Name:_______________________

 

 

Instructions:

 

�        You have 90 minutes 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 100.

�        You should have 4 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 propositions is true or false.� Using 2-3 sentences, explain your answer.

 

1.� Suppose an industry has room for three firms to produce at minimum AC.�

 

T, F, and Explain:� Even if these three firms are colluding, "trust-busting" will definitely raise the market price.

 

 

 

 

 

 

 

 

 

 

2.� T, F, and Explain: Steven Landsburg (Fair Play) argues that people have the efficient number of children under laissez-faire.

 

 

 

 

 

 

 

 

 

 

 

3.� Prohibition reduces product quality.

 

T, F, and Explain:� One good effect, from prohibitionists' point of view, is that the fall in quality leads to a smaller equilibrium quantity.

 

 

 

 

 

 

 

 

 

4.� Both search theory and signaling theory assume that different people have different abilities.

 

T, F, and Explain:� If all people were identical, neither theory would remain relevant to the real world.

�

 

 

 

 

 

 

 

 

 

 

5.� T, F, and Explain:� According to Mises (Socialism), the economic system of Nazi Germany was actually interventionist, not socialist.

 

 

 

 

 

 

 

 

 

 

 

 

6.� Caplan argues that politicians are, in large part, supplying the policies that the public irrationally prefers.

 

T, F, and Explain:� If defense services were privatized, firms would continue to cater to the public's irrational beliefs, only at a lower price.

 

 

 

 

 

 

 

 

Part 2: Short Answer

(20 points each)

In 4-6 sentences, answer all of the following questions.

 

 

1. �Suppose an insurance market has advantageous selection.� What would be the effect of a regulation requiring equal rates for all customers?� How is this different � if at all � from the effect of this regulation under adverse selection?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.� "Deregulation increases efficiency � when it's done correctly."� Consider the ability, knowledge, and incentive problems behind deregulatory disappointments like the S&L bailout and rising electricity prices in California.� Which of the three problems is most important?� Explain.