Ph.D. Qualification Examination in Microeconomics
Examiners: Borcherding, Denzau and Filson
January 30, 2008
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. Short Basic Economics and New Institutional Economics (40 points)
Answer questions, as indicated, in Sections A1 and A2. Interfield students must answer
additional parts from this section, but are exempt from Sections B and C.
Section A1: Short Basic Economics from Econ 313 (25 points)
Answer any three of the seven questions below:
1. “Bankruptcy laws are bad since they induce people to take risks they would not
otherwise take.” True or False? Explain briefly.
2. “When wages rise, those not working are more likely to offer additions to market
labor supply, but those already working may not supply more.” True or False?
Explain briefly.
3. Until recently, Peru subsidized the domestic consumption of gasoline. The
subsidy for gasoline then ended. Most of the stock of vehicles were relatively old
American cars or trucks, typically heavy and with large engines; much of the
remainder were newer Toyotas or Hondas. What happened to the distribution of
prices of the existing vehicles in Peru?
4. The standard proposition in economics holds that government minimum wage
increases reduces employment. In the 1990s, however, Card and Kreuger found
that the typical fast-food restaurants in New Jersey employed more workers after
the minimum wage rose in that state. Resolve this paradox.
5. The “War on Drugs” in the U.S. has been less than successful despite draconian
penalties for sellers. Explain the economics of two phenomena associated with
this failed policy:
a. Transacted quantities have become more potent per gram;
b. Quantities are larger per transaction.
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6. Nobelist Ronald Coase argues that given a competitive environment – where all
factors are priced at their scarcity values – firms must operate where profits are
maximized. What is his thinking?
7. If the State of California puts a per-unit tax of $1/pack on cigarettes, the final
price per pack is likely to rise by $1. If the U.S. federal government places a $1
tax on this same pack, price will likely rise by 70 cents or so. How come?
Section A2: Neo-Institutional Economics from Econ 313
and Your Political Economy Course (15 points)
Answer one of the four questions:
1. Neoclassic economists tell us that pecuniary externalities should be ignored in
public policy analyses, since only technical externalities matter.
a. What is their thinking?
b. In the real-world, politicians seem obsessed with pecuniary externalities.
In the U.S. minimum wage, tariff legislation, and the farm program have
little else to recommend then. Are politicians bad economists, i.e., nonmaximizing choosers?
2. According to the conventional wisdom (CW) of the 1960s and 1970s, free-riding
makes the efficient provisions of public goods unlikely – the “market failure”
hypothesis. But we see private provisions of collective goods all the time.
a. Why was the CW wrong?
b. Can you couch the question in terms of a predictive statement? For
example, under such-and-such conditions I, the CW is true; but under
such-and-such conditions II, III, etc., it is not.
Couch your answer in neo-institutional analysis.
3. George Stigler, the 1981 Nobelist and an important Chicago School leader,
argued that since all competitive firms in a market face the same set of prices and
enjoy the same access to technology, all firms basically should look the same.
Critique Stigler’s prediction given that 25 years of empirical evidence have been
uncongenial to his observation.
4. Using Coasian analysis some economists, Radical Paretians, claim that every
outcome is efficient. Any deviation of social benefits and costs at the margin
must be explained, according to the RPs, by the transactions cost of the implied
social arbitrage. In fact, these analysts – mostly dead men – argue that we should
not support any public subsidization of policy analysis – e.g. think tanks at
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universities, public policy journals, conferences in Albrecht Auditorium, etc.
Comment on this.
Section B: Based on Economics 316 (30 points)
Answer either B1 or B2, but not both.
1)
Consider a firm whose technology can be represented by the function:
q = L1/4K1/4 .
Suppose the firm is the only firm in its output market, and faces a market demand
represented by
Q = 36 - p
a. Derive the firm’s output choice.
b. Let the wage be 1, and the capital rental rate 1. What is the profit-maximizing
level of output? The level of profit?
c. The government now raises levies a tax of t per unit on the market in which the
firm sells. What is the new optimal output choice?
d.
What is the rate of t that maximizes government revenue from this tax? What is
the size of the tax?
2)
Consider a farmer who can work L hours on his farm each period, or consume the
time as leisure, S:
L + S = 120.
The farmer’s preferences are represented by:
U(c, S) = c1/3S2/3,
where c is market consumption with a price of 1.
The farm’s production is represented by:
y = L,
and sells the output for a price of p. No outside labor is hired by the farmer.
Weight
0.2
0.1
0.4
0.2
0.1
a.
b.
c.
d.
e.
Setup up the decision problem.
Interpret the first-order conditions.
If p = 1, what are L, y, c and S?
If p = 4, what are L, y, c and S?
If outside labor can be hired at a wage of 5, how does this change (d)?
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Section C: Based on Economics 317 (30 points)
Answer either C1 or C2, but not both.
C1. Suppose the fine for violating car pool rules is f ∈ (0,1) . Consider the following
game played between the police and n drivers. The police move first and decide how
many hours to allocate to monitoring car pool violations each day. Denote the number of
hours by x ; fractions of an hour are possible. The cost per hour is c . The number of
hours of monitoring determines the fraction of drivers observed (observed drivers may or
may not be violating car pool rules). The fraction of drivers observed by the police is
given by λ ( x) , where λ ( x) = ax1/ 2 , and a ≤ 1 (assume a is sufficiently low that λ ( x) is
always below 1).
All drivers become aware of the probability of being observed λ ( x) and then decide
whether to violate car pool rules or not. If Driver i violates car pool rules, she obtains a
private benefit Vi . If she does not violate the car pool rules, she gets a utility of 0. If
Driver i violates car pool rules and is observed by the police, she has to pay the fine f .
Suppose that, in the population of drivers, Vi ~ U [0,1] .
a. Characterize Driver i ’s best response. How does it depend on λ ( x) , Vi , and f ?
b. What is the probability that a randomly observed driver will be violating car pool
rules? Use the best responses from part b. and the uniform distribution.
c. Suppose that the police get all revenue from car pool fines, and that the police
choose x to maximize “profit”: the difference between expected revenue and the cost of
monitoring. What is the subgame perfect Nash equilibrium value of x ?
d. What are the effects of increasing f on the equilibrium levels of x and car pool
violations? Use your results to recommend how f should be set. Are there any factors
left out of the model that might lead to a different conclusion about the ideal f ?
C2. Consider the following simple bargaining and war game. There is a prize with a total
value of 1. There are two players, A and B. B is strong with probability λ and weak with
probability 1 - λ . B’s type is known only to B. The game begins when A makes a
proposal γ ∈ [0, 1] to divide the prize. If B accepts A’s proposal then the game ends; A
receives the payoff γ and B receives 1 - γ . If B rejects A’s proposal then the two players
fight (they have no choice in this). Fighting costs each player c. Payoffs from fighting are
as follows: If B is strong then A gets x-c and B gets 1 - x - c, where x ∈ [0, 1]. If B is
weak then A gets y - c and B gets 1 - y - c, where y ∈ (x, 1].
a. Draw the game tree and describe the best response functions of each type of B.
b. Suppose that A wants to make a proposal that both types will accept. What is A’s
optimal proposal?
c. Suppose that A wants to make a proposal that only the weak type will accept. What
is A’s optimal proposal?
d. Compute A’s expected payoff from the proposals in parts b. and c.
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e. Write down the inequality that must hold in order for A to make a proposal that both
types of B will accept. Describe how A’s choice of whether to risk a fight depends on c,
λ , x, and y. Provide an intuitive interpretation of your results.
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