Interfield Microeconomics Ph.D. Qualification Examination
Examiners: Borcherding, Denzau and Filson
January 28, 2009/100 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.
A1. Basic Microeconomics (50 points)
Answer A1-1 or A 1-2 from this section and any three more.
A1-1) 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. Paperbacks
have been standard editions in developing, poor countries, 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. Be sure to consider
transactions costs and property rights along with technology in your answer.
A1-2) Insurance Contracts
Health, fire and burglary insurance contracts typically are complex in construction
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:
a. What parts are likely insured and what are not?
b. Sometimes check ups and cleanings are covered and sometimes not, but often
required at least yearly. Why?
c. Why are life insurance contracts, beyond ascertainment of health status,
typically not so complex?
A1-3) Freakonomics Deconstructed
In their Freakonomics volume the two Steve’s – 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. Adam Smith over two centuries before
claimed share-cropping was also inefficient. If an agent gets less than 100% of the value
of her increment of effort – according to Levitt, Dubner, and Smith – they will offer less
than all optimal effort. (Levitt teaches at Chicago, by the way and Dubner is a journalist
1
for the New York Times. Smith died in 1798.) Critique the theory and implication of
inefficiency in share-contracting
A1-4) International Trade and Specific Factors
It is generally accepted that because certain goods and services are not shippable at
reasonable costs, their prices can diverge between national markets by sizeable amounts.
“Haircuts” are the classic example. But haircuts would surely become more subject to
the Law of One Price, if various factors of production were more globalized. Offer a
theory of international price dispersion where the variance is subject to different
globalizing and observable factors. Give examples and predict future trends.
A1-5) Aluminum and Economic History of Stocks and Flows
Decades ago, ALCOA, a U.S.-based international corporation, was sued for using its
monopoly power. Today, ALCOA is still a giant but nobody in the U.S. Department of
Justice or the E.U.’s Competition Bureau would dream of worrying about the behavior of
ALCOA. The world is awash in aluminum. The stock of existing aluminum is huge
compared to bauxite, the mineral from which aluminum is smelted, the flow of new
aluminum.
d. Offer a stock-flow theory of pricing for aluminum with respect to mark-up
over marginal cost.
e. If ALCOA really had monopoly power back in the Forties, why did it sell its
stuff outright, rather than just leasing ingots for long-periods, requiring their
return as scrap sometime in the future? According to students of ALCOA,
that company never thought this would work, antitrust issues aside.
A1-6) Is This Intelligent Design?
It is well known that the cost of training a student for a first degree in the humanities is at
least 30 to 50% lower than in the hard sciences. Economists come pretty cheap too, as do
lawyers. At professional school levels, schools specializing in medicine, engineering,
business, and law charge from two to three times the tuition of schools of education,
music, social work, and theology. Note, however, the undergraduate liberal arts colleges
– such as our sister institutions of CMC, Pitzer, Pomona, and Scripps – do not charge
different tuitions to different majors reflecting cost and market value-added dimensions.
Should these famous liberal arts colleges change their one-price tuition policies to insure
large revenues per graduate?
A2. Neo-institutional Economics (50 points)
Answer question A2-1 or A2-2 and both A2-3 and A2-4. Be sure to cite literature you
find salient.
A2-1) Coercive Paternalism and Anchoring Theory
2
Chicago behavioral economist Richard Thaler claims people are not very thoughtful
about their futures. If they take a job where they have to affirmatively check a box to
“opt into” even a generously subsidized company pension savings plan, they tend in over
half the cases to pass up that opportunity. On the other hand, if they have to check a box
to “opt out,” well less than half will do this. Thaler argues that the law should require
companies who offer pensions to require their forms to be “opt out.” Critique Thaler’s
work, taking as a policy given that personal savings is a social good, but so too is free
individual choice.
A2-2) Applied Welfare Economics and the Political Economy of Tax Reform
According to leading public finance gurus, the personal income tax has a huge
deadweight effect in the U.S. because it taxes effort and risk at progressive rates; treats
capital gains as earned income; and taxes savings as well as the income from capital. The
conventional wisdom has it that the U.S. personal income tax dissipates perhaps 50 cents
for every dollar it raises on the margin. A flat tax of 17% on earned incomes, with
savings deductible from income, capital gains exempt, and with no taxed on incomes
under $40,000 would, the tax gurus claim, replace the revenues of the current U.S. tax
and raise growth rates by half of one percent. Query, if this is such a good idea, how
come it seems to be rejected politically?
A2-3) We are in the midst of the greatest financial panic since 1929. Economists
disagree over policy choices. Write an essay explaining why, with all the advances in
economic analysis since the Great Depression in macroeconomics, transactions costs
economics, public choice and behavioral economics, the variance in policy
pronouncements is so great amongst the best minds in the profession.
A2-4) James M. Buchanan, Nobel Prize in Economics, 1986, claims that economic
policy analysis is systemically flawed by offering good economics, but poor political
analysis. He notes that practical politics, on the other hand, is flawed by the practice of
good politics, but the employment of bad economics.
a. Whatever does he mean?
b. How would concentrating on the “rules” of politics lead to a better solution of
this paradox?
c. Why has the paradox been more easily overcome in the rich world than in
developing societies?
A3. Extra Credit Questions (Up to 15 points of lost credit}
A3-1) Recently, it has been noted by political scientists and public choice economists
that voters not only are ignorant, but are ignorant in biased ways that seem to be totally
against their own interests. (For example, George Mason economist Bryan Caplan and
Princeton political scientist Larry Bartels argue that folks are fooled systematically into
3
voting against their own interests, but there is also some evidence that folks are vaguely
aware they are being fooled.) The Caplan/Bartels implication is that voting by the
grossly uninformed, perhaps 60 percent of the total, is enough to swing elections. But
political outcomes are not wholly dependent upon voters. Interest groups, both narrow
and broad, exist.
Write about how non-voting political institutions- logrolling, lobbying, party platform
development, court and constitutional constraints, grass roots development, federalism, et
al.- change the melancholy outcome outlined by Caplan and Bartels.
A3-2) Did you ever figure out what R.H. Coase in 1938 (to a bunch of accountants!)
meant when he said, “to cover costs and to maximize profits are essentially two ways of
expressing the same phenomenon.”?
A1 - A List of Short Questions to Supplement Section A1
You may answer any two of these in place of one of the elective questions in Section A1.
1)
In a world of clones, all with identical tastes, there would be no need for
economic exchange. TRUE or FALSE, and explain.
2)
A competitive firm always sells at its minimum average cost. True or false,
and explain.
3)
"It's true in theory, but not in practice." Discuss the meaning and relevance of
this statement for economics or political economy.
4)
Some economists claim that the competitive market model is a poor way to
explain the size of firms. Evaluate this claim.
5)
It is claimed appropriately by psychologists that heroin is addictive, and thus
price-inelastic. It also claimed by some in law enforcement that the provision
of heroin is monopolized. Explain the economic dilemma involved in these
two statements, and try to resolve it.
4