Economics 370 Final

Prof. Bryan Caplan

Spring, 2006




·        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.  T, F, and Explain:  Coase showed that using regulation to solve externalities problems cannot increase efficiency.












2.  Suppose manufacturers of illegal cocaine figure out a way to reduce their fixed costs.

T, F, and Explain: The market price of cocaine may not fall, because the number of firms will fall, making prohibition easier to enforce.










3.  Suppose a restaurant opens up a buffet, and notices that the average weight of its customers immediately increases.


T, F, and Explain:  This is an example of the moral hazard problem.











4.  After graduation, economics majors earn substantially more money than sociology majors.  Both programs take four years to complete.  For the sake of argument, assume that neither program teaches any significant job skills.


T, F, and Explain:  A signaling model of education can explain these patterns.












5.  "Government, which cannot go bankrupt or suffer loses in any case, need not cut costs; protected from competition as well as losses, it need only cut its service or simply raise prices." (Rothbard, For a New Liberty)


T, F, and Explain:  Caplan would argue that the main source of this problem is voter irrationality.













6.  T, F, and Explain:   Collusion between private police companies becomes less likely as population grows.










Part 2: Short Answer

(20 points each)

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



1.  Firms legally protected from competition often seem to be productively inefficient.  Explain why this is puzzling.  How can the puzzle be resolved?




















2.  What was the most important reason for the Ukrainian famine – ability, knowledge, or incentive problems?  Use Conquest’s discussion (Harvest of Sorrow) to make your case.