DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
DECEMBER 6, 2013
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
INSTRUCTIONS:
1.
Answer ONLY the specified number of questions from the options provided in each
section. Do not answer more than the required number of questions. Each section takes
one hour.
2.
Your answers must be on the paper provided. No more than one answer per page. Do not
answer two questions on the same sheet of paper.
3.
If you use more than one sheet of paper for a question, write “Page 1 of 2” and
“Page 2 of 2.”
4.
Write ONLY on one side of each sheet. Use only pen. Answers in pencil will be
disqualified.
5.
Write ------ END ----- at the end of each answer.
6.
Write your exam identification number in the upper right-hand corner of each sheet of
paper.
7.
Write the question number in the upper right-hand corner of each sheet of paper.
Section 3: Applied Economics—Answer Any Two Questions.
3A. (Econ 212: Haight) The mythic country of Balonia has endured a violent and bloody civil
war for 50 years. Now that peace has arrived, the population is made up of those left alive:
mostly the elderly and the very young. This population is comprised of three very different ethnic
groups, a hangover from its colonial days. You are told the US hopes to help the peace process
by imposing a democratic constitution and voting system. (In answering the questions below,
please be sure to state your assumptions.)
a. Describe the role that culture and ethnic fractionalization might play in the country’s
peacetime development.
b. Drawing on your knowledge of Locke and Hobbes, do you feel the constitutional
process will meet with easy success? Why or why not?
c. If a new democratic system is successfully put into place, how will the elderly and the
young adapt?
3B. (Econ 200: Foldvary) Answer both of the following:
a. Analyze the economic effects of a change in law that would allow torts to be
transferable.
b. Analyze whether making torts transferrable would shift optimal policy towards a
greater use of torts relative to criminal law and relative to regulations.
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DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
DECEMBER 6, 2013
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
3C. (Econ 205A: Holian) An econometrician estimates the following equation:
Pi = XiB – b*(1/distancei) + ei, where Pi is the price of house i, Xi is a 1 by k vector of attributes
associated with house i and B is a k by 1 vector of coefficients associated with these attributes to
be estimated; distancei is the distance (in miles) from house i to a hazardous waste site, b is a
coefficient to be estimated, and ei is an error term with the usual properties. This equation is
estimated using a sample of 1,000 homes located between 0.25 and 2 miles of the hazardous
waste site. The resulting equation, when evaluated for a home with average levels of all k
characteristics, is Pi = 200,000 – 250*(1/ distancei).
Although a sample of 1,000 homes was used to estimate this equation, there are 8,000
homes within 2 miles of the hazardous waste site. For simplicity, assume the homes are located
in concentric rings around the waste site, a quarter mile apart, and the homes are evenly
distributed geographically. In particular, 1/8th of these homes are located 0.25 miles from the
waste site, 1/8th are located 0.5 miles from the waste site, and so on. (In other words, to be sure
that it is clear what we mean, one thousand homes are located 0.25 miles from the waste site, one
thousand homes are located 0.5 miles from the waste site, … , and one thousand homes are
located 2 miles from the waste site.)
Assume that if this waste site was cleaned up, the average home in the city would sell for
$200,000 and the price of a home would not depend on its location to the former waste site.
Assume also that the social opportunity cost of cleaning up the waste site is $3 million.
a. With the information you know, can you determine whether cleaning up the waste site
is likely to be socially beneficial? Provide an estimate of net benefits.
b. Briefly discuss whether it is likely that tax increment financing could be used to fund
the clean up.
3D. (Econ 221: Holian) Demand in a market is given by P = 12 – Q, where P is the market price
and Q is the total quantity produced. Assume production technology is such that marginal cost
and average cost are zero. Characterize equilibrium price and quantity under the following
scenarios:
a. Monopoly.
b. Bertrand duopoly.
c. Cournot duopoly.
d. Stackelberg duopoly.
After characterizing equilibrium price and quantity for the four scenarios above, rank them
according to static efficiency. How might this ranking change if dynamic efficiency is taken into
account?
3E. (Econ 113A: Hummel) Discuss the pricing of slaves in the pre-Civil War American South.
What determined a slave’s price, and what factors caused it to vary, both among different slaves
and over a slave’s life? Show how slave pricing relates to the pricing of land and of modern
financial assets, and explain why this ensured that slaveholders on average earned market rates of
return. How did the bearing of slave children and the threat of running away affect the price of
slaves? Under what circumstances would manumission through self-purchase be lucrative for
slaveholders?
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DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
DECEMBER 6, 2013
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
3F. (Econ 232: Foldvary) Analyze how one would determine the optimal amount of military
defense spending for a country. Provide a policy prescription that includes military spending as a
proportion of GDP, the sources of revenue (which taxes and how much borrowing), and whether
there would be a military draft.
Include both efficiency and equity, and discuss whether in your optimal policy prescription
there would be a trade-off between these criteria.
Assumptions:
1) There are external enemies with the capability to invade the country and inflict significant
damage or possibly conquer the country.
2) The marginal costs (as percentages of GDP) of providing additional military defenses
against external threats is known, and the probability of successful defense for a given total cost
is known.
3) Providing a defense with the certainty that an attack would be successfully defended has a
lower cost than the GDP but would reduce domestic consumption to a subsistence level.
4) Your policy prescription has to be sustainable in the long run.
5) Use USA data regarding input factors, demographics, and income distributions, if these are
used.
6) Assume that public choice and social choice uses today’s voting and legislative structures,
although you may add additional methods of collective choice.
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