Name:_______________________

Economics 812 Final

Prof. Bryan Caplan

Spring, 2015

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 six propositions is true or false.  Using 2-3 sentences AND/OR equations, explain your answer.

1. Agents are endowed with 2 units of good 1 and 1 unit of good 2.  There are two types of agents:

Type A:  One-third of the agents have U=ln c1 + 2 ln c2.

Type B:  The other two-thirds have U=ln c1 + ln c2

True, False, and Explain: The price of good 2 will be at least 50% higher than the price of good 1.

2. Suppose all firms in an industry have the same cost function TC=a+bq.

True, False, and Explain:  Contestable monopoly and Bertrand competition both lead to "first-best" efficient outcomes if a=0, and “second-best” efficient outcomes if a>0.

3.  Suppose your EU=w.5, and insurance is sold at 50% more than the actuarially fair rate.  Your uninsured income is \$10,000 with p=.5, and \$0 with p=5.

True, False, and Explain: Your optimal quantity of insurance>\$1000.

4.  True, False, and Explain:  Results from Caplan (“Systematically Biased Beliefs About Economics”) suggest that the general public is no more sympathetic to the signaling model of education than Ph.D. economists.

5.  True, False, and Explain:  Paying efficiency wages is a Prisoners’ Dilemma, because it’s impossible for all employers to pay “above-market” wages.

6. Financial analysts often appeal to “herd behavior” to explain price movements in financial markets: Investors want to buy stocks that have been increasing in price, and sell stocks that have been decreasing in price.

True, False, and Explain: According to Thaler (The Winner’s Curse), herd behavior is not, on average, a profitable strategy for individual investors.

(20 points each)

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

1.  Suppose a pirate robs ten people and puts all of their money inside a treasure chest.  When the police recover the chest (and before the pirate can spend a penny), they ask each of the ten victims to state how much money he lost.  To discourage lying, the police announce that if the total losses claimed by the victims exceeds the total amount of money in the chest, none of the victims will get any money back.  Using everything you’ve learned, what would actually happen in this scenario?  Justify your answer.

2. “Both the human capital and signaling models of education suggest that online education will expand more quickly if ‘early-adopters’ of online education are relatively strong students.”  Do you agree?  Carefully explain your reasoning.

3.  Combine (a) a bias from Kahneman (Thinking, Fast and Slow) that was NOT discussed in class with (b) the Median Voter Theorem to explain a specific long-standing inefficient public policy.