Name:_______________________
Economics 812 Final
Prof. Bryan Caplan
Spring, 2008
Instructions:
·
You have
2 hours and 30 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 150.
·
You
should have 6 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 nine propositions is true or false. Using 2-3 sentences AND/OR equations, explain
your answer.
1. Consider the general equilibrium
intertemporal model.
True, False, and
Explain: A fall in interest rates definitely
indicates that expected income growth has declined.
2. True, False,
and Explain: In The Armchair Economist, Landsburg defends the market as a Darwinian
mechanism that weeds out inefficiency.
3. Consider a simple game-theoretic model of
bargaining.
True, False, and
Explain: With fully rational agents, one MSNE and
no PSNE exist. With imperfectly rational
agents (or at least some uncertainty about whether other players are fully
rational), there is one MSNE and two PSNE.
4. Suppose a woman has EU=w.5 +
X. If the woman has a baby boy, X= -10;
if she has a baby girl, X=5; if she has no child, X=0. Normally, she is equally likely to have a boy
or a girl. But if she pays a price P,
she can determine her child’s gender with certainty. Suppose further that w initially equals $400,
and the P is the only cost associated with having children.
True, False, and
Explain: The woman will remain childless if
P>87.5.
5. True, False, and Explain: Asymmetric
information problems do not require irrationality, but irrationality makes asymmetric
information problems more severe.
6. Caplan (“What Makes People Think Like
Economists?”) shows that more educated people are more pro-market.
True, False, and
Explain: The reason why
people mistakenly believe that education leads to anti-market views is probably
that, in the general population, education and left-wing ideology are highly
correlated.
7. Standard estimates of the return to education
ignore intelligence and assume that all education is productive.
True, False, and
Explain: For both of these issues, switching to
more realistic assumptions reduces the private and social return to education.
8. True, False, and Explain: There
is no change in current U.S. policy that would do much to mitigate moral hazard
problems.
9. Suppose Caplan is right that voters “buy”
large quantities of irrational political beliefs.
True, False, and
Explain: This hardly shows that political markets
are inefficient. Instead, it shows that
we have mismeasured their primary output; the main product of political markets
is psychological well-being rather than wealth-maximizing policy.
Part 2: Short Answer
(20 points each)
In 4-6 sentences
AND/OR equations, answer each of the following three questions.
1. Taking into account everything that you have
learned, what is the most efficient
way for government to raise a given level of revenue? Carefully explain your answer.
2. Taking into account everything you have
learned, sketch your best explanation for why the U.S. political system allowed the subprime crisis to happen.
3. In a critique of The Myth of the Rational Voter, Dan Klein writes: “Maybe Bryan
grants Wittman’s other premises so as to pump the importance of the unbiased
belief premise.” Why would granting
Wittman’s other premises “pump up” the importance of voter bias? Is Klein’s suggestion correct? Why or why not?