Interfield Microeconomics Ph.D. Qualification Examination
Examiners: Borcherding, Denzau and Filson
January 27, 2010/100 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. Write legibly and use your time economically. Good luck.
Section A 1: Simple Microeconomics (20 points)
Answer question A1-1 and four 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 athome 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 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?
1
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?
2
Section A 2: New Institutional Economics and Political Economy (20 points)
Answer A2-1 and any four of the nine 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?
3
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) Professor Joel Waldfogels’ new book, Scroogenomics, suggests 20% of gifts
during the recent holidays were inefficiently wasteful. He suggests everybody should
give gift cards or cash. Professor Deirdre McCloskey in her Vices of Economists
suggests Waldfogel is not too great an analyst. Weigh in on the alleged utility or
wastefulness of holiday in-kind gifts, offering, as you do, a testable proposition or two.
A2 Extra Credit (worth up to five (5) points of credit lost in this section)
Tiger Woods’ Swedish wife and former bikini model Elen Nordegan, in the face of his
scandalous behavior with many women, has left him and divorce is rumored. She is
likely to realize a huge financial settlement. Various important politicians in the U.S.
have behaved almost as badly, but their wives have oft-times “stuck by her man.” Is
Tiger’s wife doing it because of the huge amount of money, or is marriage different for
political families? You might consider the example of the current U.S. Secretary of State
and her husband, whose string of dalliances was probably up to Tiger’s level (though this
can’t be proven). (Consider in your answer the difference between consumer theory and
that of the firm.) [Hint: You might consider in your answer the difference if you use
demand theory and marriage as a consumer good or the theory of the firm where parties
have non-separable production functions.]
4