Home » Exams Overview » Advanced Micro I – Williams Final Edition
1. State whether the following is true or false and explain your response:
Existing firms in a cartelized industry prefer to be regulated by government.
2. Give a brief answer to the following:
Collusions have the natural tendency to break down.
Firms have an incentive to cheat to gain extra profits and market share. Collusions are difficult to monitor. Can’t prevent firms outside the cartel from competing, and can’t compel them to join the cartel. Small and large firms have different cost structures making quantity agreement difficult.
3. Some discount stores advertise that they can sell for less because they buy directly from the factory and sell to the consumer, thus eliminating middlemen. What is the flaw in that reasoning?
4. Is the following statement true, false, or uncertain? Explain.
A monopolist will never set price and quantity at a point where the demand is price-inelastic.
5. 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.”
(#97.a, 2014 #3.b)
6. Which of the following images is a graph of the standard intertemporal 2-period model?
Enter your answer as a single capitalized letter.
7. Do externalities offer unambiguous proof of market inefficiency or is it possible for externalities to be consistent with market efficiency?*
*Hint: Professor Williams takes the mainstream view that a situation is efficient iff it is pareto-optimal.
(#44, part 2)
Atomistic Markets == Alchain’s word for very competitive firms.
The first statement simply means that competitive markets will bring about a state of affairs where all mutually beneficial exchanges have been made, or that no more exchange can take place without making at least one individual worse off (Pareto optimal).
As far as externalities are concerned, they do not necessarily imply market inefficiency. Externalities arise in cases where property rights have not been defined, or are only defined ambiguously. However, this does not mean the situation is inefficient. For instance, as Demsetz explained, property rights institutions will arise only when it is economically efficient. Lack of property rights could mean that it is too costly to enfore said rights.
In addition to pareto-optimality, there are at least 3 other ideas of efficiency:
8. Give a brief answer to the following:
Laissez-faire capitalism encourages deceitful advertising, dishonesty, and faithlessness.
Importantly, markets achieve economic efficiency in spite of immoral preferences.
John’s Note: I consider the Wikia solution below to contradict itself. I agree with the statement “In repeated interactions people have to be truthful, honest, and faithful”, but I consider this to be opposite the statement “Laissez-faire capitalism does nothing to contribute to the morals of society.”
Instead, I affirm that laissez-faire capitalism tends to improve social morals and discourages deceitful advertising, dishonesty, and faithlessness.
Laissez-faire capitalism does nothing to contribute to the morals of society. It only allows people to exchange via price instead of other less efficient mechanisms. In repeated interactions people have to be truthful, honest, and faithful. If this type of capitalism prevails consumers can choose to frequent shops where these values are part of the price of the item. For example, sellers on Amazon.com have records of past interactions with customers. In an effort to minimize complaints the seller will often go out of his way to make amends for disgruntled customers. This raises the costs of operating a business. A customer has the choice to be price sensitive and take a risk, or pay a slightly higher price for a seller who has demonstrated honesty and faithfulness. Only when the cost of honesty and faithfulness are very high would we expect to see them cease to exist, and then only if the market is very underdeveloped.
9. Atomistic markets are supposed to permit the achievement of Pareto optimality where externalities are absent.
Explain the meaning of this statement.
(#44, part 1)
10. Give a brief answer to the following:
A person who loses his job through no fault of his own is also unemployed thereafter through no fault of his own.
John’s Note: Imho the best answer would be as follows:
However, I did not enable this as a choice because I expect Williams would mark such an answer wrong.
In Williams’ view, unemployment over time directly implies that the reserve wage is greater than the market wage.
In my view, it takes some amount of time and skill even to obtain an unpaid internship. So it’s not just the wage that matters.
A person who loses his job through no fault of his own could be said to be involuntarily unemployed. However, if he remains unemployed, then his unemployment is voluntary. This is possible due to the infinite wants and that his reservation wage is higher than the market wage. At less than his reservation wage, he prefers leisure to work.