Economics 321 Final

Prof. Bryan Caplan

Fall, 2007




·        You have 90 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 100.

·        You should have 4 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.  T, F, and Explain:  Bastiat (Economic Sophisms) argues that reducing labor productivity makes everyone poorer.












2.  Suppose that immigrants have lower average IQs than native-born Americans.


T, F, and Explain:  Immigration makes native-born Americans poorer by reducing workers’ average IQ.












3.  T, F, and Explain: Social Security taxes have little effect on labor supply because Social Security payments are a “return on investment” rather than true redistribution.











4.  Suppose that: college-age workers earn $15,000 per year; one year of college tuition $10,000; one year of college raises your annual earnings by $5000 for the rest of your life; and education is 50% signaling.


T, F, and Explain:  The private return to education is approximately 20%.  The social return to education is approximately 15%.










5.  Suppose that due to anti-foreign prejudice, immigrants earn 20% less than equally qualified natives.  A firm that hires only immigrants has the following balance sheet:



10 immigrants     @ $40,000 $400,000

Bondholders               $250,000

Stockholders              $350,000


Total                    $1,000,000



T, F, and Explain:  Replacing all of the immigrants with natives would decrease stockholder’s rate of return by 40%.










6.  T, F, and Explain:  Putting more men in jail reduces the amount of housework that (unjailed) married men are expected to do.









Part 2: Short Answer

(20 points each)

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


1.  The government passes a law requiring employers to give free health insurance to all of their workers.  Assuming wages freely adjust, what effect would economists expect this law to have on the welfare of the typical worker?  Why exactly do they expect this?

















2.  People usually marry within their own ethnicity, suggesting that people have a “taste for discrimination” in the marriage market.  Is competition as effective at controlling discrimination in the marriage market as it is in the labor market?  Why or why not?