· 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
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