Name:_______________________
Economics 812 Final
Prof. Bryan Caplan
Spring, 2009
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. 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.