DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
MAY 3, 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 205A: Holian) Imagine you work for the Sunol Glen Unified school district, which is
in Alameda County, California. There are currently ten teachers in the district and 200 students,
for a student-teacher ratio of 20. You are asked to do a cost-benefit analysis for a new proposal to
hire more teachers. The proposal is to hire an additional ten teachers, taking the total number of
teachers from ten to twenty, thus taking the student-teacher ratio from 20 to 10. Each teacher
costs the district $100,000 per year (that is $75,000 per year in salary, and an additional $25,000
per year in benefits.) To understand how the reduction in the student-teacher ratio from 20 to 10
is likely to affect test scores, you estimate the following empirical model using ordinary least
squares (OLS):
TESTSCR = 625 - 0.91*STR + 3.88*AVGINC - 0.04*AVGINC^2
Several studies have shown that a one standard deviation increase in test scores leads to
about an eight percent increase in lifetime earnings. Looking across all districts in California the
average test score is 654 with a standard deviation of 18. Assume that all students in Sunol Glen
Unified go on to college, get a job after graduating that pays $50,000 per year in real terms, and
that their salary grows at a two percent real rate for every year they work. Under these
assumptions, if they retire at 65, the present discounted value of their lifetime earnings turns out
to be about $500,000.
Describe how an analyst could use the information presented above to carry out a costbenefit analysis of Sunol Glen Unified hiring ten more teachers. Does hiring the teachers pass the
cost-benefit test? Under what conditions does hiring the teachers not increase social welfare?
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DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
MAY 3, 2013
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
3B. (Econ 212: Haight)
a. Is inequality harmful for economic growth? Under what circumstances? Are all
economists in agreement? Why or why not?
b. What effect does geography have on economic development, and through what
mechanisms does it operate?
3C. (Econ 200: Lopez) Copyright; please answer all parts:
a. Explain in detail the argument that economic efficiency depends upon support of
copyright law and enforcement.
b. Explain in detail how the optimal duration of copyright can be theoretically determined
for a given industry.
c. Next explain the different ways to configure copyright protection in general (without
reference to any specific type of creative industry), and argue what the effects on economic
efficiency would be under those different possible configurations.
d. Discuss and illustrate one creative industry in which copyright is (or would be)
efficient, one creative industry in which copyright is (or would be) inefficient, and explain with
reference to parts (a) through (c) why these work out differently.
3D. (Econ 221: Holian) Antonine Cournot’s 1838 Researches was one of the earliest examples of
mathematical modeling in economics. His ideas have arguably stood the test of time more than
any other mathematical economist. Using the assumptions that underlie this work, assume
demand for mineral water is given by P=12 - Q, where P is price and Q is total quantity. Assume
that production of mineral water is costless, that is, that marginal cost and average cost equal
zero for all levels of production.
a. Provide a mathematical expression relating the number of firms in the industry to the
price the consumer pays. Let N denote the number of firms in the industry.
b. Draw a graph, where the price the consumer pays is on the y-axis, and the number of
firms in the industry, N, is on the x-axis. Draw three points on this graph that correspond with
N = 1, N = 2 and N = 3. Connect these points.
c. In 1883, Jean Bertrand criticized Cournot’s model because Cournot’s results are driven
by the assumption that firms’ strategic choice variable is quantity. Bertrand showed that if
instead price is the strategic choice variable, the price that results in the market will usually be
different. On the same graph, draw three points on the curve for N = 1, N = 2 and N = 3 that show
that price consumers in the market will pay if we assume, like Bertrand, that price, not quantity,
is the strategic variable.
d. One economist whose approach differed quite a bit from both Bertrand and Cournot
was Joseph Schumpeter. Draw a new graph that shows the relationship between the number of
firms, N, on the x-axis and some other variable (i.e. a variable of your choosing, but not price) on
the y-axis. What would be an appropriate variable to place on the y-axis to illustrate one of
Schumpeter’s ideas? Also, what would Schumpeter argue is the relationship between it and the
number of firms in the market? Indicate the nature of this relationship with your graph, and
provide a very brief explanation for the relationship you show.
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DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
MAY 3, 2013
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
3E. (Econ 158: Estill) David Harper compares the Market Process Program with two other policy
programs. Name each program and describe at least three primary characteristics of each of the
three programs in detail. Which is the dominant policy program today according to Harper? What
two programs often get confused and why?
3F. (Econ 232: Foldvary) Suppose that there are two cities of equal population close together.
The only difference between them is that in city A, all government revenue comes from
permanent federal government grants, and in city B, all government revenue comes from an
equal lump-sum tax on all adults. There are no taxes paid in A and B other than today’s federal
taxes and the lump-sum tax in B. Assume that:
1) per capita government services are always identical in A and B;
2) every person in B can afford to pay the tax;
3) there are no transfer payments;
4) people are completely mobile;
5) residents have no emotional attachment to a location;
6) each city is unable to expand its area boundaries;
7) all persons seek to minimize their costs relative to benefits received.
Explain the incidence of public finance for this situation in A and B, i.e., how the equilibrium
is achieved (or whether it cannot be achieved) and who (what categories of persons) ultimately
bears the burden of these public finances, and who gains.
Do not assume premises not already in the problem.
3G. (Econ 139: Kropelnicki) This is a several part question covering diversification and the
Capital Asset Pricing Model. Please clearly label your graphs and show your work:
a. Risk can be defined in several ways. Specifically in capital markets, what are the two ways
we define the risk? Use a graph to clearly illustrate how you can reduce risk through
diversification and portfolio risk management– clearly show which risk is eliminated and how
diversification works. Clearly label all elements of your graph.
b. Application of the Capital Asset Pricing Model - CAPM:
 Of the two risks discussed in question part a. (above), which one is used in the
CAPM?
o This risk is also commonly known as what?
o Why do we only use this risk in the CAPM?
 Please use a graph to clearly illustrate risk and returns according to the CAPM model.
Please clearly show how different levels of risk translate into different rates of return.
Please clearly label all parts of your graph and label each movement.
 Lastly, please explain some of the issues or shortfalls of the CAPM and Beta
management?
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DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
MAY 3, 2013
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
3H. (Econ 166: Pogodzinski) Answer one of the following:
a. What is the rank-size rule (Zipf’s Law)? What economic forces account for the observed
relationship between cities’ rank and size?
b. Why do some firms prefer the median location? (That is, why does the Principle of Median
Location hold?)
c. Illustrate and explain a hedonic curve involving equilibria among heterogeneous buyers
and heterogeneous producers. Can differences between hedonic prices be interpreted as
willingness-to-pay for differences in characteristics? Why or why not?
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