Name:___________________________

Economics 812 Final

Prof. Bryan Caplan

Spring, 2014

__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. Some economists
worry that economies will become increasingly unequal if the real interest rate
*r* exceeds the rate of economic growth
*g*.

__True, False, and Explain:__ **In
an intertemporal general equilibrium consumption model, the ****real
interest rate r cannot exceed
the rate of economic growth g.**

2. __True, False, and Explain:__ **In
a Coordination game – like a Prisoners’ Dilemma – agents do not
need communication to reach a PSNE.**

3. An agent faces two choices: (1) A utility of 10 for sure; (2) A utility of 0 with 50% probability and a utility of 20 with 50% probability.

__True, False, and Explain:__ **If the agent is
indifferent between (1) and (2), then in terms of Expected Utility Theory, he must
be risk-neutral.**

4. “No one really has preferences for
fair or vindictive behavior. When people act ‘fairly’ or
‘vindictively,’ they’re just signaling.”

__True, False, and Explain:__ **This
claim is not theoretically consistent with the signaling model.**

5. “The
initial attempt to believe is an automatic operation of System 1, which
involves the construction of the best possible interpretation of the
situation.” (Kahneman, *Thinking,
Fast and Slow*)

__True, False, and
Explain:__ T**his
model of belief formation implies that lies are persuasive because people are usually telling the truth. **

6. Senior #1 and Senior #2 are both
undergraduates in their final year of college. Senior #1 knows he has a 90% chance of
successfully graduating this year.
Senior #2 knows he has a 90% chance of failing out. Both students satisfy the Permanent
Income Hypothesis.

__True, False, and
Explain:__ **Both students will
increase their consumption if they successfully graduate, but Senior #1 will
increase his post-graduation consumption by a smaller fraction than Senior #2.**

__Part 2:__** Short Answer**

**(20 points each)**

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

1. In the real world, what would happen if
a restaurant adopted Landsburg’s system for splitting checks? (*The Armchair Economist*)

2. Use the
signaling model of education to explain the sheepskin effect. Precisely specify why, in the real
world, *discrete* educational
achievement is so much more informative to employers than *continuous* educational achievement.

3. The nominal wage rigidity model blames
unemployment on nominal wages’ failure to swiftly fall to market-clearing
levels. Can this model also explain
the fact that high-ability workers are less likely to lose their jobs during
recessions? If not, how can you
modify the nominal rigidity rigidity model to explain
why recessions hit low-ability workers harder?