Chicago. Final exam for Economics 301, Price Theory. Telser, 1965

Chicago Price Theory boils down ultimately to a series of True-False-Uncertain examination questions. One of Lester Telser‘s contributions to the stock of questions comes to us from the Zvi Griliches’ papers at the Harvard Archives. A steady diet of this stuff would make for a dull economist in my opinion, but it was force fed to generations of Chicago economists, and many somehow survived to have productive (in a good sense) professional careers. Hence another important historical artifact that has earned digitization by Economics in the Rear-View Mirror.

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UNIVERSITY OF CHICAGO
DEPARTMENT OF ECONOMICS
Final Exam

Economics 301
Autumn, 1965

Mr. L. Telser
Time: 2.5 hours

Answer the following questions, true, false or uncertain and briefly defend your answer.

1. An increase in the demand for the product of a monopoly results in a rise in the price of the product.
2. If the supply schedule of an industry is perfectly elastic then the production function for the industry is characterized by constant returns to scale.
3. A monopoly can never have a larger output and lower price than a competitive industry assuming that cost conditions would be the same for both.
4. No one would resort to the cultivation of inferior lands if he did not run into diminishing marginal returns on fertile land. Since inferior lands are in cultivation, diminishing returns must be present.
5. If there are empty seats on a train then marginal cost pricing requires that new passengers should ride free.

The following two questions require essay answers.

6. The margin in stock trading is the fraction of the price of the stock which the trader must supply and the balance is lent to the trader by the broker. Hence the margin represents the trader’s equity and is analogous to a down payment. Assume there is no government regulation of the margin and that brokers are free to set any margin they please and to charge any interest rate they please on the loan they extend to traders. Assume there is perfect competition in the brokerage industry.
   1. Would you expect margins to be higher during periods of “active” speculation?
   2. Would you expect higher margins when stock prices are rising then when they are falling?
   3. Would a rise in the interest compensate for or be equivalent to a rise in the margin?
7. In the theory of the household demand for perishable goods, for a given money income there is a fall in real income if the price of some good rises. The pure substitution effect is the effect on quantity demanded of a price change for constant real income. In the case of durables households own stocks of durables. Hence a rise in the price of durables causes the value of the stock of consumer owned durables to appreciate. Hence a price rise of perishable reduces the demand for perishables if money income is given and the income elasticity is positive while a price rise of durables increases the demand because it implies a rise in consumer wealth if the wealth elasticity of demand is positive.
   1. What are appropriate budget constraints for the demand for durables?
   2. Is the last statement beginning with “HENCE …” correct?
   3. Would it make a difference if the durable good had a fixed life or if it lasted forever?
   4. What are the counterparts of constant real income in the demand for durables?

Source: Harvard University Archives. Papers of Zvi Griliches. Box 130, Folder “Syllabi and exams, 1961-1969”.