Home » Exams Overview » Advanced Micro I – Williams Final Edition
1. 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)
2. Atomistic markets are supposed to permit the achievement of Pareto optimality where externalities are absent.
Explain the meaning of this statement.
(#44, part 1)
3. 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.
4. An urban rapid-transit line runs crowded trains (200 passengers per car) at rush hours, but very empty trains (ten passengers per car) at off peak hours. A management consultant makes the following argument: “The cost of running a car for one trip on this line is about $50 regardless of the number of passengers. So the per passenger cost is about 25¢ at rush hour but rises to $5 per passenger in off peak hours. Consequently, we had better discourage off-peak hour business.” Explain the fallacy.
“Commutation tickets” sold by some transit systems (reduced-price, multiple-ride tickets) are predominantly used in rush hours. Are such tickets a good idea?
Explanations: Community, John’s Note, Wikia
While I agree that demand is less elastic during peak hours, it does not follow that off-peak hour prices should be reduced. There is no such thing as an optimal price elasticity. Efficiency is achieved by producing Q such that marginal benefit equals marginal cost at any particular moment.
It may be the case that the transit line should encourage or discourage off-peak demand, or it might be that off-peak services are already optimally priced. The economic consultant’s fallacy is not that he is necessarily wrong, it is that his reasoning is fallacious.
Wikia – http://economics.wikia.com/wiki/WEW-042
During peak hours, the demand for train service is less elastic, allowing for a possible price increase without a correspondingly large loss of passenger traffic. However, the demand for off-peak service will be more elastic, and therefore more sensitive to price increases or decreases. Therefore, off-peak business will be encouraged by a price reduction. Commutation tickets for rush hour are less effective than the same type of ticket offered for off-peak times. Since governments frequently in charge of transit systems, this is an example of inefficiency which could be resolved by the free market process.
5. Which of the following images is a graph of the standard intertemporal 2-period model?
Enter your answer as a single capitalized letter.
6. 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?
7. Give a brief answer to the following:
Cost minimization is the general criterion of economic behavior.*
*Hint: Williams implicitly assumes costs are accounting costs.
The general criterion for consumers is utility maximization, and for producers is profit maximization. Cost minimization alone does not guarantee profit. One can cost minimize by merely foregoing production.
8. True or false: Cost curves are monetized reciprocals of product curves? Explain.
(#76, #104, 2014 2.b)
9. State whether the following is true or false and explain your response:
Existing firms in a cartelized industry prefer to be regulated by government.
10. 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.