Econ 4080

History of Economic Thought

Bruce A. Seaman

Fall 1998

Name ____________________________________________

Part I. Indicate whether the following statements are true, false or uncertain, and explicitly and coherently defend your answer with economic argumentation. Again, the quality of the economic argument is the key to partial credit, so indicate what you know in as much detail as possible, and then stop- to avoid wasting valuable time. Choose 6 of 9; each worth 14 points; 84 points total.

1. According to Marx, the more physical capital that is available for use in production by labor, the more productive labor would be, and consequently the lower the surplus value that can be exploited from labor by the capitalists.

2. Friedrich List favored high tariffs against imports of manufactured goods into Germany, but was opposed to similar tariff protection for the domestic agricultural sector in Germany. This is a good example of the logical inconsistency of many of List's arguments.

3. According to the Austrians such as Menger and von Wieser, if a country had an especially large wheat crop, the total utility from wheat could actually decline, hence leading to a "paradox of value."

4. Assume that a consumer has $15 to spend among goods, X, Y, and Z, with prices of $1, $2, and $3 per unit respectively. The marginal utility for successive units of X is 40, 30, 20 and 10; the marginal utility for Y is 75, 60, 50 and 35; and for Z is 120, 90, 80, and 40. Assume that all money is to be spent in this single time period. According to the principle for the rational allocation of money income developed by Gossen, Jevons and Menger, this consumer should purchase equal quantities of X, Y, and Z.

5. Assume that a small fishing boat can fish for five hours per day either in the western part or the eastern part of a lake. The following data indicates the total fishing yield for different numbers of hours:

Hours Western : Total Fish Eastern: Total Fish

1 3 4

2 5 7

3 8 9

4 10 11

5 11 12

Question # 5 continued:

Assume that the boat is currently fishing for 3 hours in the eastern part of the lake and for 2 hours in the western part of the lake. According to the principles of production clarified by Edgeworth, the boat would do better to maximize the total fish yield by fishing even more in the eastern part of the lake where the average fish yield is higher than in the western part of the lake where the average fish yield is lower.

6. The John Bates Clark "marginal productivity theory of distribution" not only was able to explain how the total output in an economy was distributed among the different "factors of production," but provided a compelling argument that, in contrast to the views of Ricardo and Marx, the distribution of income in a capitalist society is "ethically justified."

7. According to the Cournot theory of duopoly, prices are not driven to the level of the costs of production unless the duopoly evolves into an industry with more than two firms. However, the Edgeworth theory of duopoly allows the price to be driven to the level of the costs of production even without additional firms entering the industry.

8. According to Jevons, the "optimal" amount of work for a person is that number of hours for which the marginal utility of earnings just equals the marginal disutility of work. Therefore, in the debate about whether higher wages per hour will increase the amount of hours worked (where the Mercantilists said "no," and the later "supply siders" said basically, "of course"), Jevons would be on the side of the supply-siders.

9. Assume that one of the games playable in the Georgia Lottery costs $5 to play and provides a 1 in 10,000 chance of winning $50,000. According to Jevons, a rational person will not play this game because even though it is a "fair monetary game," it is not a "fair utility game."

Part II. Discussion Question. Choose 1 of 2; 16 points.

1. It has often been said that while the classical economists were too concerned with the "supply side" of markets in determining prices, the marginalists were too concerned with the "demand side." Do you agree? Discuss, including some reference to how this debate was relevant to the issue of the merits of the "labor theory of value."

2. Overheard at the Martini Club on Crescent Avenue in Midtown: "Of course, the reality is that Marx was right in theory; it's just that as with many legitimate and logically consistent theories, certain historical events that could not be anticipated changed the underlying conditions too much to allow us to observe the validity of his predictions." Do you agree or disagree with this (still sober) observer? Explain.

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