Economics 321 Final

Prof. Bryan Caplan

Fall, 2001




        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 - 2 for the right answer, and 8 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. Imagine a horrible war leads to a large decline in worker productivity throughout the world.


T, F, and Explain: On average, workers will earn lower wages, especially in industries like farming where product demand is highly inelastic.










2. Suppose that all workers in an economy are equally able, but there is a labor shortage due to a fixed nominal maximum wage.


T, F, and Explain: Inflation, but not rising marginal physical productivity, will tend to reduce the labor shortage.











3. Suppose that interest rates fall in a slave economy.


T, F, and Explain: Demand for slaves rises, but in the long-run the supply of slaves will probably rise as well.







4. T, F, and Explain: ALL of the following are reasons why simply comparing average earnings of people will different education levels overstates the return to education: (1) they fail to control for intelligence; (2) they ignore the cost of tuition; (3) the marginal return is lower than the average return.









5. T, F, and Explain: If labor is immobile, lump sum taxes increase labor supply if product demand is elastic, but decrease labor supply if product demand is inelastic.











6. T, F, and Explain: Even if a proportional income tax has no effect on hours worked, a progressive income tax still could.











Questions 7 and 8 refer to the following information.


Employers cannot tell how productive a worker is, but they CAN tell whether a worker has a college degree, and they know the AVERAGE value of workers with and without college degrees. Competition forces them make worker pay equal their average PDV. There are four workers. The PDV of their lifetime labor is as follows:

Worker #











7. T, F, and Explain: The following table contains one mistake.


Worker #'s w/ College Degrees

Without College PDV

With College PDV

College Premium





























8. Suppose you are worker #1. All of the other workers are going to college.


T, F, and Explain: You will choose to attend college as long as the PDV of the total cost (tuition plus foregone earnings) is less than 1,833,333.










9. "[E]ven among uneducated and unskilled rubber plantation laborers in colonial Malaya, those who were Chinese produced more than double the output of those who were Malay. Not surprisingly, the Chinese earned more than double the income of Malays." (Sowell, Race and Culture)


T, F, and Explain: Sowell is distinguishing between wage differences and wage discrimination.






10. Suppose that Israeli workers have a taste for discrimination against Palestinian workers.


T, F, and Explain: The economic theory of discrimination predicts that employers in racially mixed areas will still ignore ethnicity altogether.











11. T, F, and Explain: Discrimination is more likely to persist in the marriage market than it is in labor markets.












12. The U.S. will probably get much richer during the next century.

T, F, and Explain: We should expect the number of car thieves to fall: The supply of car thieves will fall as wages in the legal sector rise, but there is no reason to expect demand for car thieves to rise.









Part 2: Short Answer

(20 points each)

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



1. "[A]dmitting that foreigners are human would only strengthen the argument's conclusion, so in that sense no harm is done by pretending otherwise. The pretense may even serve some rhetorical value; we ostentatiously ignore the most obvious beneficiaries of open borders and can still conclude that open borders are a good thing." (Landsburg, Fair Play)


Carefully explain how Landsburg's argument for open borders compares to the standard argument that he is criticizing.
















2. Consider the various estimates of the return to education from before the midterm. How does the signalling theory of education suggest these estimates should be interpreted? Carefully distinguish between the private and the social return to education.

3. Are there any groups protected under current discrimination laws that would - on average - probably benefit if employers were legally required to hire employees based solely on IQ tests? Carefully explain your answer.




















4. Suppose you are studying the child care arrangements of gay couples who have adopted children. What would the economics of the family predict about their division of labor? Explain the similarities to and differences with the economic analysis of traditional families.