Ph.D. Qualification Examination in Microeconomics
Examiners: Borcherding and Tasoff
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. Please note there is an alternative section D for those with Econ318, which may be substituted for section B.
Write legibly and use your time economically. Good luck .
Section A. M.A.-Level Section on Microeconomics & New Institutional Economics (40 points)
Answer sections A1 and A2
A 1: Basic Microeconomics (20 points)
Answer question A1-1) and A1-2) and any one other.
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?
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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 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.
(a) Offer a stock-flow theory of pricing for aluminum with respect to mark-up over marginal cost.
(b) 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?
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A 2: Neo-institutional Economics (20 points)
Answer question A2-1 or A2-2 and one from A2-3 to A2-5. Cite any literature you think salient.
A2-1) Coercive Paternalism and Anchoring Theory
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 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?
A2-5) Speculate: How does behavioral economics alter applied welfare economics?
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B-2)
Section B: Questions Based on Economics 316 (30 points)
Answer either B-1 or B-2, but not both.
B-1) An expected-utility maximizer has the following Bernoulli utility function u ( x ) = ln ( x ).
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Section C: Questions Based on Economics 317 (30 points)
Please note there is an alternative section D for those with Econ318, which may be substituted for section B.
Answer either C-1 or C-2, but not both.
C-1)
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C-2)
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Section D: Alternative Questions Based on Economics 318 (30 points)
For the few who have taken Econ 318, you may substitute Section D for Section B, if you wish . Answer either D-1 or D-2, but not both.
D-1)
D-2)
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