The following exam comes from a graduate course in the price theory and distribution sequence at the University of Chicago taught in the Autumn quarter of 1960. This copy was found in Milton Friedman’s papers at the Hoover Institution Archives in the folder “Econ. 301” which also includes exams from 1959 and 1964 that can be attributed to Friedman. Still, I am not yet certain who was the author of the exam questions for autumn 1960. More than likely it was indeed Milton Friedman, but this needs to be checked.
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Economics 301
Final Examination
December, 1960
I. Indicate which alternatives, if any, are correct or fill in the indicated blanks. Where you think it required, briefly justify your answer.
- Marginal revenue (a) cannot (b) may (c) must rise as output increases.
- A monopolized product initially sells for $1. A tax is imposed on the product. A tax of t cents per unit will reduce marginal revenue at the pre-tax output (a) more, (b) less, (c) the same amount, (d) sometimes more sometimes less than a tax of t per cent.
- In the preceding example, the imposition of a tax of t cents will lead the monopolist to reduce output (a) more, (b) less, (c) the same amount, (d) sometimes more sometimes less than a tax of t per cent.
- A reduction in demand for a product is followed by a rise in quantity sold despite no change in conditions of supply. It follows that the product is being produced (a) in a competitive industry with increasing returns, (b) in a competitive industry with external diseconomies, (c) by a monopolist, (d) this result is impossible under any of the preceding conditions.
- Assume that the government has been supporting the price of wheat by buying any wheat offered to it at its support price. Suppose it abandons the program. In the new position of long period equilibrium the total amount received by producers will rise (a) only if the market demand for wheat is inelastic in the range between the support and new price, (b) only if the market demand for wheat is elastic in this range, (c) whatever the demand elasticity, (d) under no circumstances.
- An individual buys four commodities, W, X, Y, and Z, currently spending one-quarter of his income on each. The income elasticity of W and X are 2; of Y, 1. The income elasticity of Z is _________?
- Consider three demand curves for commodity X: A, for given money income and other prices; B for given apparent real income in Slutsky’s sense; C, for given real income in Hicks’ sense. Let all three curves go through the point (po, xo). If X is a superior good, then for a price higher than po, the quantity demanded will be larger for ____ than for ____ than for ____ (Insert A, B, C, in correct spaces).
- Suppose po = $2, xo = 40, the corresponding money income is $200, and the income elasticity of demand for x is unity. Suppose that at a price of $2.50, the quantity demanded on Curve A is 20. Then the income compensation required to pass from A to B is $ _____ (be sure to indicate sign of change) and the quantity demanded on curve B is _____.
- If long run average cost (LRAC) equals short run average cost (SRAC) at an output on the falling segment of the LRAC curve then short run marginal cost (SRMC) (a) exceeds, (b) equals, (c) is less than long run marginal cost (LRMC) at that output.
- If LRAC is rising and less than SRAC, then SRMC is (a) rising, (b) falling, (c) greater than SRAC, (d) less than SRAC.
- In a discussion of the World Series last fall, Jones offered to take either side of a bet with Smith involving a payment of $2 by one party if the Pirates won, of $1 if the Yankees did. It follows that Jones’ estimate of the probability that the Yankees would win is _____ and that his utility function of income is (a) concave upward, (b) linear, (c) concave downward, (d) not concave upward, (e) not concave downward.
- Alternatively, Jones refuses to take either side of the preceding bet but offered to take either side of a bet involving a payment of $200 by one party if the Pirates won or of $100 if the Yankees did. This behavior (a) contradicts or (b) is consistent with the expected utility hypothesis.
II. Translate the following quotations into economics and discuss:
- “Costs are down partly because contractors expanded their equipment to get ready for the Federal Government’s enlarged program. But it was cut back in 1959. … Some contractors needed work to pay for their expensive equipment, and they began making low bids, often at cost, to get the work. They complain bitterly about the price-chopping competition.” (Time, Dec. 12, 1960)
- “Most foods will be much more abundant and a bit cheaper in 1959 than they were this year [1958]. This optimistic forecast was made by the Agriculture Department which warned, however, that retail price cuts won’t be as deep as the prospect of plenty would seem to indicate. Higher marketing and processing costs, officials explained, will partly offset the expected decline in food prices at the farm.”
III. A consumer in a three commodity market buys the following quantities at the following prices:
| Situation | Price of Commodity | Quantity of Commodity | ||||
| X | Y | Z | X | Y | Z | |
| A | 1 | 1 | 1 | 1 | 2 | 5 |
| B | 1 | 1 | 2 | 7 | 0 | 0 |
| C | 3 | 2 | 1 | 0 | 7 | 0 |
Prove that this behavior is consistent with his having constant tastes and an ordinal utility index.
IV. State briefly what seem to you the central features of Chamberlin’s analysis of monopolistic competition and Stigler’s criticism of the analysis.
Source: Hoover Institution Archives. Milton Friedman Papers. Box 77, Folder 2 “University of Chicago, Econ. 301”.
Image Source: Social Science Research Building. University of Chicago Photographic Archive, apf2-07490, Special Collections Research Center, University of Chicago Library.