Professor Harberger’s Midterm and Final Examinations (and ChatGPT)

A book that hardly anybody reads these days (but really should) is The Theory of Price, by George Stigler.

Take, for example, Stigler’s “A Note on Block Booking.” Block booking of movies was the offer of a fixed package of movies to an exhibitor; the exhibitor could not pick and choose among the movies in the package. The Supreme Court banned the practice on the grounds that the movie companies were compounding a monopoly by using the popularity of the winning movies to compel exhibitors to purchase the losers.
Stigler disagreed and presented a simple alternative argument. If Gone with the Wind is worth $10,000 to the exhibitor and Getting Gertie’s Garter is worth nothing, wrote Stigler, the distributor could get the whole $10,000 by selling Gone with the Wind. Throwing in a worthless movie would not cause the exhibitor to pay any more than $10,000. Therefore, reasoned Stigler, the Supreme Court’s explanation seemed wrong.
But why did block booking exist? Stigler’s explanation was that if exhibitors valued films differently from one another, the distributor could collect more by “bundling” the movies. Stigler gave an example in which exhibitor A is willing to pay $8,000 for movie X and $2,500 for Y, and B is willing to pay $7,000 for X and $3,000 for Y. If the distributor charges a single price for each movie, his profit-maximizing price is $7,000 for X and $2,500 for Y. The distributor will then collect $9,500 each from A and B, for a total of $19,000. But with block booking the seller can charge $10,000 (A and B each value the two movies combined at $10,000 or more) for the bundle and make $20,000. Stigler then went on to suggest some empirical tests of his argument and actually did one, showing that customers’ relative tastes for movies, as measured by box office receipts, did differ from city to city.

If you want a more “modern” take, you could read this lovely essay, by Chris Dixon.

But to come back to Stigler, one reason to read his book is because “a typical Stigler article laid out a new proposition with clear reasoning and then presented simple but persuasive data to back up his argument”. Which, if you ask me, is a better way to teach microeconomics than via real analysis.

If you aren’t yet subscribed to Irwin Collier’s blog, please do so. His blog is a delightful treasure trove of question papers from the past, and some of these papers really and truly make you think. Here, for example is just one question from November 5, 1957. This particular question paper was set by Professor Harberger (and the examination took place a year before Stigler joined the University of Chicago), but nonetheless, it is a great way to check how well you know price theory microeconomics.

The price elasticity of demand for a good will be higher, the higher is the income elasticity of demand for that good.

For a question like this (and before you run it through ChatGPT), think about whether the statement makes intuitive sense. If the income elasticity of demand for a good is high, that means that small changes in income will lead to large changes in demand for that good. Eating out at expensive restaurants will go down if you lose your job, for example.

Well, then, yes, you might think – the price elasticity also ought to be high then, no?

So it would seem that this is true then.

Ah, but is it? Do you know of folks who buy the latest iPhone regardless of how much (and whether) they earn? Can you, in other words, think of a single counter-example to your own argument? Does your answer change? If yes, why? If not, why not?

(My own take is that this is false, by the way. Do you agree?)

Now that you have thought a little about this yourself, ask ChatGPT what it thinks (or Bard, etc.). See if your answers match. If they don’t, have a conversation with it. Tell it why you thought your answer was whatever it was, and ask it to critique your answer.

Rinse and repeat for all the other questions in the examination, and I envy you your journey of learning price theory. Oh, and by the way, if you don’t like your current (ahem) price theory Prof, feel free to call upon the knowledge and abilities of Professor Stigler himself:

“What book should I read to learn economics?”

“The Internet, and ChatGPT!”

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