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ECON 2002

ECON 3870


ECON 4807/5807

Scholarship in Comparative Economics




Department of Economics






Welcome to Comparative

Economic Systems, ECON

3870, in Summer Session


July-August, 2015.

NOTE: The FINAL EXAM will be on Thursday, the 20th of August at 7 p.m. in a location TBA.

A copy of the CLASS ASSIGNMENT is directly below.  The due date is Friday, Aug. 7th, but because I mistakenly put Aug. 8th on the course outline, I will accept papers handed in on Saturday, Aug. 8th as well.

Please use my e-mail address given below rather than any cmail address.

Most readings for this course, other than the text, are available on Library Reserve.  Most of these in turn are available electronically through ARES.  To access ARES, please go to the Library Homepage and click on ARES under POPULAR LINKS at the bottom of the page on the right-hand side.  You will need your student computing account information.

July 2015


Department of Economics

Econ 3870V

Instructor: R. Carson

COVERAGE:  Chs. 4, 5, and pp. 188-200 of Ch. 6.


Please do each question below.  The question weights are as indicated.  Use graphs where you find them useful, but be

sure to explain them.  In general, be sure to explain yourself well enough that the grader understands you and knows

that you know what you are doing.  Finally, please type your answers double spaced, with adequate margins.  Please draw

your graphs neatly and legibly.  Illegible answers will be considered incorrect.
Sok scerencset.


1a. (15%).  The Lange-Lerner model of market socialism, pp. 194-196 of the text, is a system in which central planners try

to arrive at competitive prices through trial and error.  When a surplus of a good exists, the planners are supposed to lower

its official price.  When a shortage exists, the planners are supposed to raise its official price.  The hope is to reach prices

that just balance supply and demand.  Industry and enterprise managers are told to set output where price equals marginal


One criticism of this system is that industry managers in collusion with the managers of firms will withhold supply in order

to drive up the official price, which becomes a monopoly rather than a competitive price.  When would managers do this? 

When would they try to keep the official price below the monopoly level?  Explain.  (Hint: Think in terms of taxation.)


1b. (15%).
  A worker-managed firm is a firm managed by elected representatives of its employees.  Such firms are

believed to maximize profits per worker rather than total profits, as described in the text, pp. 196-200.  If such a firm faces

a product price, P, which it cannot alter by changing its output, will it have an upward-sloping product supply curve in the

short run, when labour is the only variable input, or will its short-run supply curve be downward-sloping?  Will an increase

in demand cause P to rise by more, less, or the same as the demand increase?  You may assume diminishing returns to

labour and constant returns to scale in production.


(Hint:  Suppose this firm produces an output, Q, with labour, L, and capital, K.  In the short run, K is fixed, as are capital

costs, F.  If MPL is labour’s marginal physical product, the profit-per-worker maximum is where P(MPL) = (PQF)/L as

at A in Fig. 6.1, p. 197 of the text.  Now re-arrange this equality so that F/P is alone on one side of the equation.  It can be

shown that constant returns to scale implies Q = (MPL)L + (MPK)K, while diminishing returns to labour then implies that an increase in L raises MPK.)


  (30%).  Suppose that a firm introduces a profitable innovation that reduces production costs.  As a result, rival firms

suffer wealth losses, and some will go out of business, although historically, the old production methods usually survive for

a time before disappearing completely. 

Show that society receives a net gain from this innovation, in the sense that the benefits to society of the innovation are

greater than its costs, even if we don't count the innovator's profits and even if the innovator is able to exercise market

power after innovating.  Then explain why a government might still want to suppress the innovation.

3.  (10%). What is meant by the "scattering of strips" in medieval agriculture?  Explain how this was a response to

conditions existing in Europe during the Middle Ages and what its advantages were under these conditions.  (Please give

two different advantages.)  What factors would cause this practice to disappear?


4.  (30%).
  In 1970, the economic historian, Evsey Domar, said that it would be impossible to have at one and the same time "free" land, "free" labour, and a land-owning aristocracy.  If "free" land means land that is in excess supply—and therefore has a zero price—and "free" labour means labour that is free of bondage, explain why this combination would be impossible.

Richard Carson, Instructor 
  B850 Loeb Building 
  (613)520-2600, x1751. 






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