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Chicago Exam Questions

Chicago. Economic Theory Prelim Exam, Friedman (chair), 1955

 

The examination committee for the Economic Theory prelim given in the summer of 1955 consisted of Milton Friedman (chair), W. Allen Wallis, and D.G. Johnson. Besides the questions, we have some of the answers that are transcribed from Milton Friedman’s handwritten notes from his copy of the examination questions.

Previous posts with University of Chicago preliminary examinations for Ph.D. and A.M.  degrees:

Preliminary Exam (Money and Banking) 1956

Preliminary Exam (Money and Banking) 1959

Preliminary Exam (Economic Theory, Old Rules) 1960

Preliminary Exam (Price Theory) 1964

Preliminary Exam (Price Theory) 1969

Preliminary Exam (Macroeconomics) 1969

Preliminary Exam (Money and Banking) 1969

Preliminary Exam (International Trade) 1970

Preliminary Exam (Price Theory) 1975

Preliminary Exam (Industrial Organization) 1977

Preliminary Exam (History of Economic Thought) 1989

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ECONOMIC THEORY I
Preliminary Examination for the Ph.D. and A.M. Degrees
Summer Quarter 1955

WRITE YOUR NUMBER AND NOT YOUR NAME ON YOUR EXAMINATION PAPER.

Answer all questions. Time: four hours.

  1. (30 points) Indicate whether each of the following statements is true (T), false (F), or uncertain (U). Give a brief explanation of your answer.
    1. ____ If the income elasticity of demand for a product is greater than unity, the relative price of that product will rise as real per capita incomes increase, i.e., will rise relative to products with income elasticity less than unity.
    2. ____ When a firm is producing in a region of rising marginal cost, that firm is in equilibrium because average costs are increasing also.
    3. ____ The market price of steel and iron scrap fluctuates more than the price of finished steel primarily because the scrap market is competitive while the finished steel market is in the hands of monopolists.
    4. ____If automobile firms overproduce and competition forces down the price of new cars, this harms a car owner who has purchased his car on credit since his mortgaged car has suffered a decline in price.
    5. ____ It is frequently stated that the more disagreeable or dirty a job is the more it will be necessary to pay workers, but this is contradicted by the fact that college professors earn more than foundry workers.
    6. ____ Lowering the support price of wheat in the United States at present would aggravate rather than relieve the problem of surpluses, since farmers would simply produce proportionately more in order to maintain their incomes.
    7. ____ An increase in demand for a commodity increases its price, but an increase in price reduces demand. Increases in demand tend, therefore, to be self-compensating.
    8. ____ Increasing the minimum wage rate to one dollar per hour will have little or no effect outside the South, since most workers now being paid less than one dollar per hour are in the South.
    9. ____ In the absence of factors making for an increase in demand, and other things being equal, a new method will be introduced sooner in a competitive than in a monopolized industry.
    10. ____ Without collective bargaining, the workers’ market disadvantage would enable the owners of other productive agencies to appropriate income that would otherwise go to labor.
    11. With collective bargaining, workers in general can appropriate income from the owners of other agents.
    12. ____ In equilibrium, it is enough to know the marginal factor cost of any one factor and its marginal physical product to know the marginal cost of the product, even though the product is produced by many factors.
    13. ____ The demand for a product at the market price is inelastic. It follows that the product must be produced under conditions of net internal diseconomies.
    14. ____ Under competition, the marginal efficiency of capital is equal to the marginal physical product of a particular kind of capital good times the price of the product.
    15. ____ To assert that the rate at which a consumer is willing to substitute x for y decreases as the quantity of x increases along an indifference curve is equivalent to saying that the indifference curve is concave toward the origin.
  2. (10 points) “East coast gas wars are forcing big producers to chop prices to retailers. With some Manhattan service stations selling gas as low as 15.8¢ per gallon, Socony Mobil, Esso Standard Oil and others have cut wholesale prices up to ½¢ per gallon in most of the seaboard marketing area from Maine to Washington, D.C., the first price reduction in nearly a year” Time, July 25, 1955.
    Explain why this quotation is bad economics.
  3. (10 points) Fair trade is now rapidly disappearing. However, a few firms (Sunbeam, Schaeffer) are actively trying to enforce fair trade pricing.
    • (a) Are these firms just misguided or are there circumstances in which fair trade would help them?
    • (b) If fair trade were generally observed, what would be the effect on return on capital and entrepreneurial effort engaged in retailing?
  4. (15 points) A recent court decree requires a company (The United Shoe Machinery Co.) which heretofore has only leased its machines, for which there are at present no competitors, to offer them for sale at prices which will make it neither more nor less advantageous to buy than to rent the machines. How can such prices be determined, and by what criteria can it be determined whether a given price meets the requirement?
  5. (15 points) Discuss the role of “Euler’s theorem” in distribution theory, and give your own position on the issues.
  6. (20 points)
    1. Define (a) perfect competition, (b) oligopoly, (c) monopoly, (d) monopolistic competition, (e) cartel, (f) monopsony.
    2. State the conditions of maximum return for the individual firm in a form in which they are applicable to all the preceding market conditions. Indicate the special form which these take for each of the preceding market conditions.
    3. Define “length of run” and state is effect on these conditions.

*  * *  *  * *  *  * *  *  * *  *  *

Milton Friedman’s Handwritten Notes for Examination

  1. (30 points)
    1. Uncertain. Depends on conditions of supply
    2. False. (blank)
    3. False. Primarily because supply is more inelastic
    4. True. Applies equally to all car owners, whether mortgaged or not
    5. Uncertain. Must allow for extra costs of becoming college professor
    6. Uncertain. Backward (word illegible) supply curve unlikely for crop like wheat with alternative that can be produced instead
    7. False. Confusion of shift in demand and movement along demand schedule
    8. False. affects complements and substitutes in (letter illegible, possibly “N”)
    9. Uncertain. In competitive industry, only necessary that AC of new be less than AC of old which is equal to MC (word illegible) at margin. In monopoly (word illegible) AC of new must be less than MC of old for (3 words illegible).
    10. False. Under competition, no market disadvantage. But (word illegible) that (4 words illegible) enable workers to get larger total income.
      With collective bargaining, workers in general can appropriate income from the owners of other agents.
    11. Uncertain. Depends on elasticity of demand for labor.
    12. True. (blank)
    13. True. if net internal economies, monopoly, which wouldn’t operate at inelastic demand]
    14. False. (not legible)
    15. True

  1. (10 points) (blank)

 

  1. (10 points)

(a) (comment not legible)
(b) Reduce it

  1. (15 points) (blank)

 

  1. (15 points)

1) Exhaustion of product problem—lh;
2) Proves too much;
3) Condition of equilibrium not result of lh.
(“lh” = “linear homogeneity”?)

  1. (20 points)
    1. Definitions. (6 points)
    2. 11 points

2 points for stating the conditions in form applicable to all the market conditions listed in question 1.

1/MR = MPPa/MFCa= MPPb/MFCb= …. = 1/MC

Special form for conditions for

      1. (2 points, perfect competition) MFCa = pa, MR = px
      2. (1 point, oligopoly) (illegible word) MFCa= pa
      3. (1 point, monopoly) MFCa= pa
      4. (1 point, monopolistic competition) same as c.
      5. (2 points, cartel) MFCa= pa, MR not equal MC
      6. (2 points, monopsony) MR = px
    1. (Definition) 1 point; (Effect) 2 points: MFC = infinity or zero for some factors

Source: Hoover Institution Archives. Papers of Milton Friedman, Box 76, Folder “76.2 University of Chicago Economic Theory”.

Image Source:  Milton Friedman (undated) from University of Chicago Photographic Archive, apf1-06230, Special Collections Research Center, University of Chicago Library.