Economics 370 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 propositions is true or false. Using 2-3 sentences, explain your answer.


Questions 1 and 2 refer to the following information and table.


Market Price per bushel (in silver pieces)

Total Quantity (in 1000's of bushels)

Total Revenue (in silver pieces)

Total Cost of Silanus

Total Cost of Maximus






















Silanus and Maximus are two wheat merchants in ancient Rome. Consumers regard their products as identical.


1. T, F, and Explain: Under free competition, Maximus will be the only seller of wheat due to economies of scale.










2. Emperor Claudius auctions off a monopoly to sell wheat to the highest bidder.


T, F, and Explain: Maximus will win the auction, earning 20,000 silver pieces in gross monopoly profits and 5,000 silver pieces in net monopoly profits.











3. "'Chiseling,' of course, is what the other cartel members call it; from the standpoint of the rest of us it is a highly desirable form of behavior." (David Friedman, The Machinery of Freedom)


T, F, and Explain: "Chiseling" is just another word for "new entry."











4. In intro micro, students learn that if demand increases, both price and quantity increase.


T, F, and Explain: This is actually an oversimplification; in fact, an increase in demand ALWAYS raises quantity, but has an ambiguous effect on price (which depends on the shape of the industry's cost curves).













5. T, F, and Explain: In markets where path-dependence is important (for example, computer operating systems), deconcentration is less harmful than it otherwise would be.










6.      Suppose a company sells insurance against a $1000 accident. The accident happens 20% of the time to insured parties.


T, F, and Explain: Due to the moral hazard problem, the actuarially fair premium is actually less than $200.









7. T, F, and Explain: Mises ("The Failure of Interventionism") maintains that National Socialism was not really a form of socialism.










8. Suppose the government taxes pollution and uses the revenue to subsidize firms that set prices above MC.


T, F, and Explain: Even in this example, reducing one form of inefficiency makes the other form of inefficiency worse.









9. T, F, and Explain: The main problem with price controls is one of knowledge; it is difficult for government to figure out the most efficient price to impose on the market.








10. Suppose the government subsidizes 50% of the total costs of its rail commuter system (tickets cover the remaining 50%).


T, F, and Explain: These subsidies have to increase inefficiency by leading passengers to take trips that they value at less than MC.










11. "Private enterprise gains a profit by cutting costs as much as it can. Government, which cannot go bankrupt or suffer losses in any case, need not cut its costs; protected from competition as well as losses, it need only cut its service or simply raise prices." (Rothbard, "Government in Business")


T, F, and Explain: Rothbard is drawing attention to the fundamental ability problems associated with government ownership.











12. T, F, and Explain: If better people had been in charge, the most serious economic disasters experienced under Russian and Chinese socialism could probably have been avoided.







Part 2: Short Answer

(20 points each)

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



1. Explain two ways that firms might use antitrust laws to make markets work less competitively.


















2. Many stores offer "price protection" - if they reduce the price during (for example) the month after you buy it, they will refund the difference. Could this be used to facilitate collusion? Can information economics provide an alternative, pro-consumer account of this practice? Which view do you think is more accurate?

3. "In both the private and public sectors, there is an adequate measure of the overall performance of the organization - profits in private firms and popularity in the government." (Breton and Wintrobe, The Logic of Bureaucratic Conduct)


Provide one example where popularity is an inadequate measure of performance - a government policy that is popular in spite of its inefficiency. Does the problem stem from voter ignorance? Voter irrationality?















4. Rothbard ("Government in Business") harshly criticizes the public sector. Give a plausible example (you don't have to agree personally) of a product that many people think government provides more efficiently than the free market. Are Rothbard's complaints about government provision of this good wrong? Or simply over-balanced by other factors? Be specific.