ECON 3320.001
Exam 1, February 23, 2004
Name _________________________________________________
SSN ______________________________________
1. True, False or Uncertain. Explain. (5 points each)
a. Mary is really angry about some aspects of her kids’ public education. She has concluded that her only
option is to withdraw them from public school and enroll them in private school. Her conclusion is
correct.
b. In a two-party primary, candidates should moderate their views, anticipating the median view they will
face in the general election.
c. Using a majority voting method, a public good will be provided only in the quantity desired by the
majority of voters.
2. Use the table below, which shows current dollars per capita, to answer the following questions.
(5 points each):
Year
1980
1985
1990
1995
Approximate Federal Government
Expenditures
$2,500
3,900
4,900
6,000
Approximate State & Local
Government Expenditures
$1,400
1,900
2,600
3,400
Approx. GDP deflator
(1996 = 100)
57
74
87
98
a. What happened to real per capita federal expenditures between 1985 and 1995, in 1996 dollars?
b. What happened to real per capita state and local expenditures between 1980 and 1990, in 1996 dollars?
3. Describe the economic roles of government – allocation, distribution and stabilization – of the Social
Security System. (15 points)
4. Imagine a simple two-person production economy with two goods: pizza and pancakes. At the present
allocation of resources, Paloma is producing pizzas at a marginal cost of $6 while Patty is producing
pancakes at a marginal cost of $0.50. The current market price of pizzas is $10 and the current market price
of pancakes is $1.50.
a. Explain what is wrong with the current allocation of goods in this economy. (5 points)
b. What change in allocation would make this economy more efficient? (5 points)
5. Use theoretical tools you’ve learned in this course to explain the allocation, distribution, stabilization and
voting issues involved in these excerpts from a Feb. 21 New York Times article, written by Rachel L.
Swarns: (20 points)
….
…. One month after Mr. Bush promised the most comprehensive overhaul of immigration law in nearly two
decades, opposition to his plan is mounting among conservative Republicans vying for votes in House and Senate races in
Illinois, North Carolina, California, Kansas and elsewhere.
With his plan, Mr. Bush hopes to revamp an immigration system widely viewed as broken and to re-establish his
credentials as a compassionate conservative — particularly with Hispanic and swing voters — at the start of an election
year. But in debates, campaign stops and interviews, some Republican candidates have sharply criticized his position as
they seek to tap into conservative anxiety over the proposal.
….
In a Senate hearing last week, Bush administration officials said that illegal immigrants living in the country as of
Jan. 7 — a group estimated at about eight million or more — would be eligible for temporary work permits for an initial
period of three years, if they can show they have jobs and if their employers certify that Americans cannot be found for
the jobs.
The officials said the permits could be renewed several times and that the workers could apply for permanent
residency without leaving the United States. By legalizing the status of millions of immigrants who officials say are
peaceful and hard working, immigration agents will be able to focus on foreigners who pose terrorist or criminal threats.
Mr. Bush has also promised to stiffen enforcement of immigration laws and to increase the number of people who
can obtain permanent residency status.
Vernon Robinson, a Republican contender for a House seat in North Carolina, said that smelled like amnesty. He
said his supporters wanted illegal immigrants deported and American troops stationed on the border with Mexico,
particularly after the 9/11 attacks.
6. Use the table below, which shows the approximate information on the distribution of money income among
families in the US, to answer the following questions:
Year
1970
2000
1st quintile
4
4
2nd quintile
11
9
3rd quintile
17
14
4th quintile
25
23
5th quintile
43
50
a. If we define the poor as those in the two bottom quintiles, describe the change in the share of money
income for the poor in that 30-year span. (3 points)
b. If we define the middle class as the middle three quintiles, describe the change in the share of money
income for the middle class over those 30 years. (3 points)
c. What happened to the Lorenz curve and the Gini coefficient over those 30 years? (6 points)
d. Describe one important factor that this table of information ignores. (8 points)
7. Explain the Coase theorem and how it is likely to apply in this situation: The neighbor who lives below you
in your apartment building loves to play Village People CD’s very loudly at 6 a.m. You’re trying to sleep at
that hour, and you dislike all Village People music. His favorite seems to be “YMCA,” which you
particularly hate. (10 points)
BONUS Question: What are the potential benefits to society from lobbying? (5 points)
BONUS Question: Economists usually favor the sale of pollution permits - a market solution - over pollution
standards – which involve penalties for non-compliance. Under what conditions might economists favor
standards? (5 points)