Economics 321 Final

Prof. Bryan Caplan

Fall, 2000




·        You have 2 hours, 45 minutes to complete this exam. 

·        You may use any books, notes, or other materials that you wish, but avoid spending too much time on any one question. 

·        Partial credit may be awarded on all questions. 

·        The maximum possible number of points is 200.

·        You should have 7 pages, counting this one.


Part 1: True, False, and Explain

(10 points each - 3 for the right answer, and 7 for the explanation)

State whether each of the following six propositions is true or false.  In 2-3 sentences (and clearly-labeled diagrams, when helpful), explain why.


1.  Workers in the fishing industry have been doing very poorly in some areas.  Assume that the demand for fish in highly inelastic.


T, F, and Explain:  One way to help workers in the fishing industry would be to provide low-interest loans on new boats and other fishing equipment.










2.  Suppose that all workers in an economy are equally able, but some are unemployed due to a fixed nominal minimum wage.


T, F, and Explain:  Both inflation and rising marginal physical productivity will tend to reduce the unemployment rate.











3.  T, F, and Explain: Economic growth actually makes slavery less likely to simply die out on its own due to unprofitability.










4.  An economist finds that workers earn 25% more for each year of education.  After adjusting for the cost of schooling, he finds that the return to education is still 15%, compared to 8% for non-educational investments with the same risk level.  One implication, the economist argues, is that increased government subsidies for education would be efficiency-enhancing.


T, F, and Explain:  The economist is making an externalities argument.












Questions 5 and 6 refer to the following diagrams.


Suppose there are only two states, West and East.  Each has a state income tax.










5. T, F, and Explain:  Diagram 1 could show the effects on West's labor markets of a labor tax increase in East.












6.  T, F, and Explain:  Diagram 2 could show the effects of similar tax reductions in both West and East.









7.  T, F, and Explain:  Krugman ("The Lost Fig Leaf") argues that drastically reducing the federal budget would be popular but unfair.










8.  Suppose George Mason decides to start giving tenure to assistant professors as soon as it hires them.


T, F, and Explain:  The quantity of assistant professors hired will definitely increase, but their salaries could either rise or fall.










9.  T, F, and Explain:  Data from the NLSY shows that the black-white labor income gap becomes statistically insignificant after controlling for education and family status.








10.  T, F, and Explain: Non-profit organizations are more likely to statistically discriminate.













11. "It might seem that locking parents into a miserable marriage, by making divorce impossible, would condemn the children to misery too." (Posner, Economic Analysis of Law)


T, F, and Explain: Posner argues that because the marriage market is competitive, "miserable marriages" will be very rare. 












12. Presidents often ask for the resignation of high-ranking officials when something goes wrong, even if they have no specific evidence that these officials were to blame for the problem.


T, F, and Explain: As a method of deterrence, this makes no economic sense.









Part 2: Short Answer

(20 points each)

In 4-6 sentences, answer all of the following questions.



1.  Suppose male and female employers are equally productive when employed, being worth $20/hr, and work 2000 hours/year.  But 20% of female employees (and 0% of males) under the age of 30 plan on leaving work to have children, costing their employers $20,000 in re-training expenses.  Diagram the market for male and female labor if employers statistically discriminate.  How does the equilibrium female wage compare to the equilibrium male wage?  How would the market respond if the government imposed an "equal pay for equal work" rule?

















2.  "[Y]ou can't always pursue two goals - in this case income redistribution and an attractive population - simultaneously."  (Landsburg, Fair Play)  Explain the economic reasoning behind this statement; in particular, carefully state why some forms of redistribution would hurt people's incentive to be good-looking.

3.  Building on all you have learned this semester about the private and social return to education, describe what you judge to be the most efficient education policies for government to adopt.  (You don't have to actually support these policies; efficiency isn't everything).  Be sure to relate your policy conclusions to both the empirical evidence and theoretical arguments from class.  Is there any difference between efficient policies for K-12 versus college?

















4.  Caplan argues that the "standard views" on many issues (labor, the welfare state, discrimination, and gender) are deeply wrong.  Pick what you judge to be the most-defensible "standard view" he attacked.  Using economic arguments, explain as forcibly as possible why the standard view is right and Caplan is wrong.