Name:_______________________
Economics 812 Final
Prof. Bryan Caplan
Spring, 2012
Instructions:
·
You have
2 hours 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 120.
·
You
should have five 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: A lump-sum tax
is theoretically the most efficient way to raise a given amount of government
revenue, but it is impractical in the real world.
2. Consider a
two-period world. Agents have U=. In period one,
everyone has a chance to buy or sell insurance for consumption in period
2. In period 2, each person receives
an endowment of 0 with p=.5 and 4 with p=.5 (each person makes an independent
draw from the probability distribution).
There are no transactions costs.
True, False, and
Explain: In general equilibrium, the price of
insurance is actuarially fair.
3. Consider a risk-neutral farmer with the cost function TC=q2. The market price is 10 with p=.7, and 1 with p=.3.
True, False, and
Explain: If
the farmer has RE, his profit-maximizing level of output is 4.
4. True, False, and Explain: Efficiency wages cease
to encourage work effort if all employers pay efficiency wages.
5. Suppose the Russian government suddenly
decides to privatize its oil fields.
True, False, and
Explain: If
Russian voters suffer from debt aversion, we should expect their government’s
spending to increase.
6.
“If politicians create an
agency, give it the incentives that it has, and retain
the power to abolish it or
change its incentives at any time, in what sense are politicians not to
blame for everything the agency does?” (Caplan, “Rational
Irrationality and the Microfoundations of Political Failure”)
True, False, and
Explain: Caplan is
arguing that politicians are being irrational when create independent agencies.
Part 2: Short Answer
(20 points each)
In 4-6 sentences
AND/OR equations, answer each of the following three questions.
1. “Behavioral economics actually
makes me more optimistic about the efficiency
of the economy.” Name the two
strongest empirical findings the optimist could cite. Then make his case for him.
2. Build on Kahneman’s chapter on “Answering an Easier
Question” (Thinking, Fast and Slow) to explain a large belief gap between
economists and the public on two questions from the Survey of Americans
and Economists on the Economy.
3. All things considered, what is your best
estimate of the true private return to education for the marginal 18-year-old
American? The true social
return? Use empirics from class to
ground your answer.