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 c_{1}
+ 2 ln c_{2}.

Type B: The other two-thirds have U=ln c_{1}
+ ln c_{2}

__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.**

__Part 2:__** Short Answer**

**(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.