MicroS05-II.2

Question from Past Microeconomics Qualifying Exam

Spring 2005 - Section II, Question two, George Mason University

What economic forces explain each of the following phenomena? Give a logically complete but brief answers in each case.

1. The tendency for married couples with small children to spend relatively more on entertainment when they go out than do married couples without small children.
2. The tendency for non-poor persons to make money or in-kind transfers to poor persons. State the assumptions that underlay the choice to make money transfers versus in-kind transfers and which is more efficient?
3. The lessened tendency for physical attributes such as race and sex to be used as criteria for choice for higher level positions of employment (managers, executives, etc.) than for lower level positions of employment (janitors, dishwashers, etc.).
4. The agricultural yield per acre being higher in Japan than United States.

Answer

1. WEW-031
2. The underlying assumption of an in-kind transfer is that poor persons don't consume enough of the commodity, which is transfered. Milk transfers to poor people, for example, would suggest that the transferer believes that poor people don't consume enough milk.
   Non-poor people that transfer money to poor people assume that the poor person has the necessary knowledge to decide what he/she needs.
   Money transfers always increase the utility of the poor person while in-kind transfers don't necessarily lead to an increase in utility. Money transfers are therefore more efficient. See also MicroS05-II.1.
3. Discrimination is a cheap form of search. When hiring low skilled workers the process of searching has to be relatively cheap because of their low contribution to output. When hiring a CEO the search process can be really expensive because of the importance of their contribution to output and discrimination will not play an important role.
4. Land is more scarce in Japan relative to the US and the price of land therefore higher. For agriultural products to be competitive on the world market their production cost cannot exceed production cost in other places. The yield per acre in Japan needs to be higher than the yield per acre in the US because of the higher fixed cost of land. In sum, the relative cost of improving the production of an acre of land is lower than simply increasing the amount of land. Thus the focus is on production to meet the food needs of the populace. Alternately... The revenue from the agricultural yield of a plot of land has to exceed the sum of land, capital, and labor costs for the plot to be a candidate for agricultural development. Since land is on average more expensive in Japan than in the U.S., assuming equal capital and labor costs and zero transportation costs, the average agricultural yield necessary to generate revenue above cost will be higher there; only the best agricultural land can deliver these yields. If we relax the zero-transportation-costs assumption, it may pay to use more intensive farming methods so long as marginal cost remains below the cost to import the same products from elsewhere. With only the best land worked - and, perhaps, worked more intensively - the average yield of the land used for agriculture will be higher in Japan. See Also WEW-011

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