Interfield Microeconomics Ph.D. Qualification Examination
Examiners: Borcherding and Denzau
January 25, 2012/100 points/Five Hours
You have one hour to read and outline your thoughts on this examination, and another four
hours to answer the questions on official qual exam paper. Carefully follow all directions.
Note: There is no Section B and that Section D is an alternative to Section C. Write
legibly and use your time economically. Good luck.
Section A1: Simple Microeconomics (30 points)
Answer question A1-1 and any four questions of the remaining eight questions below:
A1-1) When two goods, X and Y, are similar, but differ in time costs per unit consumed, e.g.
an evening meal, full prices will differ.
a. Predict the change in the ratio of consumption of X and Y, when X is at-home
consumption and Y is at-restaurant consumption as wage rises.
b. Is the analysis commensurate with the Alchian-Allen apples example?
c. What do you do about the pesky third good?
A1-2) The Wooster Wonko Works is embedded in a competitive industry. It and all its (near
identical) competitors are hit with a new capital services tax. Describe the path from the old
to new equilibrium, both for WWW and the industry. Show both WWW’s cost functions and
the industry’s supply curves.
A1-3) The Peyton Pencil Co. operates on Scribbler’s Island, where, by a quirk of ancient
colonial law, it enjoys a total monopoly on the sale of pencils to inhabitants. The latter are
prohibited under dire penalties from importing foreign pencils. PPC sells pencils to the world
market, however, where the price of a box of 10 is $2 in U.S. funds. The colonial government
of Scribbler’s is worried that the domestic price of pencils is too high, so offers PPC $1 per
box subsidy for its domestic sales. Describe the price, output, and welfare effects of this
subsidy.
A1-4) True, false, or uncertain: If a firm faces the same per unit price for both of its inputs, it
is more likely to use them in equal amounts than if the prices are very different. If false, are
there circumstances where the statement would be true?
A1-5) Doctors in private practices in California are generally paid on a fee-for-services basis.
At Kaiser Permanente, however, they are strictly on salary, though they are rewarded for
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overtime work. Does that mean Kaiser doctors are lazier and more careless than doctors, say,
affiliated in Blue Cross California, who are paid per unit of services provided?
A1-6) Lord Jim Dandy is the Proconsul of Newtonia. His subjects consume only three
goods, X, Y, and N, where N is leisure. He taxes the first two, but has no way of taxing the
latter. Jim is told by his economic advisors that X is a strong complement of N, whereas Y is
a strong substitute for it. Jim is a tyrant, but not interested in making his subjects any more
unhappy than they already are at the high taxes levied to support his profligate government.
Currently the tax rates on X and Y are equal, 35%. His economists make a suggestion to alter
the rates. What will they say?
A1-7) Capital services are very durable, but can change if market conditions dictate.
Currently, in San Bernardino County and many other areas of the U.S., the housing stock is
hugely excessive due to the collapse of the mortgage market some recent time ago. There is
serious pressure on the Obama Administration to “bail out” the U.S. housing industry in the
short-run. Describe the equilibrium path such an intervention implies, paying attention not
only to short- and long-run, but to stocks, flows, and expectations.
A1-8) A firm in a competitive industry discovers a major technical breakthrough in the
production of X that doubles the productivity of its labor. How are wages affected if this
technique is patentable and how are wages affected if no patent is possible?
A1-9) If one wants a "back of the envelope" calculation for the effect on competitive price in
a constant cost industry of a change in wages, you just multiply the percentage change of the
latter by its share of industry cost times price. If, however, one wants a more nuanced
measure, one needs a localized production function to plug in to get an analytic solution. That
second change will always be smaller than the first. Why so?
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Section A2: New Institutional Economics and Political Economy (30 points)
Answer A2-1 and any four of the remaining seven questions below:
A2-1) The size of firm obviously is dependent upon neo-classical issues such as relative
factor prices and its production function mapping (which captures the division of labor and
specialization economics, as well as the level of technology). Economists from Adam Smith
to Ronald Coase and Oliver Williamson, however, suggest that the economics of coordination
and control are hugely important, too. True, false, or uncertain: if it were not for the
“transactions” issues, all firms would be the same, and there would not be hierarchal firms at
all.
A2-2) Firms typically reject as employees job candidates who are “over-qualified.”
a. Why is this and is it efficient?
b. Would this persist if these exclusions were in the midst of a severe dislocation in
an economy, such as today’s?
A2-3) The empirical contribution of behavioral economics has suggested that people are not
nearly as rational as neo-classical assumptions imply. Behavioralists are suggesting public
sector interventions to correct these failings. It has been discovered, however, that Frederick
Hayek argued fifty years ago that although men and women indulge in behavior that is foolish
and often rash, private institutions develop without centralized coordination to constrain these
ill considered actions, at least to some extent. Some are calling this the Coasean approach to
socio-economics. What are the strengths and limitations in the Hayekian approach to human
frailty?
A2-4) John Lott argued in a memorial conference a decade ago honoring the late Mancur
Olson that the policy behavior of autocracies should not differ greatly than for democracies,
except for the distribution of rents. Predict the reaction of the other four members of the
panel (one of whom is grading this qual) using your understanding of the public choice of
autocracy vs. democracies.
A2-5) The late George Stigler argued that the study of public policy by economists should
only tred on positive-predictive issues, since normative suggestions were near useless. He
thought that all the information relevant to public choice-making was already captured in the
market for votes and legislation. What are your thoughts on this “efficient market”-type
position?
A2-6) U.S. and OECD economists generally have shown that free trade is, by their learned
assessments, efficient. This position is accepted by 95% of AEA economists and by a huge
fraction of the staffs of appointed public bodies and elected politicians. Even so, tariffs and
quotas persist. If it is so likely free trade is Paretean, why then do restrictions persist?
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A2-7) The factor prices facing firms in the U.S. and Japan are reasonably similar, yet the
corporate structures often look very different. How come?
A2-8) How does behavioral economics alter the theory of institutional choice and the
interpretations of “good” policy? Orthodox neo-institutional economics tends to ignore
psychology and assumes that institutions arise balancing out deadweight losses with the
transaction costs. Behavioral economics, however, holds that transaction costs are
complicated by emotions and herd behaviors. How does welfare economics alter with
behavioral understandings? Please give an example in your answer.
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Section
n C: Questions based on
o M.A.-Lev
vel Game Th
heory (40 points)
Answerr either C-1 or C-2, but not both.
onsider the following
f
fou
ur ways to depict
d
the strategic interaaction betweeen the
C-1) Co
Majoritty and Minorrity Leaders in the Senatte: Each cann choose a negative meddia stance
(attackiing the otherr party) or a positive
p
onee (emphasizinng their ownn party's ownn good
qualitiees).
(a) Whaat can you prredict about the outcomees in the fouur different ggames? Thatt is, find all
equilibrria (including both PSNE
E and MSNE
E if existing)) in games (1) and (2), aand solve
the gam
mes (3) and (4) using rolllback.
(b) Find
d PSNE in games (3) and
d (4). Which
h PSNE is suubgame perffect? For thoose equilibria
that aree not subgam
me-perfect, id
dentify the reeason (the soource of the lack of creddibility).
(c) Now
w suppose th
hat the Majorrity Leader is
i uncertain aabout whichh game he is playing
between
n (3) and (4)). He knows that the Min
nority Leadeer will choosse his stance after
seeing what
w stance the Majority
y Leader cho
ooses. But thhe Majority L
Leader is unncertain
about th
he Minority Leader's pay
yoff when bo
oth take posiitive stancess. With probaability p
the Min
nority Leader's payoff in
n this situatio
on is 2, and w
with probabiility 1-p it iss 5 (which
means that
t with pro
obability p Majority
M
lead
der is player game (3) whhile with proobability 1-p
he is playing game (4)). The oth
her payoffs are
a the samee as were givven in the abbove
games. Set up a gam
me that incorrporates thiss uncertaintyy. Under whaat condition on p will
the Majjority Leaderr take a posiitive stance?
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C-2) Co
onsider the following
f
gaame:
(a) Find
d all the NE in the one-sh
hot game. Verify
V
that thhis game is P
PD. Specify w
what is
'cooperate" and whaat is "defect"" for each pllayer.
(b) Whiich of the four possible outcomes
o
in this game (aagain playedd once) are P
Pareto
optimall and which are not?
(c) Willl each playerr cooperate if
i this game is repeated 1100 times? E
Explain whyy or why
not?
der what con
nditions can a mutual GT
T (Grim Triggger) lead to Pareto efficcient
(d) Und
equilibrrium if the game
g
is repeaated in a indefinite time horizon? Unnder what coondition can a
mutual TFT (Tit-for-Tat) lead to
t Pareto effi
ficient equilibbrium?
(e) Whiich player haas a higher minimum
m
disscount factorr? Explain, uusing words rather
than thee result of yo
our calculation, why you
u think that tthis player w
would have a higher
minimu
um discount factor.
(f) Now
w suppose that A and B are
a about to play
p an infinnitely repeatted. At each stage they
will plaay the above game. A's discount
d
factor is dA and B's discountt factor is dB. For
some reeason, both of
o them havee only three strategies foor playing the infinitely rrepeated
game. The
T three strrategies are: (1) Tit-for-T
Tat, (2) Alwaays-Defect, and (3) Resttitution
(start with
w defect an
nd keep coop
perating from
m the secondd stage). Draaw a 3x3 maatrix that
represen
nts the infiniitely repeateed game and fill out payooffs.
der what con
nditions with
h discount factors (dA andd dB) is mutuual Tit-for-T
Tat a Nash
(g) Und
equilibrrium in the repeated
r
gam
me shown?
(h) Verify that (Alw
ways-Defect,, Always-Deefect) is a Naash equilibriium regardleess of the
values of
o discount factors.
f
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Section
n D: Altern
native Questtions Based on Econom
mics 318 (40 points)
For the few who haave taken Econ 318, you may substittute Section D for Sectioon C, if you
wish. Answer
A
eitheer D-1 or D--2, but not bo
oth.
D-1)
D-2)
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