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Exam 2011, questions and answers

History Of Economic Thought (Northwestern University)

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Economics 318 Winter 2011 Name __________________

Professor Lynne Kiesling

Final Exam (180 points, 1.5 points per minute)

You have two hours to complete this exam. Please put the multiple choice and short answer
sections in one blue book and the essay in a second blue book. Take your time and think before
you write.

I. Multiple choice (3 points each, 45 points total, 30 minutes)

1. Mill viewed the stationary state as a precondition for __________

a. Ricardo’s theoretical construct
b. lasting social reform
c. international trade
d. wealth accumulation

2. Walras’s belief in the interconnectedness of markets implies that if an excess demand exists
for a good, then
a. equilibrium is not stable
b. price must fall
c. an excess supply exists for another
d. quantity must rise

3. In Marx’s analysis, surplus value exists because

a. workers get paid for their labor power, not for their labor
b. of the immiseration of the proletariat
c. workers are paid wages above biological subsistence
d. capitalists extract it from workers

4. “[…] in the same open market, at any one moment, there cannot be two prices for the same
kind of article.” This quote describes:
a. The common state of competition according to Hayek.
b. Jevons’s Law of Indifference.
c. Keynes critique of Marshall’s distinction between short run and long run supply.
d. Böhm-Bawerk’s critique of Marx’s claim that the value of labor-power could be lower
than the use-value of labor-power (the value of the added value it produces).

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5. According to Menger, for a useful thing to be a good, it must satisfy four characteristics,
including that the thing must:
a. fulfill a human need
b. fulfill a human want
c. be available in surplus quantities
d. be scarce

6. Böhm-Bawerk is noted for his analysis of interest as the ________ for (of) present
consumption.
a. reward
b. opportunity cost
c. cause
d. result

7. Alfred Marshall made important contributions in his attempts to characterize the way in which
supply and demand schemes depend on particular social and technical conditions. Which of the
following relations was NOT part of this enquiry?
a. Different supply patterns related to different market sizes (local, national,
international, etc.).
b. Different characteristics of supply functions viewed over different ranges of time (short
run, long run, etc.).
c. Differences in elasticities of demand related to different types of products (basic
necessities, luxury goods, etc.).
d. Different demand patterns by different social classes (lower classes, upper classes, etc.).

8. According to Walras, the ceteris paribus assumption

a. keeps only the demand constant when we analyze the supply
b. eliminates the interactions among markets that characterize real market processes
c. characterizes general equilibrium
d. is a necessary evil

9. Which of the following is NOT likely to have been a cause or a component of the consumer’s
welfare loss calculated by Marshall in his analysis of the post office monopoly?
a. A decrease in the quantity of the letters sent
b. The decision-making was done by a remote bureaucrat instead of by the “man on
the spot”, who would have had the best relevant information
c. The price of letters was higher than the competitive price would have been
d. The post office did not have enough incentive to innovate

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10. For Jevons equilibrium in exchange is determined by ________, while for Walras
equilibrium is determined by ________.
a. marginal rate of substitution; marginal rate of technical substitution
b. scarcity of the good; MU of the last unit
c. final degree of utility; intensity of the last want satisfied
d. quantity; price

11. “Adam Smith, following in the scholastic tradition, had visualized the economy as being
governed by the invisible hand of self-interest. Though he illustrated the working of this force
with innumerable examples, he did not provide a formal analysis.” (HET page 160). How did
Jevons' contribute to this idea?

a. He developed the idea of interconnectedness markets with his trade theory.

b. He formalized mathematically the invisible hand
c. He described utility optimizing individuals, which can be seen as the microfoundation for
the above idea.
d. He analyzed the demand and supply leading to the invisible hand.

12. About Keynes' General Theory, we can safely say that:

a. It was groundbreaking theoretical framework, with long lasting influence on

macroeconomists' modelling techniques .
b. It argued in favor of lowering nominal wages, so the economy could adjust faster in
depression times.
c. It laid our the concept of involuntary unemployment because Keynes disagreed that
people who were transiting from jobs should be included in the voluntary unemployment
concept.
d. One of the causes of its success was because it put several insights of his
contemporaries together.

13. Both Schumpeter and ________ believed change was endogenous to the economic system.
a. Walras
b. Jevons
c. Marx
d. Marshall

14. According to J.M. Keynes’ General Theory, which of the following is a motive that induces
people to hold cash AND is the chief factor relating changes in interest rate to changes in money
demand?
a. Transaction motive
b. Voluntary motive
c. Precautionary motive
d. Speculative motive

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15. Hayek maintained that socialism could not work because the information that individuals
use to make their decisions is:
a. present only in supply and demand functions
b. diffuse throughout society and continuously being discovered
c. not captured in cost conditions
d. is not relevant for long enough to make stable plans

II. Short Answer (15 points each, 60 points total, 40 minutes)

Your answers should be no longer than two pages for each question.

1. The following is a quote taken from Joseph Schumpeter’s Capitalism, Socialism and
Democracy (you may recall it from the course readings):

“In the case of retail trade the competition that matters arises not from additional
shops of the same type, but from the department store, the chain store, the mail-
order house and the supermarket which are bound to destroy those pyramids
sooner or later.”

Explain what Schumpeter tried to demonstrate by this example from the retail trade. In your
answer, make sure to distinguish between the standard pre-Schumpeter view of growth and
competition and Schumpeter’s unique stand.

Answer:
! This is an example of Schumpeter’s process of creative destruction
! The competition that takes place between similar existing production processes is secondary,
and cannot account for the long term growth and technological progress.
! Instead, growth is advanced in the long run by the invention and introduction to the market
of completely novel production processes, that impose themselves over the old ones and
eventually drives them out of the market completely.
! In the future, those new processes will become old, and will be destroyed by further
revolutionary advance of the production processes. Thus, there’s a continuing chain of
revolutionary cycles of innovations and destructions.
! The shops in the example stand for an old type of technology. They may compete with each
other, but this competition is not what really brings about major economic progress.

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! The “department store, chain store, mail-order house and supermarket” are examples of new
types of technologies that are bound to leave the shops obsolete sooner or later. In their turn,
those mail-order houses will be destroyed by E-bay and Amazon…

2. Some historians describe the rise of the Marginalist school as a revolution, others, as an
gradual integration of new and old concepts. What is your point of view? Please describe the
main features intersecting each group of economists comparing similarities and contrasts among
them.

3. The following is a quote from chapter 10 in volume I of Karl Marx’s Capital:

“[…] labor-power is bought and sold at its value. Its value, like that of all other
commodities, is determined by the working-time necessary to its production”

Explain what Marx meant by this statement. In your answer, explain shortly how commodities’
values are generally determined, and how specifically the value and use value of labor-power are
determined (notice the distinction between “value” and “use value”).

Answer:
! For all commodities, the value is the amount of labor that was necessary in order to produce
them.
! Marx regards labor as a commodity.
! Marx argued here that labor is no exception, and a certain amount of labor is necessary to
(re)produce labor. Hence, the value of labor is determined by that amount of labor necessary
to sustain labor.
o This is subsistence level, which is here the value of labor-power, measured by
labor.
! The use value is generally intangible, but in the case of labor, the use value of labor-power is
what it can produce, which is larger than its value.

4. In chapter 2 of The General Theory Keynes identified “two basic postulates” in the classical
theory of employment: (i) On the demand side, real wage equals to the marginal productivity of
labor for the firm; (ii) On the supply side, the marginal utility of real wage for the worker equals
to the marginal disutility from labor. What was Keynes’ criticism of either/both of these
postulates, and how was his theory novel?

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Keynes rejected (ii)

III. Essay (75 points, 50 minutes)

One development within economics during the nineteenth and early twentieth centuries is the
treatment of long-run equilibrium or the long-run steady state. What that equilibrium is like and
the process of achieving it is an important factor in the three “big picture” questions in this class:

! causes of growth,
! definitions of capital, and
! sources of value.

Analyze how the economists we’ve discussed model long-run equilibrium, making sure to
incorporate analyses of these three areas of inquiry. Your analysis should focus on the
contributions of Marx, Marshall, Keynes and Schumpeter, but you should feel free to include
others as relevant to your analysis.

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