Economics 321 Final

Prof. Bryan Caplan

Fall, 2002




        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. Suppose the government imposes a $20/hour minimum wage.


T, F, and Explain: With their increased income, low-skill workers will be more likely to select "fun" occupations.










2. Suppose a union of farm workers manages to impose work rules that greatly reduce agricultural productivity (for example, by banning tractors).


T, F, and Explain: This will reduce the demand for workers in general, and farm workers in particular.











3. "OSHA might, therefore, simply raise the level of occupational safety and health to the level at which it would be" [under laissez-faire]. (Posner, Economic Analysis of Law)


T, F, and Explain: Posner blames pro-union laws for reducing the level of worker safety.







4. People with more education tend to have higher IQs, but it is usually illegal for employers to administer IQ tests.


T, F, and Explain: Caplan argues that since education is mostly signalling, legalizing IQ tests would drastically reduce the demand for education.











5. Welfare programs often impose a 100% marginal tax rate on recipients.


T, F, and Explain: The recipients would be better off if they simply did not participate in the program.











Questions 6 and 7 refer to the following information.


You are the head of the hiring committee for the economics department, and are deciding how many job candidates to fly out. You value your time at $50/hour, and it takes a 6 hours to process a candidate. If you find someone who is "good enough for the position" it is worth $1000. Your searching abilities are as follows:


Total Time Spent


Chance of Finding Someone Good Enough

Expected Marginal Benefit of Search














6. T, F, and Explain: The last column of this table is correct.










7. T, F, and Explain: You will only fly out one candidate.










8. T, F, and Explain: Markets may not eliminate employer-on-worker discrimination if all employers have identical tastes for discrimination.












9. The NLSY classifies people as white, black, or "other non-white."


T, F, and Explain: Statistical evidence from the NLSY suggests that "other non-whites" might have benefited from discrimination laws.









10. Suppose that 10% of all women say they do not want to have children and intend to focus entirely on their careers, but only one in ten of the women who say this actually mean it.


T, F, and Explain: Statistical discrimination may prevent women from even being interviewed for highly demanding jobs.












11. Technology has not just increased the supply of female labor by reducing the time required for household production. It has also increased the demand for female labor by making them more productive workers.


T, F, and Explain: Technology has increased the demand for female labor MORE than it has increased the demand for male labor.













12. T, F, and Explain: Tourists in Third World countries probably have no effect on the supply of crime.









Part 2: Short Answer

(20 points each)

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



1. Worker-owned firms, often known as "workers' cooperatives," are rare. Keeping in mind the different economic functions of employers, explain why this is so. What exactly do workers prefer to "buy" from employers instead of their fellow workers?

















2. "No one who agonizes about the national debt can consistently support income redistribution among the living." (Landsburg, Fair Play) Why does Landsburg say this? Carefully explain his argument.

3. Give one example of taste-based discrimination in slave markets, and another example of statistical discrimination in slave markets. (Historical examples from Sowell are better, but imaginary examples are OK). Compare and contrast the effect of these two forms of discrimination from the slaves' point of view.




















4. More educated people are usually considered more marriageable. Does this raise the private return to education? The social return? Is education desired for its own sake, or is it merely a signal of other desirable attributes? Explain your answer.