The previous post provided the names of the examination committee members for the economics preliminary exams for the Ph.D./A.M. by field at the University of Chicago for the summer quarter of 1951. The names of the students registered for the respective examinations were transcribed as well. The economic theory examining committee for that round consisted of Lloyd Metzler (chair), Milton Friedman, and Frank Knight. This post provides a transcription of both economic theory exams along with Friedman’s hand-written answer to Question 5 of Part I.
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ECONOMIC THEORY
Part I
Summer Quarter, 1951
(Do not write your name on your paper. Use only the number in the top right-hand corner of this examination.)
Ph.D. candidates. Write 3½ hours. Answer all questions.
A.M. candidates. Write 2½ hours on questions #1 and #2 and one other.
- Discuss the probable shape of the long-run cost curve for an industry operating under approximately perfect competition. How would it differ in the short run, i.e., in response to an unanticipated shift in the demand-curve for the product, assumed not to be permanent?
- Briefly discuss the Ricardian conception of capital, specifically in relation to his theory of wages. Argue the question whether wages are paid out of (pre-existing) capital or out of (current) product.
Can you find any relation between the Böhm-Bawerk production-period theory of interest and the Ricardian theory of capital and profit? What is the crucial assumption about the nature and source of capital which underlies the production-period theory, and is it sound? How does diminishing returns to investment enter into Ricardo’s and Böhm-Bawerk’s theories? - Consider a trade union that is strong enough to prevent nonmembers from working at the trade in question and whose membership, for simplicity, will be supposed unaffected by the level of returns to members within broad limits (e.g., future membership consists of present membership minus members who die plus male children of present members). Analyze what its position would be toward the immigration of unskilled labor if it took account solely of the effect of such immigration on the incomes of its members. What considerations, if any, should lead it to favor more extensive immigration? What considerations, if any, to favor restriction on immigration? Is there a clear balance in favor of the one position or the other?
- “The orthodox tools of supply and demand assume that sellers and buyers are free to buy or sell any quantities they wish at the price determined by the market. This assumption cannot validly be made when price controls or rations are imposed by government. It follows that these tools are useless in analyzing the effects of such governmental actions. Economists should free themselves from slavish adherence to outmoded concepts and fashion new tools for the new problems raised by the modern Leviathan.” Discuss.
- The following figures represent the prices and quantities of two commodities, A and B, consumed by three individuals having the incomes stated in two different periods of time.
|
First Period |
Second Period | |||||||||
| Pa | Qa | Pb | Qb | Income | Pa | Qa | Pb | Qb |
Income |
|
| Arthur |
$1 |
20 | $2 | 10 | $40 | $2 | 10 | $1 | 20 |
$40 |
| John |
$2 |
20 | $1 | 10 | $50 | $1 | 10 | $2 | 20 |
$50 |
| Paul |
$2 |
20 | $1 | 10 | $50 | $2.50 | 10 | $1.25 | 20 |
$50 |
Assuming that each individual spends his whole income on the two commodities, and assuming also that there is no change in tastes between the two periods, indicate for each individual what the above information reveals as to whether the bundle of goods consumed in Period I represents a lower or a higher level of satisfaction that the bundle consumed in Period II. Explain your conclusions fully. (It is recommended that a diagram be used in answering this question.)
[Answers to Question 5 in pencil: Arthur “Can’t tell”; John “Inconsistent”; Paul: “First period better”]
From sketch in Milton Friedman’s copy of the exam.
ECONOMIC THEORY II
Summer Quarter, 1951
Time: 2½ hours.
- (a) Describe and discuss briefly the circumstances that gave rise to the establishment of the Federal Reserve System and the major events (including its actions) in its history.
(b) In light of this survey of the record, comment on the following conclusion of one student: “The Federal Reserve System should be abolished. It served as an engine of inflation in two World Wars and post-war periods, hindered the re-establishment of satisfactory monetary standards throughout the world in the 1920’s, and failed to prevent the Great Depression, if indeed it was not itself largely responsible for the severity of that depression. The United States would have had a happier history if the pre-1913 monetary arrangements had been continued thereafter.” - “From the preceding considerations it would be seen, even if it were not otherwise evident, how great an error it is to imagine that the rate of interest bears any necessary relation to the quantity or value of the money in circulation. An increase in the currency has in itself no effect, and is incapable of having any effect, on the rate of interest.” (J.S. Mill)
“We can sum up the above in the proposition that in any given state of expectation there is in the minds of the public a certain potentiality towards holding cash beyond what is required by the transactions-motive or the precautionary-motive, which will realize itself in actual cash holding in a degree which depends on the terms on which the monetary authority is willing to create cash…Corresponding to the quantity of money created by the monetary authority, there will, therefore be set. par. a determinate rate of interest.” (J. M. Keynes)
“The saving schedule tells us what part of income the community desires to save. The technical conditions…expressed by the marginal-efficiency-of-investment function, determine the marginal efficiency of the amount of investment that the giving up of consumption permits undertaking. (The intersection of the two schedules determines) the equilibrium rate of interest.” (F. Modigliani).
Can you reconcile these opinions concerning the determinants of the interest rate? Explain fully, making and stating any assumption you like as to the conditions of production, the time period under consideration, and the flexibility of prices and costs. - What measures would you advocate—and give your reasons for inclusion and omission—for controlling the inflationary tendency in the U.S. under present conditions?
Source: Hoover Institution Archives. Papers of Milton Friedman, Box 76, Folder “76.2 University of Chicago, ‘Economic Theory’”.
Image Source: Social Science Research Building. University of Chicago Photographic Archive, apf2-07490, Special Collections Research Center, University of Chicago Library.