Qualifying exam Questions Covering the Content of FRM 740



THE OHIO STATE UNIVERSITY

College of Human Ecology

Department of Consumer and Textile
Sciences

Family Resource Management Graduate
Program

Qualifying Examination, January 2001

Day 1



  1. (20%) How do the management frameworks
    considered in FM RES M 740 relate to microeconomics? Do the management
    frameworks provide the supplemental information needed to apply economics
    to households? Why or why not?


  2. (40%) For each of the following theories,
    discuss the (i) effect of life cycle on spending for education and (ii)
    the means by which life cycle affects spending for education.


    1. Human capital theory


    2. Life cycle theory of saving


    3. Human ecology theory


    4. Life course perspective

  3. (40%) Recent research has found that over
    half of all households in the United States have some money in low-yield
    savings accounts that pay on average 2.1 percent in interest (i.e. low-rate
    passbook saving, statement saving, and money market deposit accounts).
    These accounts are widely distributed throughout the population, with at
    least one-half of households in all age groups, major racial/ethnic groups,
    and income groups (except households with income less than $10,000) have
    a low-yield savings account.


    1. Discuss the implications for “economic
      status” of keeping money in low-yield savings accounts as opposed to putting
      the money into high-yielding accounts. For example, high-rate savings accounts,
      CDs, or Series EE Savings Bonds pay on average 5.1% interest, and Series
      I Savings Bonds pay on average 7.1% interest.


    2. Provide a valid rationale for the observation
      that households with income less than $10,000 are less likely than higher
      income households to have money in low-yield savings accounts.


    3. The majority of the money in low-yield
      savings accounts is held by a small minority of households. In other words
      a very small percent of all households (7%) have relatively large sums
      of money ($25,000 or more) in low-yield savings accounts. And these households
      are much older than the rest of the population with the majority of these
      households being headed by someone 55 years of age or older. Propose at
      least three valid explanations for the observation that older households
      are more likely than younger households to have large amounts of money
      in low-yield savings accounts.


    4. Describe an appropriate statistical test
      for each of the following questions:


      1. Does the amount of money held in low-yield
        savings accounts vary with age of the householder (i.e. age measured as
        a continuous variable)?


      2. Does the mean amount of money held in
        low-yield savings accounts differ between households with a householder
        under age 55 and households with a householder 55 years or older?


      3. Does the mean amount of money held in
        low-yield savings accounts differ between households with a householder
        under age 45, age 45-54, age 55-64, age 65 or older?



      4. Does the percent of households with
        a householder under age 55 that have some money in a low-yield savings
        account differ from the percent of households with a householder 55 years
        or older that have some money in a low-yield savings account?


Day 2



  1. (35%) Consider the following abstract
    of an article by Zagorsky:

  2. How accurate are individuals’
    perceptions of their wealth holdings? Data from the National Longitudinal
    Surveys show approximately 70% of all respondents believe they hold far
    less and 25% believe they hold far more wealth than they actually possess.
    For every dollar of wealth owned, typical individuals believe they hold
    only 62 cents. Increasing an individual’s wealth by one dollar raises perceptions
    by just 27 cents. Most individuals need to calculate their net worth to
    correct their perceptions. Results show older individuals have a smaller
    perception gap than younger individuals, and Blacks and Hispanics have
    a higher perception gap than whites.
    [Zagorsky, J. L. (2000). Do individuals
    know how much they are worth? Financial Counseling and Planning,
    11(1), 13-24.]

    Based on Hanna’s paper “Optimization
    for Family Resource Management”, devise a simplified optimization model
    of the decisions or behavior described in the article abstract above. Specifically
    discuss the following parts of an optimization model:


      1. An objective function (e.g., a utility
        function),


      2. Instruments (e.g., consumption levels
        of different goods),


      3. Constraints (e.g., budget constraints),
        and


      4. Normative rules derived for the optimization
        problems (e.g., allocate income among goods so that the ratio of marginal
        utility to price is the same for all goods.) (Intriligator 1971, 4.)

  1. Assume that all individuals are rational,
    even if not perfectly informed. Describe in detail, using Intriligator’s
    four parts of an optimization model, a specific model that could account
    for Zagorsky’s findings.


  2. Discuss alternative explanations for Zagorsky’s
    findings.

  1. (35%) Consider the following regression
    model, where neither Y nor X is zero:

  2. 1/Y = B1 + B2(1/X) + u


    1. Is this a linear regression model? Explain why or why not.


    2. How would you estimate this model?


    3. What is the behavior of Y as X tends to infinity?


    4. Can you give an example where such a model may be appropriate?

  3. (10%) Derive the following curves with the aid of graphs:


    1. ordinary demand curve


    2. compensated demand curve


    3. Engel curve

  4. (10%) Show the price elasticity of demand and income elasticity of demand
    for each of the curves derived in Question 3. What does each of the elasticity
    measures mean?


  5. (10%) What is the major difference between the ordinary demand curve and
    compensated demand curve?