Economics 370 Final

Prof. Bryan Caplan

Spring, 2005




        You have 90 minutes to complete this exam.

        Write directly on the 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 propositions is true or false. Using 2-3 sentences, explain your answer.


1. Suppose an industry has room for three firms to produce at minimum AC.


T, F, and Explain: Even if these three firms are colluding, "trust-busting" will definitely raise the market price.











2. T, F, and Explain: Steven Landsburg (Fair Play) argues that people have the efficient number of children under laissez-faire.












3. Prohibition reduces product quality.


T, F, and Explain: One good effect, from prohibitionists' point of view, is that the fall in quality leads to a smaller equilibrium quantity.










4. Both search theory and signaling theory assume that different people have different abilities.


T, F, and Explain: If all people were identical, neither theory would remain relevant to the real world.











5. T, F, and Explain: According to Mises (Socialism), the economic system of Nazi Germany was actually interventionist, not socialist.













6. Caplan argues that politicians are, in large part, supplying the policies that the public irrationally prefers.


T, F, and Explain: If defense services were privatized, firms would continue to cater to the public's irrational beliefs, only at a lower price.









Part 2: Short Answer

(20 points each)

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



1. Suppose an insurance market has advantageous selection. What would be the effect of a regulation requiring equal rates for all customers? How is this different if at all from the effect of this regulation under adverse selection?


















2. "Deregulation increases efficiency when it's done correctly." Consider the ability, knowledge, and incentive problems behind deregulatory disappointments like the S&L bailout and rising electricity prices in California. Which of the three problems is most important? Explain.