Econ 131
Spring 2025
Emmanuel Saez
Final Exam
May 16, 3-5pm
Exam Instructions:
• The exam lasts 120 minutes, closed notes, closed books, no electronic devices.
• Explanation should be written using pens (we recommend black or blue ink,
as these scan the best).
• Write your solutions in the spaces provided.
• Total points for the final exam is 37 points.
• When time is called, STOP writing, immediately CLOSE your exam packet and hold
it up until it is collected by one of the GSIs.
• Show your work. Credit will only be awarded on the basis of what is written on the
exam.
• Sign the academic honesty pledge. Cheating carries stiff penalties.
Student Name:
Student ID Number:
Affirm the academic honesty pledge below. For those writing on a non-printed copy,
please just write “Academic Honesty Pledge as on exam”, and sign your name.
If you do not affirm this pledge, your exam will be marked invalid.
0. ACADEMIC HONESTY PLEDGE
I confirm that I have abided by all academic honesty rules for UC Berkeley and Economics 131.
I confirm that I did not see this exam before my official exam start time. I confirm that I have
not shared and will not share this exam with anyone else. I confirm that I haven’t copied from
anybody else’s exam.
Signature:
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1. True/False/Uncertain (18 points, 2 points per question.)
Explain your answer fully based on what was discussed in class, since all the credit is based
on the explanation. Your grade depends entirely on the substance of your justification, not on
whether you are correct in writing “True” or “False”. Note that it is possible to answer each
question for full credit with three sentences or fewer, and answers longer than ten lines long will
not be graded.
(a) The earnings test of the US social security retirement system is a tax on earnings above
the disregard and generates substantial bunching in earnings precisely at the earnings
disregard.
(b) In the Tiebout model of local public good provision, people can move and “shop” for their
preferred public goods. Therefore public goods become like private goods and hence the
Samuelson rule for efficient public good provision no longer applies.
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(c) The study for UC Santa Cruz showing that students with higher GPAs in introductory
economics class are more likely to major in economics and earn more later in life is not
compelling evidence of a causal effect of majoring in economics on earnings. That’s because
even without a GPA requirement to major in economics, we expect that high scoring
students to have more ability and hence earn more later in life.
(d) Consider a central government that gives a local government such as a city $1 million
extra in funding. In case 1, the $1 million is a block grant for local police spending. In
case 2, the $1 million is a block grant for local fire safety. In case 1, there will be more
police and less fire safety in the city than in case 2.
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(e) In the social security theoretical model we discussed in class, social security increases
consumption in old age for both myopic and rational savers.
(f) According to standard labor supply theory, an increase in the tax rate for the top bracket
of the individual income tax reduces the labor supply of top bracket taxpayers through
both income and substitution effects.
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(g) In the US, large firms have to provide health care insurance to their workers. As a result,
firms rather than individual workers bear the burden of this employer provided health
insurance.
(h) Changes in value-added-tax rates in Europe show that consumers bear almost the full
burden on these taxes.
(i) A new company offers insurance against car theft. A market study shows that the risk of
car theft is .1% per year. However, among its clients, the probability of car theft is .5%.
This is an example of moral hazard.
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2. Community college funding (19 points, 2 pts per question except as noted)
A major component in post-secondary education in the United States is the community college sector. These institutions provide vocational training as well as lower-division academic
coursework for those intending to transfer to 4-year institutions. The following questions apply
a variety of public economics tools to the topic of community college funding.
(a) Provide two economic motives justifying government involvement in education. Explain
each.
(b) (1 pt only) Provide at least one economic motive justifying government NON-involvement
in education. Explain.
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Let’s focus on the market for 2-year college education in Oakland. Assume the local demand for
community college degrees is described by the inverse demand function P = 8, 000 − 2Qd , while
the inverse supply function is given by P = 2Qs , where P is the price of attending community
college. We assume that each community college degree produces a positive externality with a
marginal benefit to the community for each degree equal to $2,000.
(c) (1 pt only) Determine the private market equilibrium price and quantity.
(d) (1 pt only) What is the socially optimal demand function?
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(e) (1 pt only) Find the socially optimal equilibrium price and quantity.
(f) (1 pt only) Find the DWL associated with the private market equilibrium.
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(g) Graph the market for community college in Oakland. Be sure to label 8 things: PMC,
SMC, PMB, SMB curves, the Marginal Benefit, the DWL, the private market equilibrium
and the socially optimal equilibrium.
(h) What would be the Pigouvian solution to the externality problem introduced above.
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At the California state legislature in Sacramento, lawmakers are debating policy proposals
to increase per-student expenditures for community colleges. The three proposals are as follows:
• No change in funding;
• a $1,000 increase in funding per student; and
• a $2,000 increase in funding per student.
In addition, there are three voting blocs:
• Group A: Prefers more community college funding to less.
• Group B: The $1,000 increase in funding is the most preferred option, followed by no
change in funding, with the $2,000 increase as the least preferred option.
• Group C: No change in funding is the most preferred option, followed by the $1,000
increase, with the $2,000 increase as the least preferred option.
(i) Which groups’ preferences are single-peaked? Explain or demonstrate why. You may use
a graph.
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(j) Assuming equal proportions of voters in each group, will majority voting generate consistent outcomes? Explain why or why not.
(k) If 2 of the 3 proposals are selected to compete in an election, would the median voter most
preferred alternative win? Explain
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(l) Suppose now that group C has the following preferences: their favorite option is no change
in funding, followed by $2000 increase in funding, with the $1000 increase as the least preferred option. Which option is now going to win in majority voting and why?
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