent wins. As in question 1,
Incumbent moves before Challenger.
a.
b.
c.
Draw the game tree and indicate the rollback equilibrium.
What happens on the equilibrium path? That is, who wins the election and what kind of
campaigns are run by each candidate?
Is this outcome in this game Pareto Efficient? Explain.
3. Now suppose that both players make their decisions about campaign style simultaneously.
a.
b.
Write the normal form game for the case where Challenger wins when both run
negative campaigns. Identify any dominant strategies.
Write the normal form game for the case where Incumbent wins when both run
negative campaigns. Identify any dominant strategies.
4. Now return to the case where Incumbent moves first, and Incumbent wins if both run negative
campaigns. Suppose that Incumbent is uncertain about Challenger’s preferences. Specifically, because
Challenger is new to politics, there is some chance that a negative campaign will bother him more than
it would a more seasoned politician. If the Challenger is “soft”, he loses 7 units of utility from running a
negative campaign, instead of the 1 unit he would if he were “tough.” Incumbent thinks that the
probability that the Challenger is “tough” is q.
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a.
b.
c.
Draw the game tree that captures this uncertainty.
For what values of q does the Incumbent choose a positive campaign?
Suppose q is in the range where Incumbent chooses a positive campaign. What is the
probability that Incumbent loses?
2. Consider the Extensive-form game below.
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Section D- Extra Credit Questions (up to 10 points)
You may answer two, and only two, of the four below for a maximum of ten lost points from
Sections A, A', B, and C
1. Real estate sale contracts in the USA and Canada are generally negotiable, but the modal
and mean contract ask the owner-seller to give the selling agent roughly 6% of the final price,
split evenly between the original listing agent and the agent making the sale. These agents, in
turn, split their share with their sponsoring brokerages. Thus, the agent actually selling the
house will earn about 1.5% of the sale price. This seems a recipe for under investment in selling
effort, since the marginal product of an extra unit of effort by the selling agent yields her only
1.5% of the value created. What explains this strange market?
2. Statutory minimum hourly wage rates, currently around $9 in California, are likely to rise to
$15/hr. in Los Angeles because of the effective political power of local unions. The argument
that some economists offer, however, is that minimum wage increases really are “no big deal”,
since the research of Card & Kreuger, now some years ago, seems to have established that
observed franchises in the fast food industry did not reduce their staffing at their New Jersey
outlets, compared to their franchises in Pennsylvania where the state did not raise that wage
floor. What do you think about the argument that L.A. will not see much job loss from this
proposed rise?
3. On Jan. 14 an important US Federal Court said the FCC's “net neutrality” rules exceeded the
FCC's statutory powers. (Net neutrality requires internet carriers to treat all customers
equally). Predict the effects.
4. Janet Yellen and George Akerlof argue that, to insure high quality inputs, firms often pay
employees "efficiency wages," i.e., beyond the market rate for that factor’s services. This
suggest, however, that employees who have the jobs will earn more than those who would like
to have such a position, but aren't successful in finding such employment. What are the
implications of this excess supply situation?
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