Name:_______________________
Economics 812 Final
Prof. Bryan Caplan
Spring, 2013
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. Two players are deciding whether to contribute to a public good. The public good is discrete: it is produced at the optimal level so long as one person contributes. If the public good is produced, everyone gets a benefit of 3 if they didn't contribute, and 2 if they did. If no one contributes, everyone gets 0.
True, False, and Explain: This
is a Prisoners’ Dilemma, not a Hawk-Dove game.
2. Suppose the demand curve for a contestable monopoly crosses the AC curve at three points.
True, False, and Explain: There
is a unique equilibrium.
3. Suppose insurance companies are perfectly competitive and know true accident probabilities. All of their potential customers are risk-neutral, but have a subjective P(getting in an accident) equal to the square root of the objective P(getting in an accident).
True, False, and
Explain: All potential customers will definitely buy
insurance.
4. “Economic theory predicts that you
are not enjoying this book as much as you thought you would.” (Landsburg,
The Armchair Economist)
True, False, and Explain: As
Landsburg shows, neoclassical economics is not only consistent with, but implies, violation of the rational
expectations assumption.
5. Suppose the entire return to
education stems from signaling. The
signal, however, is noisy; some good workers don’t have degrees, and some
bad workers do.
True, False, and
Explain: The
measured return to education will fall to zero if you fully control for ALL of
the traits that education signals.
6. Voter’s rational ignorance creates a
moral hazard problem for politicians.
True, False, and
Explain: As usual, there
is a simple way to mitigate this moral hazard problem.
Part 2: Short Answer
(20 points each)
In 4-6 sentences
AND/OR equations, answer each of the following three questions.
1. In the modern U.S., what is the most efficient way for the federal government
to spend an extra billion dollars? What
is the maximally utilitarian way for
the federal government to spend this sum?
(In both cases, assume that tax cuts are not an option). Use everything you’ve learned to
craft a thoughtful answer, and be specific.
2. Some people
argue that nominal wage rigidity is individually rational because many people
(especially home-owners) have large nominally-denominated debt. Is this a sound argument? Why or why not?
3. Paul Krugman recently accused
anti-Keynesians of being “knaves and fools.” What would Kahneman say about this
accusation? Use Thinking, Fast and Slow to craft a thoughtful reply.