MICRO AND MACRO ESSAYS
This part of the written, comprehensive exam in Economics is divided into two parts, micro and macro, which are given equal weight in your final Economics comprehensive grade.
Answer each part in a separate bluebook.
Be sure to put your identification number and the phrase "Econ Comps" on each bluebook. In addition, put "Micro" on the cover of the bluebook containing the micro part and "Macro" on the cover of the bluebook containing the macro part.
Your answers will be graded on the basis of the content and presentation of the economic analysis. The Macro part is an essay -- take the time to organize your ideas and present them in coherent form. Your answer should include appropriate verbal, graphical and mathematical reasoning. The Micro part is composed of a series of specific questions.
Remember, the Macro and Micro sections are equally weighted. Allocate your time efficiently!
Use the 30 minute reading period to read the entire exam. Read carefully and underline important information. You may write notes to yourself on the exam (plenty of space between questions has been provided) or the excerpt that has been provided, but we will evaluate only the answers in your blue book.
The macro exam has a single question that you are to answer in an essay. The micro exam contains 10 separate questions with clearly labelled point values. Spend more time and answer more completely the questions with higher point values. Each question on the micro exam is bolded and italicized.
For the micro exam, carefully number each answer in your blue book.
Remember, the Macro and Micro sections are equally weighted. Allocate your time efficiently!
At a recent meeting of the Federal Reserve Open Market Committee (charged with directing open market operations for the Federal Reserve System) "members concluded that the potential for additional inflation remained substantial and, from a monetary policy standpoint, rendered especially urgent the ongoing assessment of inflation trends. . . . most members agreed on the desirability of maintaining a steady policy course."
In pursuit of its macroeconomic objectives, the Federal Reserve has raised the discount rate (the rate it charges depository institutions when they borrow from the Fed) 6 times since 1993. These actions have contributed to the widespread belief that the Fed has followed a restrictive monetary policy that has driven interest rates upward in an attempt at taming inflation pressures in the economy.
Question: Do the data on discount rates, interest rates, and other significant macroeconomic variables, including those listed in Table 1 justify the conclusion that "since the second quarter of 1993, the Fed has followed a restrictive monetary policy that has driven interest rates upward in an attempt at taming inflation pressures in the economy "?
Table 1 has been scanned and put on this web site for your convenience. It may take a bit of time to load -- be patient! Click here to access Table 1.
Your analysis should:
Your answer will be evaluated on the clarity, coherence, and completeness of your answer as well as on the conclusions and graphs.
Introduction:
The Micro Essay part of the 1995 Economics Comprehensive Exam will test your knowledge of microeconomic theory by asking a series of questions about how economists view traffic congestion.
The questions are designed to be answered with a graph and a few sentences of explanation. Do not spend too much time on any particular question! None of the questions requires more than one page in your blue book for a perfect answer. We stress that partly answering all of the questions is much better than long-winded, comprehensive explanations of a few questions.
The micro exam seems long but that is because we have a great deal of explanatory text and lots of space between the questions. Patiently and systematically work your way through each question.
[Remember, the Macro and Micro sections are equally weighted. Allocate your time efficiently!]
Instructions:
Read the excerpt, Appendix A: Graphic Analysis of Peak-Hour Road Pricing, then answer the questions below in your MICRO blue book.
The reading has been scanned and put on this web site for your convenience. It may take a bit of time to load -- be patient! Click here to access the reading excerpt.
We recommend active reading: underline important ideas or terms; jot down notes in the margins; ASK if you are unsure of the meaning of a word or phrase.
Questions:
(5 points)
1) What is the source of the "inefficiency of no-fee driving"?
(10 points)
2) Downs claims that the socially efficient level of traffic is found at level OD in Figure A-1 on p. 168:
"At that level of traffic, the average total costs imposed by each additional driver -- line MCAF -- are equal to the average total benefit received by all drivers -- line PB." (see excerpt, p. 168)
As we noted in the introduction to the excerpt, Downs made some mistakes in the language he used. Given that, How would you explain why OD is the socially efficient level of traffic flow?
(10 points)
3) Use a "totals" graph (either total benefit and total cost OR total net benefit) to explain what the "shaded area lying within the triangle connecting points A, K, and G" (see excerpt, p. 168) in Figure A-1 represents.
(5 points)
4) Redraw the graph (Figure A-1) and show how much government revenue would be generated by Downs' optimal toll.
(20 points)
5) What effect would adding another lane (one each way!) to the commuter expressway have on the graph and the conclusion that no-fee driving is inefficient?
(Yes, you need to draw a graph here and provide a brief explanation of the effect of the extra lane on the graph and on the conclusion that no-fee driving is inefficient.)
(10 points -- 5 points each)
6)
a) Suppose the price elasticity of demand for driving on the commuter expressway is -0.2. In plain English, what does this mean?
b) What use would knowledge of the price elasticity of demand for driving on the commuter expressway be to a government which plans to charge commuters for driving on the highway?
(10 points)
7) Consider the owner of a small, private delivery service which operates delivery vans on the commuter expressway. The more miles its vans drive on the highway, the more packages can be delivered and, thus, revenues increase. However, more miles means greater expenses (salary of drivers, gasoline, etc.). The delivery service is small enough so that no matter how many miles it chooses to drive, it has no effect on overall congestion.
Let's assume that the revenue and cost functions are given by the following:
TR(Miles per day) = $5*Miles per day
TC(Miles per day) = $0.005*Miles per day2
(Yes, that's miles per day squared . . .)
So, if the delivery company decides to drive 400 miles per day on the commuter highway, it will make $2000 in total revenues, incur $800 in costs, yielding $1200 in profits.
Find the optimal number of miles per day and optimal profit.
(Show all of your work.)
Although Downs spends much of his time touting the "market-based approach" of government-established prices for driving, an alternative, more "market-based" in philosophy, would rely on a "marketable driving permit" scheme. Ignoring the practical complexities for the sake of argument, we could imagine a situation in which one needed a permit to drive on the commuter expressway on any given day. Such permits could, of course, be bought and sold. Economic theory could help us understand the properties of the marketable driving permit scheme.
In the Edgeworth-Bowley Box below, point E shows the initial endowment of driving permits and the hackneyed Composite Good (that represents all other goods). Individual A has more of the Composite Good than Individual B, while holding an equal amount of driving permits. (To make the story more concrete, say that A has driving permit rights on alternating workdays, while B holds driving permit rights on those days when A has to car-pool or take the bus. So, on any given month, they each have driving privileges for 10 working days.) The dark line is a price vector that represents one of the many possible terms of trade (or exchange rates) of permits for Composite Goods.
(10 points)
8) In the Edgeworth-Bowley Box above, why is point E Pareto Inferior?
(10 points)
9) In the Edgeworth-Bowley Box above, explain why the price vector shown is NOT the equilibrium price vector.
(10 points)
10) The Edgeworth-Bowley Box below shows the final, equilibrium solution of the marketable driving permit scheme.
Discuss the properties of point Z using the following terms: Pareto Optimality, Contract Curve, and Utility Possibilities Frontier.