Name:_______________________
Economics 812 Final
Prof. Bryan Caplan
Spring, 2016
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. In a world with
no externalities, suppose the government imposes a lump sum tax and uses it to
fund an hourly work subsidy.
True, False, and
Explain: The deadweight cost of this
tax-and-subsidy policy is zero.
2. Suppose a market has free entry, positive fixed costs, and constant marginal costs.
True, False, and Explain: Cournot competition leads to a first-best efficient outcome.
3. True, False, and Explain: In the real world, risk misperceptions unambiguously reduce the demand for insurance.
4. “As in the
judgment of whether a work of art is genuine or a fake, you will usually do
better by focusing on its provenance than by looking at the piece
itself.” (Kahneman, Thinking, Fast
and Slow)
True, False, and
Explain: Kahneman
is arguing that elite credentials are the best predictor of expert accuracy.
5. Suppose workers are paid nominally rigid
efficiency wages.
True, False, and Explain: Employee shirking will be procyclical – i.e.,
higher during good economic times, lower during bad economic times.
6. True,
False, and Explain: Median
Voter equilibria are automatically Kaldor-Hicks efficient because they give
voters what they most prefer.
Part 2: Short Answer
(20 points each)
In 4-6 sentences
AND/OR equations, answer each of the following three questions.
1. “Moral hazard is at least
second-best efficient because there’s really nothing government can do to
fix it.” Using everything
you’ve learned, critically analyze this statement.
2. How will you
revise your long-term financial plans in light of the evidence from behavioral
finance? Methodically explain your
answer.
3. Name a specific market where government
could increase efficiency in theory
even though government reduces efficiency in
practice. Use Caplan
(“Systematically Biased Beliefs About Economics” and “What
Makes People Think Like Economists?”) to explain this perverse policy-making. Justify both parts of your response.