Spring 2012 Ph.D. Qualification Examination in Microeconomics
May 30, 2012
Examiners: Borcherding and Tasoff
100 points/Five Hours*
Please read all examination questions and outline answers during the first hour. Then answer
questions in Sections A and A’, B, and C. *If you took Econ 318, you will answer the question in
Section D. It adds 20 points to the examination. You will get an extra 45 minutes of time. Write
legibly and don’t crowd your answer sheets. The latter are free to you. Recall what examiners
can’t read they can give no marks. Good luck.
Section A: Based on Economics 313 (25 points)
Answer both A1 and A2 below. Note choices offered.
A1. Some quickies: Pick any three of the five below: (10 points)
(a) State and explain intuitively Hicks Third Law of Demand. Why is it important and
useful?
(b) Diminishing marginal rates of substitution for X and Y in consumption do not require
diminishing marginal utilities for X and Y. Why? Give an example.
(c) If indifference curves are vertically parallel, good X is not a normal-type of good. What
is it then?
(d) High income wage earners eat out more than those persons whose incomes are similar but
whose incomes are largely from capital sources. Why?
(e) When skilled wages rise in competitive but non-open economies, high tech capital
intensive firms get larger. How come?
A2. Simple problems. Pick one of three below (15 points)
A2-a)
Ken’s utility function is given by
initial wealth is $2,500.
, where W denotes Ken’s wealth. Suppose that
(i)
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(ii)
Suppose Ken is offered to toss an unbalanced coin that shows head with probability 0.2.
If he accepts to toss that coin, he will win $5,000 if it’s a head and will lose $1,000 if it’s
a tail. Show that although the expected value of his wealth is higher than his initial
wealth if he plays this game, Ken will refuse it.
(iii)
What is the maximum Ken is willing to pay to avoid the game in (ii)? How does that
compare to what he is willing to pay to avoid the game in (i)? Explain this result.
A2-b)
(i)
(ii)
(iii)
Answer briefly: Assuming costless interactions, what sort of institutions would be
necessary to reach the socially optimal outcome.
(iv)
Answer briefly: What happens if interactions become costly, that is transaction costs are
introduced into Coasean exchange?
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A2-c)
The American auto industry has had a near death experience. Through prudential behavior
[Ford], government subsidies [GM, Chrysler], helpful foreigners [Chrysler], and outright
nationalization followed by forming a new entity [GM], thing now look better for the American
car industry.
In all three entities [Chrysler, Ford and GM] the umbrella labor union, the United
Brotherhood of Auto Workers, has had some hard going. A strong union from the end of the
Great Depression through the 1970s, things slipped for the UAW pretty dramatically in the last
couple of decades. The UAW membership contracted by 30 percent or more. Its power to keep
its pension benefits at all was largely maintained by political force-the Bush-Obama-Canadian
government bailouts in particular. Real wages have stopped rising and new workers are forced
to work much more cheaply. In plants south of the Great Lakes region of Michigan, Indiana,
Pennsylvania, and Ohio, plants are not union organized at all, most of which are run by Japanese
and German competitors.
Use the Marshall-Hicks product-factor analyses to show how the auto industry lost its
economic power since the late 1970s/ early 1980s. In your analysis employ each of the Hicksiou
four rules, but don’t derive them.
Section A – Extra Credit (up to 5 points of missed credit)
Choose only one of the two of these questions:
Extra Credit A1: Generally speaking, modest homes are built on modest parcels of land;
elaborate houses are built on expensive land. Why? (This is not an Akhian-Alen-BorcherdingSilberberg phenom, which you could explain instead.)
Extra Credit A2: Coase claims that competitive firms always pick the sweet spot,
P=MR=C, since at this point he holds P=AC, regardless of the success of the firms.
True?
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Section A’: Neo- Institutional Economics (20 points)
Answer any two of the following five questions.
A’1. Textbook Durability
The late Jack Hirshleifer (along with co-authors David Hirshleifer and Amihai Glazier) now
have a paperback edition of their iconic intermediate micro-theory text. Paperback texts have
been standard editions in developing, poor countries for fifty years, but they are now beginning
to become standard in the rich OECD countries. Does this suggest anything about the frequency
of new editions, especially given the cheapness of electronic printing, or is it just a reflection of
rising cost of hard-cover books? Predict the future, but recall that consumers have choices, no
matter what a professor’s syllabus says about “required texts.”. Be sure to consider transactions
costs and property rights along with technology in your answer.
A’2. Insurance Contracts
Health, fire and burglary insurance contracts typically are complex in construction when
compared to life insurance. In the former, some items are not insured, or subject to
“deductibles.” Others are subject to fractional compensation. Assume a dental insurance
contract formed in a competitive environment:
(i) What parts are likely insured and what are not?
(ii) Sometimes check ups and cleanings are covered and sometimes not, but often required at
least yearly. Why?
(iii)Why are life insurance contracts, beyond the initial ascertainment of health status,
typically not very complex?
A’3. Freakonomics Deconstructed
In their now famous Freakonomics volume, the two Steves – Levitt and Dubner – claim that real
estate brokers chisel their clients. Professor Levitt and one of his students found that real estate
brokers spent roughly ten days to two weeks longer selling their own houses and properties than
when they worked for a client. Over two centuries before Adam Smith claimed share-cropping
was also inefficient. A principle would seem to emerge here: If an agent gets less than 100% of
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the value of her increment of effort they will offer less than the optimal effort. Critique the
theory and implication of inefficiency in real estate brokering share-contracting of Smith and the
Steves.
A’4. Wisdom of the Old Guys
Twenty years after his death, Hayek is again a rock star of economics, mentioned along with
Friedman, Samuelson, Arrow, Coase, and Hayek’s close friend, Keynes, as the top scholars of
the 20th century. Unlike the four more contemporary economists, neither Hayek nor Keynes
assumed the individual was wholly rational, but was subject to “animal spirits,” appetites, and
conflicting emotions. Both men argued that irrationality could be mitigated, but never “cured”
by institutional constraints developed correctives. With this in mind, explain how Hayek and
Keynes would testify in the recent Dodd-Frank hearings on the current financial debacle,
comparing and contrasting their differing recommendations.
A’5.
Explain how the introduction of social capital, culture, and behavioral economics alters
interpretation of the Coasian theory of the firm, particularly the Jensen-Meckling version. Be
specific.
Section A’ – Extra Credit (up to 5 points of missed credit)
Answer only one of the two.
Extra Credit A1: People tend to become more religious when they have children and when they
retire. Why?
Extra Credit A2: One term U.S. presidents are fairly uncommon. Scholars note that voters tend to
re-elect sitting president more reliably if unemployment and inflation are low. Carter and Bush I
were exceptions to this rule, but polls suggest that Obama may be one too, i.e. he’ll be re-elected
even with relatively higher unemployment. What’s missing in the orthodox theory of reelections?
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Section B: Based on Economics 316 (25 points)
Answer either B1 or B2, but not both.
B1.
B2.
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Section C: Based on Economics 317 (30 points)
Answer either C1 or C2, but not both.
C1.
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C2.
Section D: Based on Economics 318 (20 points)
Note: Only students who have taken Econ 318 should answer this section. You have 50 extra
minutes to answer this. Your total of points will be 120 instead of 100. Answer either D1 or D2,
but not both!
D1.
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D2.
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