Interfield Microeconomics Qualification Examination
May 26, 2010
Examiners: T. Borcherding and A. Denzau
100 points/1 hour for reading and outlining/4 hours for writing
The exam has three parts, and a provocative extra credit question. Note several questions offer choice, but answer no more than required. Write legibly, in ink if possible. Good luck .
Part A: M.A. Level Microeconomics (34 points)
A-1: Basic Microeconomics (25 points)
1.
True, false, and/or explain. Answer a.) and four of the remaining six. (15 points) a.
Your college roomie tells you by e-mail she’ll be visiting and while in
L.A. wants to take in a professional baseball game. She asks you to buy two tickets for her and her fiancé for the Dodgers, and (trustingly) gives you her credit card numbers, etc., but gives you no more instructions other than the date. You call her, but she is not home, nor do you have her cell phone, and the visitors, the St. Louis Cardinals, are so popular that you must act quickly to get seats. You can get only three pairs of tickets: directly behind the home plate for $200 per seat; in the “Blue Section” up
80 feet with an excellent view behind the Dodger’s dugout, for $40 per seat; and way down the third baseline, 270 feet from home plate, and 50 rows back, for $20 per seat. Your ex-roomie is still paying off her M.A. in
Economics degree and is an entry-level management person in the
California Department of Franchise Revenue (taxation department), but this is a special trip since her fiancé, from Estonia, has never seen a live baseball game though he has watched them often on TV. What tickets will you buy in her name? b.
When the rate of interest rises, so too will savings. c.
Bankruptcy laws are bad; they encourage excess risk. d.
If the price of a pound of tea rises by 5 cents, we find the consumption of coffee will increase by one ounce. This means that the cross-effect of a price rise in a pound of coffee will be precisely what? e.
In a competitive industry if a tax on the consumption of X is $1, its price must rise by $1.
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f.
If in a world of only two goods, X and Y, where the income elasticity of X equals that of Y, what do we know about the proportions of X and Y in consumption? g.
Pecuniary externalities are not fully internalized in non-competitive situations.
2.
Choose a or b, but not both. (18 points) a.
The price of a typical house in Claremont (2000 sq ft), between Foothill and Baseline Roads, is currently about $600,000. A similar house sells for
15% less fifteen or twenty miles east in Rancho Cucamonga. Ignoring idiosyncratic amenities and school quality, how should the ratio of P
C
/P
R varied as the demand for housing rose in 2005-2007? P
C
is now roughly
20% of its summer 2007 high (= $750,000). b.
Consumer surplus when measured using the Hicksian method differs than when Stusky’s approach is followed. Assume an initial equilibrium with
P
X
= 1, P y
= 1, and income M = 100. There are only two goods, X and Y. i) If the price falls from P
X
= 1 to P
X
= 0.5, show how the two compensated methods of measurement of consumer surplus differ and compare these to the Marshallian approach. Offer a graph to show their relative size when X is a normal, an inferior good (but not a Giffen good), and one whose consumption is unaffected by income. ii) Since income effects drive your answer, when is it generally acceptable to use the inaccurate Marshallian measure?
A-2: Neo-institutional Economics (33 points)
Answer one of the three below:
1.
Since the 1970s the theory of the firm, as enunciated by Coase, Alchian and
Demsetz, Williamson, et al., hones in on transactions cost in predicting firm governance structures. c.
What are the key issues in predicting these structures in the Coase,
Alchian and Demsetz, Williamson, et al. model? Give examples. d.
How does this model alter when one brings in cultural issues? Give examples. e.
How does it alter when neuro-economics issues are introduced as in
Akerlof and Thaler’s new best seller,
Nudge?
Give examples.
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2.
Twenty years after his death, Hayek is a rock star of economics, mentioned along with Friedman, Samuelson, Arrow, Coase, and Hayek’s close friend
Keynes as the top scholars of the 20 th
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 emotions. Both men argued that irrationality was mitigated, but never
“cured,” by institutional constraints that developed as correctives. a.
How, in the face of firmly established neuro-scientific facts, do institutions arise to control the vagaries of “animal spirits”? b.
Why do the views of Hayek and Keynes differ so much on the favored institutional solutions and how is this reflected in the current debate over dealing with the current economic calamity and avoiding them in the future? c.
Given the fact of globalization can sub-parts of the international institutional system go their own way, some taking the Hayekian path while others go down the Keynesian one?
3.
There are two sorts of people in society X: A’s and B’s. A’s are awful sorts, genetically selfish, total economic men (and women). B’s are very benign folks, genetically cooperative. The problem is that the B’s cannot distinguish ex-ante a B from an A, so when they deal with one of the latter, the B type always regrets it. Below is the payoff matrix of A’s and B’s interacting with
A and B shown separately:
A deals with an
(A payoffs shown)
A B
2 6
B deals with an
(B payoffs shown)
A
0
B
4
Suppose Darwinian survival is proportional to the payoffs A and B each received.
So if P
A
> P
B
then A has a “fitness” advantage and her genes will thrive and B will diminish in the population. The opposite holds for P
B >
P
A.
Reproduction is asexual so the A’s and B’s spontaneously and asexually reproduce every period.
Given that there is no “natural” way for B to tell an A from a B ex ante:
Note, if you wish, you can answer A-2.3 in Part B below.
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a.
Starting out with say half A’s and half B’s, what will be the long-run ratio of
A’s to B’s? b.
If the B’s do figure out an ex-ante method to tell A’s from B’s, things do happens, but such a method has a cost. Tell how the ratio of A to B people alters as that cost-per-interaction rises from 1 to 2 to 3 to 4. c.
Draw some inferences from this simple model. d.
If the B’s do figure out an ex-ante method to tell A’s from B’s, things do happens, but such a method has a cost. Tell how the ratio of A to B people alters as that cost-per-interaction rises from 1 to 2 to 3 to 4. e.
Draw some inferences from this simple model.
Part B – Interfield-Level Game Theory (33 points)
Answer either question 1 or 2, but not both, or answer question 3 in A-2, but not 1 or 2.
1.
Consider a market with 2 participants, 1 and 2. They each have a constant marginal cost, but at levels that may differ, c
1
and c
2
; i.e.,
Cost of firm j = c j
q j
. with c
1
= 2, c
2
= 4.
Let total quantity in the market be Q,
Q = a
1
+ q
2,
and inverse demand be
P(Q) = 100 – q
1
– q
2 a.
Assume that they compete Cournot-like. What is the equilibrium price and quantities? b.
What are the profits of the firms? c.
Assume that they compete Bertrand-like. What is the equilibrium price and quantities? d.
What are the profits of the firms?
2.
On Wall Street, a large part of the total compensation package of many investment bankers is a “performance bonus” given at the end of the year. In a good year, these can at least equal the “base salary”. Comment on the following: a.
Bonuses are never negative. Does this mean that the wage contract does not
“punish” employees (except perhaps by dismissal) even when their department performs badly? b.
Many other industries do not make as heavy use of bonuses (or of “profit sharing plans” or related schemes). What are some reasons why paying a
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relatively flat wage might be efficient in many cases? Make clear, informally, what kind of “tensions” are at work in designing a wage contract.
Part C – An Extra Credit Question (up to 5 points of lost credit)
Tyler Cowen in his Marginal Revolution blog poses this question: Suppose one day the sun goes through some sort of once-in-a-ten-billion year paroxysm and shoots out genetically debilitating rays that causes all mammalian life to have its fertility cut by
100%. The eruption is only for a milli-second and affects only one half the globe.
What are the long-run consequences for the global economy, polity, and society as well as the various political entities of the world? Do not assume this demographic cataclysm is anything as dramatic as what befell the dinosaurs following the asteroidal bombardment millions and millions of years ago. Spend no more than 50 to 75 words on this. (Talk about it amongst yourselves after the exam, since the Cowen Conjecture is now the subject of much lunchtime discussion.)
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