Question from Past Microeconomics Qualifying ExamEdit
Fall 2000 - Section II, Question three, George Mason University
- Analyze the following economic puzzles:
- a. "The distinction between the long run and the short run is a fiction with no counterpart in the real world." Evaluate this critisism, explaining why one might make such a statement, but show how this fictional distinction might be defended.
- b. In macroeconomic analysis, the possibility of economic equilibrium with a degree of unemployment is ordinarily assumed. But in microeconomic analysis, we generally postulate that prices must be such to clear markets. Is it possible to give a microeconomic explanation for unemployment, without calling upon wage rigidities due to government or union action to keep wage rates from falling?
- c. The concept of marginal utility is subject to the objection that it implies a numerical measurement of total utility.
- (i) Can we overcome this difficulty?
- (ii) Is it important that we do so?
- (iii) Translate into terms which do not involve the cardinal measurement of utility: the law of diminishing marginal utility, and the Pareto optimality condition that the ratio of the marginal utilities of two goods must equal for all individuals in a free-exchange economy.