Economics 812 Final

Prof. Bryan Caplan

Spring, 2009




·        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.  True, False, and Explain:  In a general equilibrium framework, “fiscal stimulus” can’t work, because the funding for the stimulus package has to come from somewhere.













2. Suppose there are an infinite number of equally efficient potential producers.


True, False, and Explain: With constant MC and zero fixed costs, there are an infinite number of PSNE and an infinite number of MSNE.











3.  Landsburg (“People Wanted”) argues that there are positive externalities of population growth.


True, False, and Explain:  Search theory suggests that Landsburg actually understates the case for higher population.








4.  Consider a simple asymmetric information model: The “true value” of a company to sellers is uniformly distributed along [0,100], and the value to buyers is 50% more than to sellers.


True, False, and Explain:  In theory, irrationality could increase or decrease market efficiency; in practice, however, experiments show that irrationality makes this “market for lemons” less efficient.













5.  True, False, and Explain:  Moral hazard models predict that the people with the most insurance will take the most risks, but adverse selection models predict the opposite.












6.  More educated workers normally have lower unemployment rates than less educated workers.


True, False, and Explain: The efficiency wage model can explain this pattern.









7.  True, False, and Explain:  In signaling models, selfish agents might voluntarily supply public goods.














8.  True, False, and Explain:  According to Caplan’s rational irrationality model, political betting markets are especially likely to make biased predictions.













9.  In most countries, the median voter favors protectionism.


True, False, and Explain:  One Wittmanian explanation is that the benefits of free trade are unevenly distributed; free trade raises Americans’ average income, but the median American voter is still worse off.






Part 2: Short Answer

(20 points each)

In 4-6 sentences AND/OR equations, answer each of the following three questions.


1.  Suppose that greeting other people is a special kind of Coordination game.  We are in the equilibrium where everyone shakes hands; but there is an equally polite equilibrium where no one shakes hands.  The only bad result is when some people offer to shake hands, and others refuse.  How you would modify this simple model to account for the rise of swine flu – a disease that might be spread by hand-shaking?  Is it possible for this disease to change the number of equilibria in the game?  Explain using both words and a normal form.


















2.  The economic events of 2008 are widely seen as “disproving” the RE hypothesis.  What is the most compelling RE account of 2008 you can think of?  Give details.















3.  Use Caplan’s article “Stigler-Becker vs. Myers-Briggs” to argue that, in practice, behavioral anomalies matter much less in the real-world than most behavioral economists suggest.  (Hint: Self-selection)  Give TWO empirically important examples.