· 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?