Review Questions for Final Examination
1. Explain David Ricardo’s theory of value. How does his theory differ from Adam Smith’s theory of value? Elaborate.

2. Explain Karl Marx’s labor theory of value. In your answer, be sure to comment on Marx’s analysis of the circulation of commodities (C-M-C versus M-C-M’). Elaborate.

3. Leon Walras was convinced that a system of competitive markets would converge to what he called a general equilibrium. What are the properties of that equilibrium? What optimal outcomes are occurring at that point? Elaborate.

4. Alfred Marshall believed that free competition would always, in the long run, bring about an outcome where the market price would equal minimum unit cost. He believed this to be true even in the case of industries subject to increasing returns to scale. Pierro Sraffa wrote an influential paper criticizing this proposition. Explain why Marshall was wrong in believing that free competition would ensure that prices equal minimum unit cost even in the presence of increasing returns to scale.

5. Explain Thorstein Veblen’s theory of conspicuous and emulative consumption. In what sense is this theory a refutation of the neoclassical theory of human behavior? What does this theory say about the presumed efficiency of capitalism? Elaborate.

6. Using Alfred Marshall’s theory of the demand for money, explain why he believed that Say’s Law always held. Why, in other words, did the mainstream believe that aggregate supply could never be permanently in excess of aggregate demand (or stated differently, why a permanent excess demand for money was impossible)? Elaborate.

7. Explain John Maynard Keynes’s theory of aggregate effective demand. Explain the behavior of aggregate supply and aggregate demand in this theory. Does this view of the economy guarantee full employment? Why? Elaborate.