· 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.