Economics 370 Final
Prof. Bryan Caplan
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 propositions is true or false. Using 2-3 sentences, explain your answer.
T, F, and Explain: If the professor values his time at $20/hour, then the average cost curve of teaching Econ 370 is flat.
2. T, F, and Explain: If all firms have the same cost curves, then price will equal average cost unless both economic competition (e.g. cutting prices) and political competition (e.g. hiring lobbyists) are illegal.
3. In the shoe market, the most efficient firm earns positive profits.
T, F, and Explain: The monopoly profit earned by the most efficient firm has the same efficiency consequences - both positive and negative - as a patent.
4. T, F, and Explain: Predation is more difficult when the AC curve is flat or downward-sloping at the pre-predation market price.
5. T, F, and Explain: One of the few benefits of antitrust enforcement is that it makes it easier to privately solve path-dependence problems.
T, F, and Explain: If the number of people who shop in the town increases, both the number of stores and the prices charged at the original ten stores will increase.
Mutual funds charge a fee for their services; by definition the net return=(gross return minus management fee).
T, F, and Explain:Search theory predicts that the net return of the actively managed funds will exceed that of index funds.
8. T, F, and Explain: All-you-can-eat salad bars may suffer from an adverse selection problem.
9. T, F, and Explain: If bad workers found school easier and more enjoyable than good workers do, government subsidies to education would be less wasteful.
T, F, and Explain: One problem with this solution is that the government must raise the revenue for the subsidy by taxation - which is itself distortionary.
T, F, and Explain: It is difficult for economic theory to explain why people know so little about issues of vital importance to their well-being.
12. T, F, and Explain: While government often prices goods inefficiently low (below MC), it at least has no reason set the prices of goods inefficiently high (above MC).
13. T, F, and Explain: An ideal government would be just as productively efficient as private enterprise.
T, F, and Explain: The mass starvation accompanying collectivization was primarily the result of a severe knowledge problem, since the central planners generally did not know about local resources or weather conditions.
In the Kolyma camps, for men doing twelve to sixteen hours' heavy physical labor a day, eight months of it in very low temperatures, the daily ration, of very poor bread, is given by a former prisoner writing in the West:
for more than 100% of the norm
up to 930 grams
T, F, and Explain: As this quotation indicates, a primary reason that socialist systems are productively inefficient is that they refuse to use material incentives.
16. T, F, and Explain: The main advantage of sub-contracting government services is the greater allocative efficiency of private supply.
17. In a system of private criminal law, the victim receives restitution from the criminal if he successfully prosecutes.
T, F, and Explain: While this would encourage victims to come forward, it would also be sure to spark far more false accusations than the current legal system does.
18. T, F, and Explain: Private police would not want to defend clearly guilty clients for the same reason that insurance companies won't insure against pre-existing conditions.
Part 2: Short Answer
(20 points each)
In 4-6 sentences, answer all of the following questions.
1. If you wanted to help find a cure for AIDS, what would the efficiency advantages be of contributing to a cash prize payable to the discoverer of the cure? Would there be any disadvantages to this?
2. What does the "chicken" game suggest about the equilibrium level of fraud in free markets? How could regulation increase or decrease the efficiency of this equilibrium level?
3. At the end of the lecture of Week 10, I presented a proposal for reforming university education. What is the relationship between the economic theory of signaling and my proposal?
6. The most common objection to private police provision is that police agencies would fight wars with each other. State two arguments to the contrary, and briefly critique them.