Economics 849 Final

Prof. Bryan Caplan

Fall, 2004




        You have 2 hours, 45 minutes to complete this exam.

        Write all answers 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 200.

        You should have 7 pages, counting this one, PLUS one page with a regression.


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. In 2-3 sentences (and clearly-labeled diagrams, when helpful), explain why.


QUESTIONS 1 and 2 refer to the following information:


Suppose both France and Germany tax truckers to ship goods from one country to the other. The quantity of trucking services supplied is given by:

Qs=50-(tF+ tG), where tF is France's tax and tG is Germany's tax. Both countries independently maximize their revenue.


1. T, F, and Explain: tF+tG=50/3.














2. T, F, and Explain: Uniting France and Germany would eliminate Tiebout-type competition, leading to higher taxes.










3. T, F, and Explain: According to the Mean Voter Theorem, political bargaining can solve the problem of preference intensities, but not the problem of political intransitivity.








4. Sometimes political "extremists" refuse to vote for the major party closer to their views.


T, F, and Explain: This always pushes equilibrium policy even further away from the extremists' ideal point.













5. T, F, and Explain: The effect of ideology*education on political beliefs is greater than the effect of ideology because more educated people tend to be a little more liberal.












6. Brennan and Lomasky show that inefficient policies can in theory enjoy unanimous support.


T, F, and Explain: One implication of Brennan and Lomasky's analysis is that in a market setting people might sign a contract that makes every participant worse off.







Part 2: Short Essays

(20 points each)

In half a page each, answer all of the following questions.


1. Drawing on everything you have learned, analyze the efficiency implications of giving college-educated voters two votes each. What is the net effect? Explain your reasoning.



















2. How does Tiebout competition interact with the Ramsey rule? Does this interaction make the efficiency argument for inter-governmental competition stronger or weaker?




















3 Voter irrationality usually decreases the efficiency of policy. What is the effect of voter irrationality on the equity of tax policy? Discuss from the perspective of (a) Rawls, (b) Landsburg, OR (c) Rothbard.


















4. Caplan ("How Do Voters Form Positive Economic Beliefs") argues that the determinants of "causal" and "non-causal" beliefs differ. Illustrate his analysis using two issues from the 2004 presidential campaign.

5. The SAEE asks respondents "Do you expect your children's generation to enjoy a higher or lower standard of living than your generation, or do you think it will be about the same?" Answers are coded as follows:


0="Lower" 1="About the same" 2="Higher"


The next page shows a regression of responses to this question on some respondent characteristics. Are the results consistent with pessimistic bias? Are the results consistent with the usual patterns of "what makes people think like economists"? Discuss in detail.



6. Assess the rationality of EITHER liberal or conservative economic ideology using evidence from the SAEE. Are the ideology's biases mainly exaggerated versions of one or more of the standard economic biases? Explain.






















7. Propose a constitutional reform that specifically tries to correct for expressive voting and/or voter irrationality. Defend your proposal as forcefully as you can.