Wednesday, December 12, 2012

Microeconomics Exam

It's exam week at the University of Chicago. In that spirit, here are some economics "exam" questions. Answers below the break with interesting links.

1. True or False: The economic effects of a terrorist attack, a hurricane, or a destructive space alien attack make people better off on net because the extra work required to rebuild creates jobs.
2. Why is corn syrup used to sweeten Coke and not cane sugar? (Hint: cane sugar was used prior to 1984 and is still used to sweeten Coke in other countries.)

3. Why does Doctor Barbie cost twice as much as Chef Barbie?

4. True or False: Welfare programs that means-test for illiteracy can lead to less literacy.

5. True or False: Letting the 2001, 2003, and 2009 income tax cuts expire on schedule for everyone, letting the gift and estate tax provisions expire on schedule, and not indexing the alternative minimum tax (AMT) to inflation will lead to a balanced budget for the Federal government in the year 2020.


1. False. The broken window fallacy explained.

2. See Why is There Corn in Your Coke? on the political incentives of inefficient subsidies (HT: MR)

3. Price Discrimination! Ask yourself: "Who's willing to pay more?" (HT: David Hagen)

4. True. See "Profiting From a Child's Illiteracy" on some bad incentives of welfare. "Kids get taken out of the [literacy] program because the parents are going to lose the check."

5. Most likely false (although it's kind of hard to tell with these things. Economic growth matters a lot, projected status quo matters a lot, etc.). And this is really more macro. In any case, the WSJ has a fantastic Make Your Own Deficit Reduction Plan tool up! Solve the crisis your Congressman can't! (HT: Greg Mankiw)

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