Milton Friedman’s price theory reading assignments, problem sets, and final exams from his courses Economics 300A and 300B taught during the academic year 1951-52 at the University of Chicago were transcribed in an earlier post. During the previous academic year, W. Allen Wallis and Lloyd A. Metzler taught the first quarter course, Economics 300A. Milton Friedman and Lloyd A. Metzler taught the second quarter course, Economics 300B. Problem set and final exam for Friedman’s section have been transcribed for this post.

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ECONOMICS 300B

Problems for Reading Period

Spring, 1951

“Productivity” is a catch-word in most general discussions of wage policy, as for example in the following quotation:

“General increases in wage rates exceeding the average growth of productivity raise costs and will ordinarily result in high prices,” from which it is implied that wage rates “ought” to rise by the same percentage as “productivity”. Sometimes, this argument is carried over to particular industries or occupation; and sometimes, the conclusion is drawn that wages “cannot” “on the average” rise by more than “productivity”.

Discuss from the point of view of price theory, with special reference to the meaning of the concepts used and the validity of the inferences drawn. Do not get involved in business cycle, or income and employment theory.

Consider a hypothetical society in which there is no investment, either net or gross. All capital is completely permanent, not subject to change in form but capable of being used for different purposes. There is no selling or buying of capital goods: whoever owns the capital goods is forced by the laws or conventions of society to hold them and is permitted only to read them out (i.e., all capital is subject to the conventions that now govern human capital). Lending or borrowing is prohibited, so that there is no market rate of interest that matters, and all saving takes the form of hoarding of cash. The total amount of money in society is fixed in nominal units (say dollars). Although this economy is stationary in the aggregate, it is not static. Explain the meaning of the sentence and its bearing on the willingness of people to hold money. Wages are initially rigid (by law or otherwise) and the society is in the state of Keynesian unemployment equilibrium. Explain. What is it that assures that the aggregate amount actually saved is equal to zero? What is it that assures that the aggregate amount people wish to save is equal to zero? Wages are now made flexible. Describe the process of adjustment to a new equilibrium position. Does this new position involve unemployment? What is the equilibrium condition on saving? What forces operate to bring about the satisfaction of this condition? Discuss the factors that determine the rent of capital goods and the wages of labor at equilibrium when both are flexible. Lending and borrowing is [sic] now introduced, but all other assumptions are retained, so that all loans are in essence “consumption loans”. What determines the equilibrium rate of interest? What effect, if any, would the introduction of lending and borrowing have on the price level?

Final Examination

Economics 300B

June 12, 1951

“The statement that wages tend to equal the net product of the worker’s labor… is not, as some have thought, an independent theory of wages, but only a particular way of wording the familiar doctrine that the value of everything tends to be equal to its expense of production.” (Marshall) Explain why “the statement that wages tend to equal the net product of the worker’s labor” is not “an independent [i.e., complete] theory of wages.” Prove that it is “only a particular way of wording the familiar doctrine…” in doing so, interpret “everything” to mean “final products,” not “labor.” (a) Discuss the meaning of “profits” in connection with the theory of distribution. Outline briefly “a” theory of “profits.”

(b) A private enterprise economy is frequently described as motivated by the desire to maximize “profits.” Is the word “profits” in this statement used in the same sense as in the discussion under (a)? Explain any difference. “Rent is but the leading species of a large genus.” Discuss. The income of farmers from the sale of their products depends on the prices at which the products sell. The general level of agricultural prices, in turn, depends primarily on the income of the nonfarm population. But the income of the nonfarm population depends on the prices of nonfarm products which, in turn, depends partly on the income of farmers.

This kind of analysis is often criticized as circular reasoning and hence is incapable of leading to any useful conclusions. Is this criticism valid? Explain your answer. Beef sold in rural New England is mostly purchased from Chicago. Yet it is said that the retail price of the better cuts of beef is substantially less than in Chicago for the same grade of meat. Assuming that this is in fact the case. How would you explain this phenomenon in strictly economic terms? (I.e., do not give the easy – and probably wrong – explanation of irrationality, gouging, or the like). How would you test the validity of your suggested explanation? Suppose that legislative hearings were to be held on the following (a) A national bill to make the minimum wage rate very regionally, so it would be lower in the South than in the North; (b) A bill in a particular state to make it legal for manufacturers to enforce a minimum retail price on their products (a so-called “fair-trade” law).

Indicate what groups you would expect to be testifying for and against each bill, and why you would expect them to do so.

Source: Hoover Institution Archives. Milton Friedman Papers, Box 76, Folder 10.

Image Source: Milton Friedman (undated). University of Chicago Photographic Archive, apf1-06230, Special Collections Research Center, University of Chicago Library.