Factor markets and distribution

Discuss the significant of variability of the proportions of the factors of production and of variability of the supplies of the productive factors for a marginal productivity theory of distribution.

(Answer either A or B)

A. Discuss the effects of establishing by legal action be minimum wage above the wage actually received by, say, one-fourths of the workers actually employed: (a) under conditions of prosperity with approximately full employment; (b) under depression conditions with a large volume of unemployment.

B. Criticized the view that industry fails to distribute sufficient purchasing power to buy its product, resulting in economic on balance.

Indicate whether each of the following statements is True, False, or Uncertain and justify your answer briefly.

Production of a commodity occurs under conditions of fixed proportions. The supply curve for A shifts to the right. It is to the advantage of the owners of A that expenditure on A shall have represented a small part of total costs.

A firm will not carry on production at a given level of output, if one factor exhibits increasing average returns at that output level.

When a firm is in equilibrium, the ratio of the price of a factor to the marginal physical product of the factor determines the marginal cost of production.

If the demand for output is perfectly elastic, a decline in the price of factor A will always increase the demand for factor B unless A and B are perfect substitutes (only two factors employed).

If the demand for output is less than perfectly elastic, a decline in the price of A may either increase or decrease the demand for factor B.

If a monopsonist is not a monopolist, it is possible to construct the monopsonist’s demand curve for a factor.

If all the factors used by a firm are paid the value of their marginal products, the sum of the payments will equal the total receipts of the firm.

If all factors are paid the value of their marginal products, it would not be possible to increase total real output of the economy by any change in the allocation of factors.

It is widely asserted that workers have less “bargaining power” than employers because there are more workers than employers. Discuss.

(a) Discuss and evaluate alternative theories of “Profits” as a distributive share.

(b) It is frequently said that in a private enterprise economy the producers’ motive is to maximize “profits”. Discuss the meaning of “profits” in this connection in relation to your answer to (a).

Briefly outline or list the main features of the Ricardian theories of value and of distribution and contrast each point with a “sound” modern view.”

Assume an economic system in which real expenditure upon goods and services (real consumption, investment, government expense) is a function of real income and the interest-rate; show that the set of values which satisfy the conditions for equilibrium in the commodity market (make real savings and investment equal) need not contain the “full-employment” income level; i.e., that level of real income which would be produced when the quantity of labor supplied equals the quantity demanded, both the labor supply and labor demand being functions of the real wage.

Evaluate the assumptions of this system on terms of their realism, citing the relevant evidence; and indicate modifications which would result in the inclusion of the “full employment” level of income as one of the values satisfying the condition for equilibrium in the commodity market.

Define briefly the following terms and indicate their use in economic theory:

Backward bending supply curve

Giffen effect

Composite demand

Elasticity of substitution

Exhaustion of product

Marginal value product

Sunk costs

Rent

Firm

Present value

Rate of time preference

Describe the cost curves for an individual firm, explaining the relation between short-run and long-run curves, average and marginal cost curve. Explain the equilibrium of the firm for various market conditions of competition.

b. Describe the demand curves on the part of the individual firm for factors of production under various market conditions of competition.

c. Demonstrate that (a) and (b) are fundamentally translations of one another.

It is sometimes alleged that unionized firms are not injured by competition with non-union firms in the same industry because the presence of the union wage scale and working conditions enables the firm to obtain better quality labor, to have better labor morale and labor relations, etc.

Analytically, are these arguments well-founded? Discuss.

What data would you need on union and non-union firms to confirm or reject these arguments as an empirical proposition? In particular, would you use comparative output per man-hour, unit labor costs, or what? Why one and not another?

What are Marshall’s four propositions on derived demand? What subsequent contributions have been made concerning these propositions? In the light of these contributions, how would the propositions now be correctly and fully stated?

Indicate whether each of the following statements is true (T), false (F), or uncertain (U). Give a brief explanation of your answer.

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.

When a firm is producing in a region of rising marginal cost, that firm is in equilibrium because average costs are increasing also.

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.

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.

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.

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.

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.

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.

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.

Without collective bargaining, the workers’ market disadvantage would enable the owners of other productive agencies to appropriate income that would otherwise go to labor.

With collective bargaining, workers in general can appropriate income from the owners of other agents.

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.

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.

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.

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.

Discuss the role of “Euler’s theorem” in distribution theory, and give your own position on the issues.

Indicate whether each of the following statements is true (T), false (F), or uncertain (U). Explain briefly the basis for your answer.

_____. If the market elasticity of demand for peaches is -2, a peach producer whose output accounts for 1/20th of the total supply of peaches will be faced by a demand function of elasticity -40.

_____. If a constant amount of carpenters’ services is required per unit of housing constructed, and the elasticity of demand for housing is -1, the elasticity of demand for carpenters’ services used in housing must be less (in absolute value) than unity.

_____. If the production possibilities for wire can be represented by a Cobb-Douglas production function, and the wire industry is competitive, a rise of 10 per cent in the wages of wire-workers will lead to a reduction of 10 per cent in their employment.

_____. The elasticity of demand for a group of commodities with respect to the average price of the group can never be larger in absolute value than the largest of the individual price elasticities of the commodities which comprise the group.

_____. If total consumer expenditures are the same before and after a tax, then an excise tax on a consumer good of elastic demand will lead to an increase in consumer spending on other consumer goods, while an excise tax on a consumer good of inelastic demand will lead to a decline in consumer spending on other consumer goods.

_____. A tax of 10 per cent per year on the rental value (actual or imputed) of all land will in the long run lead to a lowering of the marginal productivity of labor in agriculture.

_____. A technological advance opening up widespread possibilities for new investment in the electronics industry at very high rates of return will tend to lower the real value of the existing stock of residential housing in the United States.

_____. A supply curve passing through the origin has an elasticity equal to unity.

_____. Given certainty, no firm would hold inventories.

_____. A negatively sloping supply curve of labor implies a positively sloping demand curve for leisure.

_____. It is impossible to derive a supply function for a monopolist.

_____. A legally enforced minimum wage for a particular occupation may increase employment in that occupation.

_____. Wage rates rise while interest rates remain the same. It follows that the ratio of capital to labor will increase.

_____. Engel’s laws are due to Friedrich Engels.

“It is too obvious for argument that a single employee bargaining with a great corporation, or even with a moderately small employer, is under a disadvantage, except perhaps in time of serious labor shortage”. (Arthur Larsen, A Republican Looks at his Party, p. 125)

Analyze, being sure in the process to discuss the concepts of “bargaining disadvantage” and “labor shortage”.

Derive a demand function for a factor of production. What does it depend on? What things are held constant in the derivation?

a) What was Malthus’ theory of population? In answering, distinguish explicitly between the two variants of his theory, according to the character of the restraints on population.

b) Tell how equilibrium is established under each variant.

c) What effect did the theory have on economic theory?

Indicate whether each of the following statements is true (T), false (F), or uncertain (U). Explain briefly the basis for your answer.

A tax on a product whose supply is of zero elasticity will have no effect on resource allocation.

If factors of production are used in absolutely fixed proportion in the production of a particular product, the demand for each of the factors by the producers of the product will be completely inelastic with respect to price.

Since 1951 interest rates have risen by about 50 percent whereas real wages have risen only by approximately 24 percent. This implies that firms are and will be using more labor per unit of capital than they did in 1950.

An income tax has no resource misallocating effects.

A competitive firm will increase its demand for factor A as a result of a fall in the price of factor B.

“A monopolist has no supply curve.” Hence it is impossible to predict his response to a shift in the demand curve facing him.

Budget studies have yielded an income elasticity of demand for food of .5 for urban families and of . 35 for farm families. This implies that farm families have substantially different tastes or consumption habits.

Price stabilization at the mean of fluctuating prices would harm consumers.

Product A is one of the major inputs used in the production of product B. Price control is imposed on product A, but not on product B, at a level below the equilibrium price of A. This will result in a fall of the price of B.

A tax of 50% of the gross sale price of all new automobiles in the U. S. will in the short run tend to double the market value of used automobiles, and in the long run tend to double the gross market price of new automobiles as well.

Suppose the armed forces want to raise a fixed number of men. One way to do this would be to set a price at which the number of volunteers would equal the number wanted. Another way would be to set a lower price and draft the difference between the number wanted and the number volunteering. Assume that each person receiving a draft notice would be permitted not only to enter as a draftee but also either to buy a substitute or to be a substitute for someone else.

Contrast the two schemes in terms of the personnel secured, the pay received, and the source of this pay.

In a recent study, David Blank and George Stigler note the existence of an interrelation between the demand for higher education and the supply of faculty for institutions of higher education. “For”, they write, “the very presence of a much increased demand [for higher education] … carries with it a much increased supply of trained individuals” from whom faculty members can be recruited.

What do you regard as the essential feature of the interrelation? Can you cite other examples? Contrast with specific examples where this particular interrelation does not arise.

Suppose the increased demand for higher education led to no increase in the student body but was met entirely by severer rationing, by price or otherwise, of entry into college. Would the statement quoted above be rendered false?

Justify your answer.

We frequently speak of “the substitution of capital for labor”. What do you take this phrase to mean (a) for an individual firm; (b) for the economy as a whole? Does your interpretation allow for the fact that the major part of the cost of new capital equipment is labor cost?

Explain, and discuss the validity, purpose, and usefulness of any three of the following Marshallian concepts:

(a) quasi-rent;

(b) consumers’ surplus;

(c) unit elasticity;

(d) maximum satisfaction;

(e) representative concern.

Compare the wage theories of Adam Smith, Ricardo, and John Stuart Mill.

Outline a research project for either:

(a) The statistical verification of an important proposition in price theory, or

(b) A statistical study in some phase of distribution theory.

Answer whether the statement is true, false, or uncertain. In each case, write a few sentences explaining your answer. Your grade will depend heavily on your explanation.

The elasticity of a linear supply function that passes through the origin is always unity.

If a firm is producing in the region of rising marginal costs, the firm is realizing profits.

An effective price ceiling on cotton, i.e., one that holds its price below the free market level, will decrease the price of textiles.

Steel prices and output usually move together during business cycles. This means that the income effect of a rise in price is greater than the substitution effect.

Firms try to minimize unit costs; at the point where unit costs are at a minimum, they equal marginal costs; therefore, firms tend to operate where their unit and marginal costs are equal.

Marginal productivity theory does not apply if factors are always used in fixed proportion.

Since all firms in competitive industry have the same marginal costs, it is meaningless to speak of more or less efficient firms.

If a Paasche price index is higher than the Laspeyres' index, tastes must have changed.

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.

“Commodities with higher, income elasticities have higher demand (price) elasticities.” (Stigler, 1952 ed., p. 45)

If X and Y are substitutes, a decline in the price of X can increase the amount of Y demanded only if Y is an inferior good.

The elasticity of demand for a group of commodities with respect to the average price of the group can never be larger in absolute value than the largest of the individual price elasticities of the commodities which comprise the group.

A rational consumer is insatiable.

Answer each question “true”, “false”, or “uncertain”, and explain your answer briefly. Your grade will depend heavily on your explanation.

A competitive firm will increase output as the result of a fall in the price of one of its inputs.

In equilibrium, a competitive firm has all the business (sales) it wants. Hence advertising is incompatible with either competition or equilibrium.

Duopolists with different cost functions cannot achieve a monopoly price without transfer payment between the firms.

A multiplant firm will schedule its output so that the marginal costs are equal in all plants.

The price of haircuts in Chicago is approximately 40 percent higher than in New York; therefore, average earnings of barbers in Chicago are higher than in New York.

The supply curve of a monopolist is inelastic at the point of maximum monopoly profit.

If it takes one day to catch a beaver and two to catch a deer, one deer will exchange for two beavers.

Assume that the world demand elasticity for tin is -2 and that Bolivia produces 1/3 of the world’s tin. Therefore, the elasticity of demand for Bolivian tin is at least -6.0 (in absolute value).

A safety ordinance prohibiting the use of automobiles older than 10 years will increase the long run demand for new automobiles.

The own-price elasticity of demand for a commodity is no smaller in absolute value, than the marginal propensity to consume that commodity.

For a single consumer the sum of income elasticities of demand for all commodities is unity, while the sum of their price elasticities is zero.

It is a convention in economics to draw consumption indifference curves convex to the origin, but we have no way of knowing whether they really are.

Each firm in an industry is given a license to operate and no new firms are allowed to enter. The value of a license rises over time. Does this prove that firms operate subject to diseconomies of scale?

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.

Using indifference curves, derive the supply curve of labor as A function of real wages. Distinguish between the “income effect” and the substitution effect. State what, if any, will be the circumstances under which a rise in real wages will lead to a reduction in the quantity of labor offers.

True, False or Uncertain. In each case write a few sentences explaining your answer.

If the firms in the coal industry were to merge into one single firm, the demand curve for coal miners would become more elastic.

Marginal cost exceeds average cost wherever marginal cost is rising.

In the case in which factors combine in fixed proportions to produce a product X, the elasticity of demand in industry X for a factor will be greater, the larger is the fraction of the total costs of producing X which is spent on hiring the factor in question.

A firm having monopsony power in the market for its labor will hire workers up to the point where their wage is equal to their marginal value product (marginal physical product times marginal revenue), not to the value of their marginal physical product.

If, at a point in a homogeneous production function, the marginal product of A is rising, the marginal product of B will be negative. (Consider A and B as the only two factors.)

If, at a point in a homogeneous production function, the marginal product of B is negative, the marginal product of A will be rising. (Consider A and B as the only two factors.)

Discuss and comment on Marshall’s four rules of derived demand

True, False, or Uncertain. In each case write a few sentences explaining your answer. Your grade will depend heavily on your explanation.

If the United States exports one tenth of its coal, the elasticity of supply of domestic coal being unity, the elasticity of supply of U.S. coal exports must be at least 10.

If the price of X rises while the price of X stays constant, the amount of Y demanded will always increase, so long as X and Y are substitutes. (Assume money income and other prices remain unchanged.)

The own-price elasticity of demand for a commodity must always equal or exceed, in absolute value, the cross elasticity of demand for that commodity with respect to the price of any other commodity.

The own-price elasticity of demand for a commodity must always equal or exceed, in absolute value, the marginal propensity to consume that commodity.

When the production function is such that factors of production combine with each other in fixed proportions to produce a product, the own price elasticity of demand for the use of any of the factors in the production of the product must be less than the price elasticity of demand for the product. (Assume that the production of the product in question is competitive.)

The income elasticity of demand for a commodity is the marginal propensity to consume that commodity divided by the average propensity to consume that commodity.

The elasticity of demand for labor in the production of automobiles will be lower in the case in which the quantities of other factors are given than in the case in which the prices of other factors are taken as given.

The elasticity of demand facing a monopolist will be lower than the elasticity of demand facing the same industry if it were competitive.

The welfare cost of a 5 percent tax on automobiles is the same as the welfare cost of a 5 percent subsidy on all goods and services other than automobiles.

The welfare cost per dollar of tax receipts of a 5 percent tax on automobiles is the same as the welfare cost per dollar of tax receipts of a 5 percent tax on all goods and services other than automobiles.

If, at a point in a production function which is homogeneous (of degree 1), the marginal product of factor B is negative, the marginal product of factor A will be rising (in the sense that the marginal product of A will be higher when the proportion of factor A to factor B is slightly increased). Assume that A and B are the only two factors.

The supply curve of labor can be backward bending only if leisure is an inferior good.

The demand for the services of a factor of production in a particular industry will be more elastic, the larger is the share of that factor in the total costs of the industry in question.

All short run average cost curves are tangent at (at least) one point to the long run average cost curve.

The GJS corporation, manufacturers of gadgets, have determined that for every 10 per cent increase in the capacity of a gadget factory, minimum short-run average total cost falls by 1 per cent throughout the relevant range of capacities.

What can you say about the production function for gadgets over the relevant range?

Suppose that the company hires two factors of production, labor and capital, and pays each its marginal product. Will anything be left over for the owners of the company who contribute no services? Explain.

Suppose that the company wants to build a plant to produce 10,000 gadget per week. What can you say about the size of the plant that will produce these most efficiently?

In the United States, about one-fifth to one-fourth of all income is property income. State briefly (a) the advantages of having private income from property in our economy (b) the costs or disadvantages. You may judge these according to any values you care to use, making the values as explicit as possible.

In a certain isolated area there are 50 farms of each of two types, A farms and B farms (100 farms in all). Within each type, all farms are identical. All farms are worked by identical workers. The marginal product schedules of one farm of each type are given below, in bushels of wheat per year.

No. of workers — A Farm, B Farm: 1 — 100, 95 2 — 90, 84 3 — 80, 73 4 — 70, 62 5 — 60, 51

If there are 260 workers in the area, how many will be employed on each kind of farm? What is the total product of each kind of farm? The rent of each kind of farm? The wages of workers on each type of farm in bushels per year? (Assume that farmers compete freely for labor, and labor can move within the area.)

By means of an irrigation project, the owners of twenty B farms transform them into A farms. Recompute the answers to (a), counting the transformed farms as A farms. Who gained and who lost from the project, and why?

The Edgeworth Box Company is the only employer in the town of Yarmouth. Its supply schedule of labor is given by $W=40+\frac{1}{4}q$, where $W$ is the wage in cents per hour and $q$ is the number of manhours supplied per week. The company sells boxes in a competitive market. The value of the marginal product of labor is given by

$V=100-\frac{1}{2}q$ for values of $q$ greater than zero.

How many man-hours of labor will the company employ, and at what wage?

Show diagramatically for part (a) first, the wage bill and second, the sum of monopoly profits and the return to factors of production other than labor.

What will be the effect on employment of a legal minimum wage of 60 cents an hour? of 80 cents an hour?

This problem may be solved algebraically or graphically. The following table gives numerically some points on the schedules whose equations are given above:

Supply [q (Man-hours), W (cents)] / Marginal Product [q (man-hours), W (cents)]: 1, 40.25 / 1, 99.5 2, 40.50 / 2, 99.0 3, 40.75 / 3, 98.5 4, 41.00 / 4, 98.0 etc. / etc.

Three top executives leave company A and join company B. The price of company A’s stock falls and the price of company B’s stock rises. This proves that the executives are being exploited.

Consider an economy with two, L and K, factors of production producing goods, X and Y, under conditions of constant returns to scale. Assume that X is relatively L-intensive at all factor prices.

(a) Analyze the effect of an increase in L on the production of X and Y on the assumption that the relative price of X and Y is constant. How would the increase in L affect the share of L in the economy’s income?

(b) Analyze the effect of an increase in the relative price of X on relative and absolute factor rewards, and on the share of L in the economy’s income. Would your answer be altered if both production functions were of Cobb-Douglas type?

(c) Analyze the effect of an increase in K on the relative price of X on the assumption that neither X nor Y is inferior in the community’s consumption.

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.

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?

Indicate whether each of the following statements is true or false and explain briefly why.

1. An “inferior” good is one for which the marginal utility is negative.

2. The short-run marginal cost curves cross the long-run marginal cost curve from below (proceeding from left to right) at the quantities corresponding to the points of tangency of their respective average curves.

3. For a homogeneous production function of degree one, and, for given relative factor prices but varying output, both of the following are true:

a. The ratios of the quantities of the various inputs are constant at all levels of outputs.

b. The average productivities for each factor are constant at all levels of output.

4. Suppose you have the following budget data for two periods for a consistent consumer (i.e., a consumer who, in those situations where the same two commodity bundles are within his budget and he chooses one of them, will never choose the other one): prices of all goods in only the first period $p_{i1}$ for $i=1,2,\dots ,n$) and quantities purchased of all goods ($q_{i1}$ and $q_{i2}$ for $i=1,2,\dots ,n$).

Then it is true that implies that the consumer is “better off” in the first period than in the second.

5. Consider an individual’s demand functions for two goods, $x_k$ and $x_j$. Then the cross elasticity of demand for $x_k$ with respect to $p_{ik}$ is equal to the cross elasticity of demand for $x_j$ with respect to $p_k$ when only the substitution terms are considered.

6. “The more the merrier” is a denial of the law of diminishing marginal utility.

7. “The increment of product resulting from adding one more worker to a firm should not be attributed exclusively to labor because it results partly from the more intensive working of the other productive factors.”

8. A tax of 20 per cent on all wages and salaries will decrease the supply of labor by more than a tax of 20 per cent on overtime pay alone.

9. Carpenters would not receive a wage equal to the value of their marginal product if they were a “specific factor of production” in the industry using their services.

10. The demand function for labor on the part of a competitive industry can in some cases be more elastic in the neighborhood of a given point if the quantities of other factors are taken as given than if the prices of other factors are taken as given.

We frequently hear it said that labor is cheap and capital dear in a country like the U.S. Such statements seem reasonable, yet it is not clear how one can compare the price of labor (rupees or dollars per hour) with the price of capital (percent per year). Can you suggest a way to interpret the statements so that they make sense?

President Johnson has recently sent to Congress a bill that would require certain industries to pay double the standard wage-rate for overtime. Assuming competitive conditions, what can you say about the effect on (a) prices of products (b) output (c) number of man hours, (d) number of persons employed in (1) the industries affected and (2) other industries?

Currently, the number of taxicabs permitted to operate in the city of Chicago is limited by licensure, no new licenses are being issued, and existing licenses which can be transferred sell for substantial sums. In addition, the price which taxicabs charge is fixed by the city. (A) Suppose restrictions on licensure were lifted but prices continued to be fixed at present levels. What would be the effect on (a) number of cabs, (b) incomes of non-driving owners of cabs, (c) wages of non-owning (i.e., hired) cab drivers?

(B) Suppose the price restrictions were lifted, so cabs could charge whatever they wanted. What would you expect to happen to prices for taxicab rides, both with respect to level and structure?

Comment briefly on each of the following passages (explanation, justification, disproof, qualification, as may be appropriate).

“It is not the case that an increased demand for mutton must in the long run necessarily operate to lower the price of wool. An increased demand for mutton will stimulate sheep farming, but it will also stimulate the substitution of crossbred [mutton type] for merino [wool type] breeds; and the resultant of these two opposite tendencies is logically indeterminate.”

“When Consols are at 93½ , and business in in a tranquil state, it matters not how many buyers of these securities there are at 93, or sellers at 94. They are really off the market. Those only are operative who may be made to buy or sell by a rise or a fall of an eighth. The question is, whether the price shall remain at 93½, or rise to 93 5/8, or fall to 93 3/8. This is determined by a very few persons and by the sale or purchase of very small amounts.”

“The degree of monopoly control by a seller equals the degree by which price exceeds marginal revenue.”

“The degree of monopoly control by an employer as employer equals the degree by which the value of the marginal product of labor exceeds the marginal supply price of labor.”

“Where it is the case that people would not give as large a total sum for a larger quantity of an article than for a smaller, this would be expressed geometrically by saying that the demand curve would cut negatively a rectangular hyperbola.” [negatively means cut from above]

“The fact that supplying labor with better or more instruments results in an increase in output has sometimes led to the conclusion that capital is productive, a phrase which must be used with care. The strictly accurate statement is that labor applied in some ways is more productive than labor applied in other ways. Tools and machinery, buildings and materials, are themselves made by labor, and represent an intermediate stage in the application of labor. Capital as such is not an independent factor in production, and there is no separate productiveness of capital.”

Suppose that a single monopolist takes charge of an industry which has hitherto been in the hands of a large number of independent producers and which makes extensive use of a specialized type of labor. Give an account of the factors which will determine the effect of the change on (a) the industry’s output, and (b) the volume of employment of labor by the industry.

A demand schedule for labor shows the amount of labor in physical units that will be taken at each wage. A demand schedule for capital shows the amount of capital in physical units that will be taken at each interest rate.

The marginal cost of producing a commodity is equal to the price of any one factor divided by its marginal physical product, even though many factors are used in producing the commodity.

If a worker’s utility function in the two dimensions, (1) leisure and (2) all other goods and services, is homogeneous of first degree, then his supply curve of labor will be backward sloping.

The price of haircuts in Chicago is approximately 40 per cent higher than in New York; therefore, average earnings of barbers in Chicago are higher than in New York.

III. (40 points)

Some prominent manufacturers such as Sunbeam, Eastman Kodak, and Bayer Aspirin, set minimum prices below which retailers may not resell their products. In most states an agreement to this effect between a manufacturer and some retailers is legally enforceable on all retailers.

(a) What is the probable effect of this practice on the net rate of return on factors of production used in retailing?

(b) What is the probable effect of this practice on the net profits of the manufacturers concerned?

Explain your answers fully.

There has been much talk of the so-called “wage-price spiral.” What is generally meant by this term? Give a theoretical analysis of the so-called spiral, indicating under what circumstances you think it could or could not arise.

There has been much talk of the so-called “wage-price spiral.” What is generally meant by this term? Give a theoretical analysis of the so-called spiral, indicating under what circumstances you think it would or would not arise.

Analyze briefly each of the following propositions: Marginal productivity analysis…

proves that the existing distribution of income is ethically just;

provides a basis for understanding the demand for factors of production;

is a complete theory of the determination of the prices of production;

provides a basis for understanding the supply of factors of production;

does not apply in the case of fixed proportions.

Indicate briefly the meaning of each of the following phrases, identify the economist (or economists) associated with each, and state some of his major contributions to economics:

Engel’s Law

Say’s Law

Iron Law of Wages

Schumpeterian innovators

Conspicuous consumption

Contract curve

Elasticity of demand

(1 hour) Answer each question “true” or “false” and explain your answer very briefly.

It is a tautology that the average costs of all firms are equal in equilibrium in a competitive industry.

A cartel which allows its members to buy and sell output quotas will have a larger net profit for all firms combined than one which does not.

Since all firms in a competitive industry have the same marginal costs, it is meaningless to speak of more and less efficient firms.

A fall in the price of houses will increase the sales of doorbells; a fall in the price of doorbells will not increase the sales of houses; therefore Slutsky’s equation is wrong.

The average size of farm has risen in recent decades in the United States and Canada. This shows that the farm enterprise is typically subject to increasing returns to scale.

A specialized machine has a life of 5 years. Total returns to it in periods of less than 5 years are quasi-rents.

Assume that the world demand elasticity for tin is -2, and that Bolivia produces 1/3 of the world’s tin. Therefore, the elasticity of demand for Bolivia tin is at most -6. 0.

If factors of production are used in absolutely fixed proportion in the production of a particular product, the demand for each of the factors by the producers of the product will be completely inelastic with respect to price.

A supply curve is a curve displaying the quantities which will be supplied at all possible prices. It follows that there is no supply curve under monopoly.

If a firm is operating in the region of falling marginal costs, it must be making losses because marginal cost is then less than average cost.

(60 points) Indicate whether you believe each of the following statements to be true, false, or uncertain. In each case write a few sentences explaining your answer. Your grade will depend heavily on your explanation.

If the rate of obsolescence is constant over time for each type of capital equipment, a rise in the rate of interest will shorten the optimal life of capital equipment.

If oranges are substitutes for apples, apples are complementary to cheese, and cheese is a substitute for butter, oranges and butter are complements.

If a certain commodity is rationed and subject to price control, and there is a black market price for it, the black market price is the equilibrium price of the commodity in the absence of price control.

Let ${\sum }_i{p}_{i1}{x}_{i1}$ and ${\sum }_i{p}_{i2}{x}_{i2}$ be the expenditure of a firm on factors of production per unit of output at two points in time. If ${\sum }_i{p}_{i1}{x}_{i2}>{\sum }_i{p}_{i1}{x}_{i1}$ and ${\sum }_i{p}_{i2}{x}_{i1}<{\sum }_i{p}_{i2}{x}_{i2}$, the production function of the firm has changed between the two points of time.

A company cannot have a monopoly if its shareholders receive only the normal rate of earnings on their stock in it.

If the production function of an Industry is subject to constant returns to scale, the industry supply curve will be horizontal.

If it were possible to travel backwards as well as forwards in time, everyone would be a millionaire.

The development of better fertilizer will increase the value of farm land.

Manufacturers frequently advertise that their products contain extra ingredients, and they generally succeed in selling “extra-ingredient” products (e.g. Bufferin) at higher prices than “similar” single-ingredient products (e.g. aspirin). This implies that consumers have a diminishing marginal rate of substitution between the ingredients.

The removal of a barrier to competition anywhere in the economy must make society better off.

Given:

a three-product world,

the cross-elasticity of demand of x with respect to the price of z is zero,

the own-price elasticity of demand for x is -1,

y and z are substitutes,

expenditures on X occupy half of consumers’ budgets, expenditures on Y one quarter of consumers’ budgets in the initial situation,

it follows that the own-price elasticity of demand for y is greater than 1.5 in absolute value. (For this question consider all price-elasticities defined to include the substitution effect only.)

The price-elasticity of demand on the part of a competitive industry for a factor of production will be greater, the smaller is the share of that factor of production in the total costs of the industry in question.

If production in industry X (assumed to be competitive) is governed by a Cobb-Douglas production function, then no wage set by the trade union in that industry will produce greater total labor income than any other wage.

A tax of a fixed amount per unit of output, placed upon the product of an industry with constant costs, will necessarily result in a smaller rise in price if that industry is organized (and behaves) as a monopoly than if the industry is competitive.

In an industry employing just two factors of production, the elasticity of demand on the part of that industry for either factor must be less in absolute value than the elasticity of substitution between the two factors in that industry.

In order that an industry shall operate at constant costs as its output is varied, what conditions must hold as to:

the definition of “industry”;

the supply curves, general and partial, of the factors used by that industry;

the mode of operation of the law of diminishing returns in that industry;

the presence or absence of internal diseconomies of large-scale firms in that industry;

the size of the changes in output?

Comment briefly on the following statements:

“If labor has effective occupational mobility, the prices of all commodities under competitive conditions will tend to equal their marginal labor costs.”

“Labor is paid out of current product, and if advances are made, they are made by laborer to employer, rather than vice versa.”

“Saving is necessary only in an expanding economy. No one need wait for the product of his labor or property in a stationary economy.”

“Any increase in investment lengthens the production period, and the production period cannot be lengthened unless more investment takes place.”

Indicate whether statement is true, false, or uncertain, and briefly give your reason.

A firm has a monopoly in its home market and also sells in a perfectly competitive world market; if its home-market price is 50% above the world market price, the elasticity of demand in the home market must be 3.

If a multiplant firm has to produce a given quantity of output, it will never pay it to produce in more than one of its plants if that plant has decreasing marginal costs.

The development of more rapid urban transport will inevitably raise the aggregate rental value of urban residential property.

If the number of acceptable applicants for admission to medical schools is less than the number that could be accepted, the medical profession cannot be raising its earnings by artificially restricting entry.

The rate of interest is determined by the marginal productivity of capital.

If a particular commodity is subject to a special tax not imposed on other commodities, removal of that tax will always increase economic welfare.

If the supply curve of a competitive industry has a positive slope, it means that the industry is subject to decreasing returns to scale.

If wage rates, on the average, increase at the same rate as average product per worker, this means that the marginal return on investment declines over time.

Entrepreneurs in a competitive industry may realize short term gains or profit as a result of an increase in the price of an input (due to a shift in the supply function for the input), even if the demand curve for the industry remains unchanged.

A. A drug manufacturer stated that the prices of drugs sold in England were priced at about one half the price of similar drugs in the United States. The reason given for the price difference was that per capita incomes were much lower in England than in the United States and the English could not afford to pay as much for the drugs.

Accept the factual statements as valid. Discuss the statement in terms of:

Demand functions for drugs in the two countries (income and price elasticities).

Whether the manufacturer could be maximizing his profits.

International trade restrictions on drugs in the two countries.

B. In a given competitive industry, both price and output increase between two time periods. Indicate why each of the following statements is consistent or inconsistent with the observed changes in price and output or is simply irrelevant:

The industry has a perfectly elastic supply curve.

The demand curve has shifted to the right.

The factor supply curves are upward sloping.

The industry is subject to diminishing returns.

Total revenue has increased because the price elasticity of demand is greater than unity.

Rents and quasi-rents have increased.

A. In the effect of union-produced wage increases on prices, one economist says,

“A competitive industry (with a horizontal long run supply curve] will eventually pass all of a wage increase on to consumers in higher product prices” but “a monopolized industry, if it maximizes profits both before and after the wage increase, will not pass on the full amount of the wage increase in prices.”

Assume that the monopolized industry, like the competitive, operates under long-run constant costs.

Explain precisely what “pass all of a wage increase on to consumers in higher prices” means.

Is the statement for the monopolized industry correct? If so, prove it. If not, state why not and indicate any additional conditions required to make it true.

B. This economist also says that the competitive industry “will regain its normal rate of profit”, whereas, in the monopolized industry, “the wage increase will lower monopoly profits”

What does the word “profit” mean in these statements? in the phrase “maximizes profits” of the preceding question?

Do the two statements imply a difference in results in the sense that the monopolized industry will not regain “its normal rate of profit”?

Indicate briefly what other meaning or meanings, if any, does the term “profit” have in economic theory.

(60 minutes) True-False. State very briefly the reason for your answer to each question.

The cross-elasticity of demand of left shoes with respect to the price of right shoes is zero.

A competitive firm buying electrical equipment was not injured by the collusion of the producers (General Electric case) even if the collusion raised prices above the competitive level.

If a consumer’s income rises in the same proportion as a Laspeyres index of his cost of living, his real income is rising.

Duopolists with different costs cannot achieve a monopoly price without transfer payments between the firms.

The marginal utility of income is not constant for a worker who increases his hours of work when the wage rate rises.

If two goods are substitutes in consumption, a 10 cent fall in the price of either good will lead to the same increase in the consumption of the other good.

A minimum wage law may increase the demand for labor by some firms.

A competitive firm will have a more elastic demand function for a factor of production than a monopsonist.

If a firm is operating in the region of falling marginal costs it must be making losses, since marginal cost is then less than average cost.

A multiplant firm will schedule its output so that marginal costs are equal in all plants.

(30 minutes) Capital formation may be defined as the use of current resources in such a way as to increase future income, and on this definition capital formation includes investments in equipment, human beings, and discovery of new knowledge. Discuss the problem of the meaning of the marginal product of capital, and whether capital as defined is subject to diminishing returns.

Indicate briefly whether the following statements are correct or incorrect and why.

Economic theorists contend that, under competition, wages are always equal to the marginal product of labor. It seems to follow that if they are right, the simplest way to raise the productivity of labor, and hence to increase the total output of society, is to force employers to pay higher wages.

The value of the marginal product of a laborer employed at the same wage rate is higher if he is employed by a monopolistic firm than if he is employed by a competitive firm. It follows that the monopoly employs labor more efficiently.

A rise in wages will tend to lower the marginal productivity of capital.

The law of diminishing returns is contradicted by the fact that agricultural output of this country has increased tremendously despite a decrease in the proportion of the working population on farms.

Discuss the conditions that may give rise to long-run decreasing cost for an industry. What are the implications of the various conditions for the state of competition in this industry.

Suppose the wage differential between northern and southern laborers of the same grade were eliminated by raising the southern wage rates. Discuss the short- and long-run economic effects, including the effects on employment in the north and south.

A particular industry composed of numerous competing firms each producing a single product has been hiring labor by the hour and is in a position of long-run equilibrium. This industry (and no other) is required, because of a new law, to hire the labor by the year at a guaranteed annual wage equal to the hourly wage prevailing prior to the change times the number of hours in a normal working year. Discuss (1) the short-run effect of this change on (a) the average and marginal cost curve of a typical firm, (b) the output of that firm, (c) the number of man hours of labor employed by that firm; (2) the long-run effects on the number of firms in the industry and the output of the industry.

Part I

The income of farmers from the sale of their products depends on the prices at which the products sell. The general level of agricultural prices, in turn, depends primarily on the income of nonfarm population. But the income of the nonfarm population depends on the prices of nonfarm products which, in turn, depends partly on the income of farmers.

This kind of analysis is often criticized as circular reasoning and hence as incapable of leading to any useful conclusions. Is this criticism valid? Explain your answer.

Discuss the following quotation from Marshall:

"A useful history of the opposition to machinery is given in Industrial Democracy (by Sidney and Beatrice Webb)…It is combined with the advice (to trade unions) not generally to resist the introduction of machinery, but not to accept lower wages for working on the old methods in order to meet its competition. This is good advice for young men. But it cannot be followed by men who have reached their prime."

How would you expect prices in local, neighborhood, stores in large cities to compare with prices in the central shopping district (in Chicago, the "loop")? In your answer, distinguish among different products, and include an evaluation of the statement so often made by neighborhood stores that they can charge lower prices because they pay lower rents.

Part II

There are 100 each of A and B farms. The product schedules of one farm are

Number of laborers / Total Product (A Farm / B Farm): 1: 40 / 40 2: 90 / 80 3: 140 / 115 4: 185 / 145 5: 225 / 170 6: 260 / 190 7: 290 / 205 8: 315 / 215 9: 335 / 220

a) Determine wages, rents, and employment on both types of farms

(i) if there are 900 laborers and full competition

(ii) if with 900 laborers, the laborers on the A farms organize and succeed in setting a wage rate of 40,

(iii) if, with 900 laborers, the laborers on the A farms organize and succeed in raising the standard wage rate to 47.

b) State briefly the general economic principles illustrated by each part of the above problem.

Consider a hypothetical society in which there is no investment, either net or gross. All capital is completely permanent, not subject to change in form but capable of being used for different purposes. There is no lending or borrowing, no selling or buying of capital goods: whoever owns the capital goods is forced by the laws or conventions of society to hold them and is permitted only to rent them out (i.e., all capital is subject to the conventions that now govern human capital). Hence there is no market interest rate that matters, and all saving takes the form of hoarding of cash. The total amount of money in society is fixed in nominal units (say dollars). Wages are initially rigid (by law or otherwise) and the society is in a state of Keynesian unemployment equilibrium, unemployment keeping the real income down to a level at which dissaving equals saving, so total net saving is zero. Now wages are made flexible. Describe the process of adjustment to a new equilibrium position. Does this new position involve unemployment? What is the equilibrium condition on total net saving? What forces operate to bring about the satisfaction of this equilibrium condition?

3. Assume that the demand curve for complete flashlights of a standardized type is known; that the case and bulb are produced separately from the batteries; that the cost of putting the batteries in the case can be neglected; that the number and type of batteries put in each flashlight is fixed and unchangeable; that the supply curves of (1) case and bulb assembly and (2) batteries are known; and that the markets for complete flashlights, case and bulb assemblies, and batteries are reasonably competitive.

a. Indicate how to derive the demand curve for batteries alone. Under what assumptions is this demand curve valid; and for what kinds of problems is it relevant?

b. Suppose the supply curve of case and bulb assembly shifts to the right (i.e., supply increases). What effect will this have on the price of batteries?

c. Under what conditions would you expect the derived demand curve for batteries to be extremely inelastic?

Answer each of the following “true,” “false,” or “uncertain” and explain your answer briefly. Your score will depend heavily on your explanation.

If two linear demand curves have the same slope at the same price, then at that price the one for which quantity is largest is least elastic.

An important difference between an indifference map and an isoquant map is that indifference curves never cross.

An important difference between the utility functions depicted by usual indifference maps and production functions is that distances in utility space can be ordered but not measured.

The following conditions are necessary and sufficient for the short-run maximization of monopoly profits: (a) Marginal revenue is equal to marginal cost; (b) price is greater than average variable cost.

An increase in fixed cost caused by an increase in the rate of interest on long run term debt will increase long-run marginal cost but not short-run marginal cost.

An effective legal minimum wage above the prevailing wage will increase the employment of a firm that is a monopsonist in the labor market.

The costs of owner-operated businesses are generally understated because the owners do not pay themselves wages. If they did, the accounting costs would be equal to the economic costs.

The way to produce a given output in the long run at lowest cost is to construct the plant whose short-run average costs are at a minimum at that output.

If a monopolist maximizes profit in the short-run and operates where total revenue is at a maximum, he has no variable costs.

A production function shows constant returns to scale if an increase of 10 per cent in the input of one factor will increase output by 10 per cent.

“Productivity” is a catch-word in most general discussions of wage policy, as for example in the following quotation:

“General increases in wage rates exceeding the average growth of productivity raise costs and will ordinarily result in high prices,” from which it is implied that wage rates “ought” to rise by the same percentage as “productivity”. Sometimes, this argument is carried over to particular industries or occupation; and sometimes, the conclusion is drawn that wages “cannot” “on the average” rise by more than “productivity”.

Discuss from the point of view of price theory, with special reference to the meaning of the concepts used and the validity of the inferences drawn. Do not get involved in business cycle, or income and employment theory.

Consider a hypothetical society in which there is no investment, either net or gross. All capital is completely permanent, not subject to change in form but capable of being used for different purposes. There is no selling or buying of capital goods: whoever owns the capital goods is forced by the laws or conventions of society to hold them and is permitted only to read them out (i.e., all capital is subject to the conventions that now govern human capital). Lending or borrowing is prohibited, so that there is no market rate of interest that matters, and all saving takes the form of hoarding of cash. The total amount of money in society is fixed in nominal units (say dollars).

Although this economy is stationary in the aggregate, it is not static. Explain the meaning of the sentence and its bearing on the willingness of people to hold money.

Wages are initially rigid (by law or otherwise) and the society is in the state of Keynesian unemployment equilibrium. Explain. What is it that assures that the aggregate amount actually saved is equal to zero? What is it that assures that the aggregate amount people wish to save is equal to zero?

Wages are now made flexible. Describe the process of adjustment to a new equilibrium position. Does this new position involve unemployment? What is the equilibrium condition on saving? What forces operate to bring about the satisfaction of this condition?

Discuss the factors that determine the rent of capital goods and the wages of labor at equilibrium when both are flexible.

Lending and borrowing is [sic] now introduced, but all other assumptions are retained, so that all loans are in essence “consumption loans”. What determines the equilibrium rate of interest? What effect, if any, would the introduction of lending and borrowing have on the price level?

“The statement that wages tend to equal the net product of the worker’s labor… is not, as some have thought, an independent theory of wages, but only a particular way of wording the familiar doctrine that the value of everything tends to be equal to its expense of production.” (Marshall)

Explain why “the statement that wages tend to equal the net product of the worker’s labor” is not “an independent [i.e., complete] theory of wages.”

Prove that it is “only a particular way of wording the familiar doctrine…” in doing so, interpret “everything” to mean “final products,” not “labor.”

(a) Discuss the meaning of “profits” in connection with the theory of distribution. Outline briefly “a” theory of “profits.”

(b) A private enterprise economy is frequently described as motivated by the desire to maximize “profits.” Is the word “profits” in this statement used in the same sense as in the discussion under (a)? Explain any difference.

“Rent is but the leading species of a large genus.” Discuss.

Suppose that legislative hearings were to be held on the following (a) A national bill to make the minimum wage rate very regionally, so it would be lower in the South than in the North; (b) A bill in a particular state to make it legal for manufacturers to enforce a minimum retail price on their products (a so-called “fair-trade” law).

Indicate what groups you would expect to be testifying for and against each bill, and why you would expect them to do so.

Indicate whether each of the following statements is TRUE, FALSE, or UNCERTAIN. In each case write a few sentences explaining your answer. Your grade will be determined by your explanation.

It is immediately obvious that if the firm has any significant degree of monopoly power, sales maximization would be better for the rest of the economy than profit maximization.

When a firm increases its price because its raw material costs have risen, the buyers accept the price increase more readily.

If A and B are produced in fixed proportions and consumed in fixed proportions, one of the two will be free.

Marshall asserts that the rents of different qualities of agricultural land will approach equality as the economy grows in population and wealth.

An industry whose output is increasing cannot be making negative profits.

The prohibition on environmental pollution by (say) a factory cannot increase national income.

A competitive industry is more likely to cartelize when the probability of expropriation increases.

Regulation of a competitive industry by the government will decrease the probability of cartelization.

In the social security systems of most countries, the age of retirement after which old age pensions are “payable” is lower for women than for men (usually 60 as compared with 65 years of age), even though on the average women live significantly longer than men. This is a clear case of discrimination against men, which should be protested by the Men’s Liberation Movement.

The U.S. personal income tax system allows married couples to “split” their aggregate income equally and pay tax on the results at the same rates as single people would. This is a clear case of discrimination in favor of heterosexuality that should be vigorously protested by the Gay Liberation front.

If the elasticity of supply is less than unity, and the elasticity of substitution in production greater than unity, a fall in the price of a factor must increase the demand for it.

Labor can be “Exploited” only if there is monopoly in the product market.

Ontario imposes a tax of 30 percent on the sale or bequest of any land to non-Canadians. What are the effects of such a tax on:

Landowners, Canadian and non-Canadian;

Non-landowners, Canadian and non-Canadian.

What will the effect be if leases are not regulated?

The accompanying diagram showing a set of indifference curves between income and work is part of a diagram given by Boulding in Economic Analysis in his discussion of the effects of various types of direct taxation, and reproduced by Schwartz and Moore in the March 1951 American Economic Review. The latter write, “Given O Q2Q5 as a rate of pay, the equilibrium position is P1 where the rate of pay is equal to the MRS between leisure and income. Let us assume that we are to collect a tax from this individual equal to OL. One method of collecting the tax would be to levy a poll tax, leaving the rate of pay unaltered, as LP5. Another direct tax would be a proportional income tax represented by OSP2 which would have the effect of lowering (flattening) the rate of ‘take-home’ pay. To extract the same amount of revenue as the poll tax does, this rate of pay must be tangent to an indifference curve at an intersection with LP5. Thus P2Q2 = OL. Since the rate of ‘take-home’ pay is flatter, P2 must lie below and to the left of P5; i.e. less effort is expended and the worker enjoys a smaller net income. More important, his welfare is diminished because he must be on a lower indifference curve…Given the premises of the conventional indifference curve pattern, this must necessarily be true.”

(a):

(1) Why do the indifference curves in the diagram slope positively?

(2) How can you justify their being drawn concave upwards?

(3) The statement that OQ2Q5 is “a rate of pay” is of course wrong. OQ2Q5 is a line. Reword the statement so it is accurate.

(4) What do the authors mean by MRS?

(b) If we suppose the diagram to stand for a “representative” individual, or one of a society of identical individuals all to be taxed alike, the last sentence in the quotation is false: the authors' welfare conclusion does not follow from their premises and arguments. Point out the fallacy in the proof.

(c) Under what conditions is the authors' welfare conclusion valid? Can you give a proof of your statement?

Available evidence tentatively indicates that (1) average income of white families living in the same size city is roughly the same in the North and the South; (2) the wage rate of a white worker in any given occupation is higher in the North than in the South for cities of the same size; (3) property income is roughly of equal importance for white families in the North and the South.

For purposes of this question, accept these as correct statements of fact. Can you suggest any way of reconciling the apparent contradiction among them? Presumably, any reconciliation will turn on the larger fraction of negroes and greater discrimination against them in the South than in the North.

Spell out your suggestion in detail, explaining the theoretical links if any between the higher fraction of negroes and greater discrimination, on the one hand, and the indicated results on the other. Indicate how the validity of your suggestion would be tested.

Indicate whether each of the following statements is true (T), false (F), or uncertain (U), and state briefly the reason for your answer. It is to be understood that in each question the appropriate “other things” are to be held constant.

1. The imposition of a minimum wage for labor of type X higher than the preceding wage leads to an increase in the number of laborers of type X employed. It follows that labor of type X is hired under monopsonistic conditions.

2. Under both competition and monopoly in the product market, marginal value product of a factor to a firm is equal to marginal physical product of the firm times marginal revenue to the firm from the sale of the product.

3. Marginal productivity analysis shows that, in the absence of monopsony, a laborer gets as a wage his marginal value product. If this analysis is correct, it follows that unions can raise wages in the absence of monopsony only if they either make each worker more efficient, or increase demand for the product, or make the demand for the product more elastic.

4. The law of variable proportions (or diminishing returns) is contradicted by the fact that agricultural output of this country has increased tremendously despite a decrease in the proportion of the working population on farms.

5. The rate of interest is equal to the rate of time preference of consumers.

6. At present levels of operation, three quarters of the total cost of the XYZ railroad is overhead cost that does not vary with traffic, only one quarter is variable cost. It follows that marginal cost is much less than average cost.

7. The demand curve of an individual firm for a factor of production is identical with its marginal value productivity curve for the same factor of production.

8. The demand curve of a firm for a factor of production is a meaningless concept if the firm is a monopsonistic purchaser of that factor.

9. A declining long run supply curve is impossible in a competitive industry.

10. Marginal factor cost is equal to the price per unit of a factor whenever the product market is competitive.

11. According to the theory of joint demand, the absolute value of the elasticity of derived demand for a factor of production will be smaller the more inelastic the supply of that factor.

12. The fact that individuals do not choose occupations solely on the basis of their pecuniary attractiveness helps explain why the supply curve of labor for a particular occupation has an elasticity greater than zero.

13. If all types of services were used only in fixed proportions, a marginal-productivity theory would be neither necessary nor possible.

14. Our society is often described as a “profit” economy or “profit-maximizing” economy. The word “profit” is here used in the same sense as in the uncertainty theory of “profit.”

15. “Profit” as defined in the uncertainty theory of profit is the expected return to any factor assuming uncertainty over and above the guaranteed expected income it can obtain if it assumes no uncertainty.

16. If one income is higher than another before income tax it will also be higher after a progressive income tax, provided only that the marginal tax never exceeds 100%. It follows that if one accepts the theory that individuals act as if they sought to maximize their income, he must also accept the conclusion that such taxes do not alter individual's actions and hence are not shifted.

17 and 18. A minimum wage law is repealed. The wage rate of a class of workers hired under competitive conditions was equal to the minimum before repeal and falls after repeal. It follows that:

17. The total wage bill for this class of labor will rise, remain constant, or fall, according as the elasticity of demand for labor of this class is greater than, equal to, or less than unity in absolute value.

18. The quantity of labor of this class employed will fall, remain constant, or rise according as the elasticity of supply of labor of this class is positive, zero, or negative.

19. The great technological improvements in the past few decades in the production of synthetic fibers (rayon, nylon, etc.) and associated decline in their relative price has, among other effects, tended to raise the price of meat in general, especially of lamb and mutton.

20. At the same time, stringent rationing of meat consumption in Great Britain, by tending to offset this effect, has improved the competitive position of the synthetic fiber industry, and so enabled it to expand more than otherwise.

“The wages of every class of labour tends to be equal to the net product due to the additional labour of the marginal labourer of that class.

“This doctrine is not a theory of wages: but is a useful part of a theory.” (Marshall)

(a) What does Marshall mean by “net product”? By “Marginal labourer”?

(b) Explain and evaluate the second sentence in the quotation.

An earthquake destroys half the physical capital in a country but miraculously there is negligible loss of life. The earthquake was most unusual, was unexpected and no one expects a repetition.

Show graphically the effect on (1) the stock demand and supply for capital; (2) the flow demand and supply curves.

Assuming flexible prices and full employment throughout, what, if anything, can you say about the initial effects on (1) rental rate on capital goods; (2) sales price of capital goods; (3) interest rate [i.e., ratio of (1) to (2)]; (4) real wage rate; (5) fraction of income consumed; (6) absolute level of investment.

What about ultimate effects on these variables?

Assuming initially rigid wages and underemployment, what, if anything, can you say about initial effects on items listed in (b)?

Suppose the earnings of military personnel were set below the price that would make the number of volunteers equal to the demand by the military, and that draft calls were sent out strictly at random to males aged 18-26 to bring the number entering up to demand

a.

1. How would the composition of drafted personnel compare with those that would enter if military earnings were raised sufficiently to make the number of volunteers equal to demand?

2. How would the total tax burden and its distribution among the population compare?

b. Assume now that drafted personnel could buy a substitute or substitute for someone else (as during the Civil War) instead of entering as a draftee. Assuming the capital market for substitutes works well, in equilibrium

1. How would the composition of men entering and the tax burden compare with that under a drafted and a fully voluntary system?

2. What determines the price that substitutes can get?

Evaluate. “Chinese labor is far less productive than American labor as evidenced by the fact that it takes so of it to get jobs done. One the other hand, American wheat land is less fertile than wheat land in Europe (e.g., France) as evidenced by the lower yield per acre in the United States.”

Give brief (a sentence or two) comments to the following:

(a) Demand curves tend to be more elastic in the long run than in the short run.

(b) Men (persons) do not differ significantly from roaches.

(c) Unemployment means that there are not enough jobs to go around.

(d) The tendency for mechanics to charge women higher prices for a given emergency repair than that charged men.

Give very brief (one paragraph) answers to the following:

(a) Collusions have the natural tendency to break down.

(b) Cost minimization is the general criterion of economic behavior.

(c)Laissez faire capitalism encourages deceitful advertising, dishonesty, and faithlessness. Comment.

(d) Is a person who loses his job through no fault of his own also unemployed thereafter through no fault of his own? Explain.

The marginal productivity basis of the demand for labor is inapplicable to cases in which the labor is doing research, teaching or in other cases where there is no identifiable measurable product or in situations where there is non-market allocation of services. Evaluate.

If two people work jointly in production, it is impossible to tell who produced how much. What then is the meaning of the statement: that each gets what he produces?

What economic forces explain each of the following phenomena? Give a logically complete discussion in each case.

(1) The tendency for married couples with small children to spend relatively more on entertainment when they go out than do married couples without small children. (Note: this does not mean that couples with small children go out more often!).

(2) The tendency for non-poor persons to transfer income or goods-in-kind to poor persons. (Avoid making interpersonal utility comparisons.) State the assumptions that underlay the choice to make money income transfers versus goods-in-kind transfers and which is more efficient?

(3) The lessened tendency for physical attributes such as race and sex to be used as criteria for choice for higher level positions of employment (managers, executives, etc.) than for lower level positions of employment (janitors, dishwashers, etc.). Does the same reasoning explain why nepotism is virtually absent in professional sports?

(4) The virtual absence of manual labor operating elevators, picking cotton, picking tomatoes and theater ushers in the United States.

The Cobb-Douglas production function has the following form:

$q=f(x,y)=A{x}^{\alpha }{y}^{1-\alpha }$

Show that such a function is linearly homogeneous to degree one and state two other characteristics of such a production function. Also prove mathematically that with a production function such as a Cobb-Douglas that if factors are paid according to their marginal products the total product is “exhausted”.

You are the absolute czar and head of a union of 1,000 plumbers in Austin, Texas. You have the absolute power to set the wage at which the plumbers will work. The economist that you have hired tells you that the demand for plumbers in Austin is $Q=1,200-100W$, where Q is the number of plumbers employed and W is their wage. If there were no other plumbers in Austin, what wage would you set if (a) you wished to achieve full employment at the highest possible wage, (b) you wished to achieve maximum total payments to plumbers? Get the elasticities of demand for plumbers at the wages identified in (a and b) both answers.

With the advent of the women’s liberation movement, there is reason to believe that women’s preferences may be changing so as to make the reservation uses of their time less attractive than before in comparison to market employment. What effect would such a taste change have upon the supply curve of female labor? Upon the relative market wages of male and female workers?

Assume that men and women are equally productive in a certain occupation but the conditions of supply between men and women differ is not numerically different). Produce an argument showing that the profit maximizing firm will engage in wage discrimination between men and women. Make sure you explain the supply differences.

“If the minimum wage law is eliminated, it will only shift the burden of unemployment from sons to fathers.” Evaluate.

“The wage rate is determined by the marginal productivity of labor.” If someone offers this statement as a formulation of the marginal productivity theory of wages, what corrections or amendments will you insist upon? Explain.

D.H. Robertson divides the effects which “an artificial raising of wages” is apt to have on employment into “two analytically separable reactions”–first, “A movement along the existing marginal productivity curve,” and second, “a cumulative lowering of the curve.” Explain the two reactions and indicate what assumptions concerning the other factors of production are involved.

(a) In a competitive (atomistic) industry, suppose that a maximum wage law lower than the equilibrium wage is imposed and enforced. Indicate graphically the implication for employment in the industry, the areas representing distributive transfer(s) and those areas representing social gains or losses.

(b) Do the same, but assume now that the industry is empowered to conscript laborers at the specified maximum wage.

The Marxist doctrine of distribution is “to each according to his needs and from each according to his ability” while the capitalist doctrine is “. . . to each according to what he produces.” Explain the meaning of each statement.

“A substantial number of relatively unskilled persons reported that they cannot find work. At the same time there are many unfilled jobs for relatively skilled people. Apparently, the problem is that there are more unskilled people than unskilled jobs.” What is wrong with that reasoning?

“On a proportional basis, there are too many Negroes and too few Jews among professional athletes. This shows that sports have overcome racial discrimination but not religious discrimination.” Comment.

“Rent is price-determined, not price determining.” Explain why this statement is both true and false. In your answer explain what is meant by rent.

In macroeconomic analysis, the possibility of economic equilibrium with a degree of unemployment is ordinarily assumed. But in microeconomic analysis, we generally postulate that prices must be such to clear markets. Is it possible to give a microeconomic explanation for unemployment, without calling upon wage rigidities due to government or union action to keep wage rates from falling: Show how it is, if it is.

Give short, but complete, answers to the following:

(a) “Automation is destroying 300,000 jobs a month.” Is destroying jobs socially good or bad? Does automation mean that people will be left without jobs. Why?

(b) If in some town the minimum wage rate for taxi-driver employees were raised to $5.00 an hour, what would happen to the ratio of cabs driven by the owners to cabs driven by employees of cab owners? Why?

(c) If you were a visitor in some underdeveloped country in which all lending and borrowing are effectively prohibited, is there an interest rate; if so, where could you get date to compute it; how could you tell when it changes?

(d) Why do you think that the commandments: “Thou shalt have no other Gods before me” and “Thou shalt not make unto thee any graven image. . . .” are the two most important among the Ten Commandments, in the eyes of God?

Give very brief (one paragraph) answers to the following:

(a) Collusions have the natural tendency to break down.

(b) Cost minimization is the general criterion of economic behavior.

(c) Laissez faire capitalism encourages deceitful advertising, dishonesty, and faithlessness. Comment.

(d) Is a person who loses his job through no fault of his own also unemployed thereafter through no fault of his own? Explain.

Write brief answers explaining each of the following:

(a) Explain what Hayek might mean when he asserts that: “The most significant fact about the price system is the economy of knowledge with which it operates.”

(b) Why does specialization lead to a larger output? What is meant by specialization in this context?

(c) If two people work jointly in production, it is impossible to tell who produced how much. What then is the meaning of the statement that each gets paid according to what he produces?

(d) Give at least three reasons why the observation of a negative rate of interest is highly improbable.

Unemployment means that there are not enough jobs to go around. Apply economic analysis to this statement.

“The wage rate is determined by the marginal productivity of labor.” If someone offers this statement as a formulation of the “marginal Productivity theory of wages,” what corrections or amendments will you insist on? Explain.

With the advent of the women’s liberation movement, there is reason to believe that women’s preferences may be hanging so as to make the reservation uses of their time less attractive than before in comparison to market employment. What effect would such a taste change have upon the supply curve of female labor” Upon the relative market wages of male and female workers? If employees perceived the differences between sexes it would lead to a decrease in wages relative to wages.

“A substantial number of relatively unskilled persons reported that they cannot find work. At the same time, there are many unfilled jobs for relatively skilled people. Apparently, the problem is that there are more unskilled people than unskilled jobs.” What is wrong with the reasoning?

“The advent of the one man bus involved more capital equipment: an automatically operated coin box and door control device - to name two of the capital goods that replaced the conductor.”

(a) Is this a case of capital replacing labor? Where?

(b) Is this a case of labor replacing labor? Where?

Evaluate the following statement:

(a) Taiwanese labor is far less productive than American labor as evidenced by the fact it takes so much of it to get things done e.g., it may take three or four Taiwanese to do a job done by one American;

(b) American agricultural land is less fertile than Taiwan land as evidenced by the lower yield per acre in the U.S. Separately evaluate both statements.

Assume that you are a member of a minority group in some country and have reason to doubt that your property rights would be enforced and respected in the community.

(a) What forms of capital would you invest in?

(b) What kinds of skills would you encourage for your children?

(c) Do you know of any evidence of such actual behavior by minority groups?

The National Teacher’s Federation, a teacher’s union, advocates a single salary scale wherein every teacher, regardless of specialty, gets the same salary his first year of teaching, with salary thereafter tied strictly to years of service. Who would suffer (why) and who would benefit (why) if that were made universal: Men or women? Negroes or whites? Superior or inferior teachers? Mathematics or physical-education teachers?

“On a proportional basis, there are too many Negroes and too few Jews among professional athletes. This shows that sports has finally overcome racial prejudice, it has not overcome religious prejudice.” Comment.

You are the absolute czar and head of a union of 1,000 plumbers in Austin, Texas. You have the absolute power to set the wage at which the plumbers will work. The economist that you have hired tells you that the demand for plumbers in Austin is $Q=1,200-100W$, where $Q$ is the number of plumbers employed and $W$ is their wage per hour. This demand function can also be written $W=12-Q/100$. If there are no other plumbers in Austin, what wage would you set if (a) you wished to achieve full employment at the highest possible wage; (b) you wished to maximize total payments to plumbers?

Taxi fares in New York recently were increased by nearly 50%. Predict the effect on the price of taxicab medallions, the earnings of taxicab drivers and congestion in New York streets.

“If every employer hired its best qualified applicants for a job at every opportunity, the phenomenon of black poverty (as distinct from poverty) could be wiped out in ten years.” Do you agree/disagree? Comment.

Give brief analysis to each of the following:

(a) Evidence of sex discrimination lies in the fact that the median annual earnings of women are only 59 percent of male earnings.

(b) Professor of Economics, Betty J. Watson, of the College of Notre Dame in Baltimore said, in reference to the minimum wage, “It’s more important to focus on creating jobs. Black youth have to deal with racism, and lowering the wage isn’t going to help them find jobs.” ( The Cincinnati Enquirer, November 23, 1986).

(c) Evaluate: A jet plane can fly from New York to Los Angeles three hours faster than a propeller driven plane. Which is the more efficient? Why?

Evaluate the following: The laws of supply and demand cannot apply to the labor market because labor is not a commodity to be bought and sold like machines.

The supply curve for labor is $S_L=100W$, where $W$ is the market wage. The marginal revenue product curve for the firm is $D_L=-50W+450$.

(a) If the firm is a monopsonist, how many workers will it hire in order to maximize profits? What will be the wage?

(b) If the supply of labor is monopolized, how many workers are supplied in order to maximize the wage bill? What is that wage?

“Long ago we stated the reason for labor organizations. We said that they were organized out of the necessities of the situation; that a single employee was helpless in dealing with an employer; that he was dependent ordinarily on his daily wage for the maintenance of himself and his family; that if the employer refused to pay him the wages that he thought fair, he was nevertheless unable to leave the employer and resist arbitrary and unfair treatment; that a union was essential to give laborers opportunity to deal on an equality with their employer.” This statement was made by Chief Justice Charles Hughes, of the Supreme Court of the United States in the case of United States v. Jones and Laughlin, 1937. Evaluate Chief Justice Hughes’ propositions for their meaning.

Evaluate the following quote from USA Today, March 22, 1988:

“Raising the minimum wage wouldn’t result in fewer jobs because businesses would absorb the costs as they have absorbed other costs, according to Robert McGlotten, director of legislation for the AFL-CIO.”

‘Business doesn’t hire people on the basis of wage,’ he says, ‘but on the basis of need.’

‘If an individual with a particular kind of occupation is needed, then that occupation and the skill levels of the individuals would be matched with a wage rate,’ he says.

And the lost-job claim? McGlotten says critics made that argument when the minimum wage was 25 cents an hour. And ‘that’s never been true at all.’”

In the “absence of unions, employers would be able to pay workers whatever they wanted.” True or false? Why?

Suppose that Florida migrant farm workers are effectively unionized. What will be the impact of the unionization on (a) the price of Florida oranges, (b) the profits of Florida fruit growers in the short run and in the long run, (c) the mechanization of the fruit picking industry and (d) the employment of fruit pickers?

Assume that an industrial union’s primary purpose is to raise the wages of its members above the competitive level.

(a) Explain on a theoretical level how this increase might be accomplished.

(b) What conditions would make the union’s job easier?

The average wage rate of women is only 59% of that of men. This shows that women are paid just 59% as much as men for doing the same work. Evaluate this statement.

What is wrong with this way of thinking?

“Higher wages help everybody. Workers are helped because they can now purchase more of the things they need. Business is helped because the increase in workers’ purchasing power will increase the demand for products. Taxpayers are helped because workers will now pay more taxes. Union activities and legislation mandating higher wages for workers will promote economic progress.”

“Jobs are the key to economic progress. Unless we create more jobs, our standard of living will fall.” (True or false? Explain.)

Suppose that Florida migrant workers are effectively unionized. What will be the impact of the unionization on (a) the price of Florida oranges, (b) the profits of Florida fruit growers in the short run and in the long run, (c) the mechanization of the fruit picking industry and (d) the employment of fruit pickers? Explain each answer.