DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
DECEMBER 7, 2012
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 221: Holian) Consider the following situation. One agent, “the Monopolist,” must
decide whether to Violate or Not Violate an antitrust law, knowing that there is a second agent,
“the DOJ” (for the Department of Justice) who might investigate the monopolist or not. The DOJ
gets a payoff of 2 whenever the Monopolist does not violate the law, but investigating is costly
for the DOJ, and it incurs a disutility payment of -1 if it investigates. If the DOJ catches the
Monopolist violating the law, he gets a payoff of 5 (but still gets the disutility of -1, for a net
payoff of 4). If the DOJ does not catch the Monopolist violating the law, the DOJ gets a payoff of
zero (representing a reprimand). As for the Monopolist, it gets a payoff of zero if it does not
violate the law (representing normal profits), a profit of 1 if it violates the law when the DOJ
does not investigate, and a payoff of -1 when it violates the law and the DOJ investigates.
a. Represent this game in normal form (i.e., a payoff matrix).
b. How many pure strategy Nash equilibria are there in this game?
c. Calculate the mixed strategy Nash equilibrium to this game.
3B. (Econ 212: Haight) Distinguish between economic development and economic growth, and
between the different sorts of economic growth. Illustrate your case with reference to both
economic theory and historical and contemporary examples.
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DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
DECEMBER 7, 2012
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
3C. (Econ 158: Estill) Discuss the knowledge that entrepreneurs might display as they seek new
processes, new alignments of resources, and new products using “The Use of Knowledge in
Society,” “Competition as a Discovery Procedure,” and “The Tacit Dimension.” Make sure you
include the author of each article. Explain the main point of each article in detail and clearly
relate each point to successful market entrepreneurship.
3D. (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, using graphical analysis of the production of innovation.
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.
3E. (Econ 205A: Holian) Suppose a hospital located in a less developed country is considering
expanding its facilities. The expansion would encroach on a neighboring village. The investment
expenses for the expansion include land and construction costs as well as relocation expenses to
move the villagers. The land and construction costs are estimated at $20 million. The costs of
relocation depend on political factors, and the hospital expects relocation costs will be between
$5 million and $15 million with $10 million likely. These investment and relocation expenses
would be incurred today. Beginning one year from today, the expanded hospital would start
operation. Incremental operating expenses for personnel, maintenance, supplies, etc. are
estimated at $1 million annually. The medical benefits (which are treated as the value of the
marginal product from incremental savings in these patients’ productive agricultural work days
that result from receiving the expanded hospital’s services) are assumed to accrue at the
beginning of each year. Depending on the severity of the medical illnesses treated, the medical
benefit estimates range from $1 million to $11 million, with $6 million likely. Assume
construction would start tomorrow, take one year to complete, the expanded hospital operates for
ten years thereafter, and the real discount rate is 10%.
a. Calculate a base case estimate of the net present value of the program. (Hint: Use the
formula for the annuity factor, and the facts that 1.10^10 = 2.594, and 10/2.594 = 3.855)
b. Given the uncertainty surrounding the relocation costs and medical benefits, calculate
best case and worst case NPV estimates.
c. A more complete picture of the uncertainty surrounding this project can be provided
with a Monte Carlo analysis. Briefly describe how one conducts such an analysis in a spreadsheet
program.
d. Medical benefits were measured using data from two comparable villages where
hospital services were expanded. After the expansions, agricultural output rose in these villages.
Briefly describe 1) an empirical technique that would allow you to isolate the causal impact of
expanded hospital services on sick days, and then 2) how to value, in the local currency, each
eliminated sick day.
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DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
DECEMBER 7, 2012
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
3F. (Econ 232: Foldvary) Do both parts a and b:
a. Contrast the typical source of funding for the elevators of hotels versus the typical source
of funding for a city mass transit system. Contrast the efficiency and equity of the two sources.
b. Assuming that the city transit system provides a net social and economic benefit, aside
from the source of funds,
 Explain why this difference in funding exists between the hotel and the city;
 State and explain the optimal public finance for the urban transit system;
 Apply public choice theory to explain the governing structure that would be most
likely to provide the most efficient public-finance outcome.
3G. (Econ 139: Kropelnicki) This is a several part question covering the Capital Asset Pricing
Model and diversification. Please answer all parts:
a. Assume two stocks have the same amount of systemic risk, and different amounts of unsystemic risk. According to the CAPM which stock should have the higher return and why?
b. Of the two risks discussed in question part a, which one is used in the CAPM? What is
another name for this risk?
c. Please use a graph to illustrate risk and returns according to the CAPM model. Clearly
show what happens as the level of risk increases and decreases?
d. Use a graph to illustrate how you can reduce risk through diversification—clearly show
which risk is eliminated and which risk remains.
3H. (Econ 166: Pogodzinski) Answer either a or b:
a. What is the mortgage interest deduction and what effects does it have on the rate of
homeownership, the price of housing, and the “footprint” of U. S. cities?
b. Identify the essential elements of the Tiebout Model and explain the role of constant
returns to scale in the production of the local public good in the Tiebout Model. The Tiebout
Model implies sorting of people. Is the kind of sorting observed in U. S. cities consistent with the
Tiebout Model? Explain your answer.
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