Course 
Final Exam 

mean 
89.87 
93.16 
standard deviation 
8.43 
11.92 
25th percentile 
85.64 
90 
50th percentile 
92.18 
100 
75th percentile 
95.68 
100 
minimum 
66.33 
53.33 
maximum 
103.45 
100 
range 
37.12 
46.67 
As noted in the syllabus, the final course grade is determined according to the following equation (see http://economics.garven.com/syllabus.htm):
Final Grade = .30(Problem Sets) + .30(Midterm Exam) + .40(Final Exam).
Besides listing mean and standard deviation, each column in the table above also indicates quartiles (i.e., the 25^{th} percentile, the 50^{th} percentile (i.e., the “median”), and the 75^{th} percentile) in addition to the minimum and maximum values for each variable. The average grade on the final exam was 93.16; the average grade in the course overall currently stands at 89.87. The combined effects of a high average grade on the final exam along with its 40% weighting in the overall course grade equation caused the average course grade to increase by more than 4 points, going from 85.63 right after the midterm exam (see http://bit.ly/6OVl9t) to 89.87 at the end of the course.
Next, let me translate these data into letter grades for you. The final grade curve for the course is as follows:
Final Letter Grade 
Minimum Numeric Course Grade 
A 
96 
A 
91 
B+ 
88 
B 
84 
B 
81 
C+ 
75 
C 
66 
The application of this curve results in a class GPA of 3.46, including 10 A’s, 13 A‘s, 4 B+’s, 5 B’s, 2 B‘s, 3 C+’s, and 2 C’s (note that A = 4 grade points, A = 3.75 grade points, B+ = 3.5 grade points, B = 3 grade points, B = 2.75 grade points, and C+ = 2.5 grade points). I have posted all of these grade results to Blackboard, so if you login there, you’ll be able to see the final letter grade that you earned in ECO 5315. Anyway, merry Christmas and happy holidays to everyone!
Just to be clear, I assigned a total of 7 rquired problem sets and 1 required survey that were averaged to produce a problem set grade (these are listed as items 1–8 on the http://economics.garven.com/problem_sets webpage). I also assigned 4 extra credit opportunities worth a maximum of 20 points each which get added to your lowest required problem set score. The last 2 extra credit assignments included the sample final exam and the chapters 14–15 problem set; the details on these assignments are provided at http://bit.ly/6oCtOt. The first extra credit assignment is described at http://bit.ly/4GTVbr, and the second extra credit assignment is described at http://bit.ly/5gkiBc.
Anyway, I gave 100’s to all students turning surveys in, and obviously the grades on problem set 1–7 varied depending upon your performance. Consider the hypothetical example given in the table below. This “student” earned a 100 on the survey and got 80’s on problem sets 1–7. She also turned in all four extra credit assignments so she earned the maximum possible extra credits.
Student Survey 
100 
Problem set 1 
80 
Problem set 2 
80 
Problem set 3 
80 
Problem set 4 
80 
Problem set 5 
80 
Problem set 6 
80 
Problem set 7 
80 
Extra Credit 1 
20 
Extra Credit 2 
20 
Extra Credit 3 
20 
Sample final exam (exam grade x .2) 
20 
Her problem set average is computing by totaling the points earned on the student survey and the 7 problem sets, and then also adding the extra credit points. Since there were 8 required assignments, this sum is divided by 8 in order to determine the problem set grade. In this hypothetical case, the average problem set grade is 92.5.
]]>Let me know if any of you have any questions or concerns about the exam. See you tonight!
]]>“This test consists of 3 sections. Each section has 15 questions and problems, and each is worth 31/3 points. The first section is based upon chapters 11 and 1315. The second and third sections include questions and problems taken from chapters 12, 47, and 10 (section 2) and from chapters 11 and 1315 (section 3). At your option, you may either answer sections 1 and 2 (in which case your exam is based upon all chapters covered in ECO 5315) or sections 1 and 3 (in which case your exam is based upon only chapters 11 and 1315). If time permits, you may also answer questions in the section that you otherwise plan to omit (i.e., section 2 or section 3). However, the most credit that you can earn on this exam is 100 points, which will occur if you answer 30 questions correctly.”
I will start the exam promptly at 6 p.m. on Monday evening, and the exam will end by no later than 10 p.m. While it’s totally up to you to decide upon your preferred exam strategy, I nevertheless have some advice to offer. If you have studied for a comprehensive exam based upon chapters 1–2, 4–7, 10–11, and 13–15 in the textbook, then I recommend that you focus your attention upon sections 1 and 2 in the exam booklet. However, if you have studied for a final exam based only upon chapters 11 and 13–15, then I recommend that you focus your attention upon sections 1 and 3 in the exam booklet. Once you have completed 2 of the 3 sections, you are welcome to either turn your exam in or try answering questions and problems listed in the “omitted” section. Even if someone manages to solve all 45 questions correctly, the highest credit available for the exam is 100 points (although I would surely be impressed if this were to happen :)).
]]>Moral hazard and adverse selection are related, in the sense that both phenomena exist because it is costly to acquire information. Thus, information is asymmetric – the agent knows things that are important to her relationship with the principal that the principal is either not aware of or harbors suspicions about. Moral hazard is a problem of “hidden” action; action is hidden in the sense that the principal is not able to perfectly monitor the agent, so it’s in the interest of principal and agent alike to write incentive compatible contracts. Incentive compatible contracts motivate the agent to take actions (e.g., work hard and not shirk in labor markets, prevent or mitigate losses in insurance markets, etc.) that are consistent with maximizing the welfare of the principal.
What differentiates adverse selection from moral hazard is that the latter pertains to situations where a contractual relationship between principal and agent is already in place, whereas the former pertains to situations where a contractual relationship between principal and agent is in the process of being formed. Thus what you worry about as a principal is that you end up “getting stuck” with someone who or something that lacks the qualities that you are looking for. This is the “lemons” problem; e.g., you end up buying an inferior used car, hiring a lazy, incompetent and/or corrupt worker, etc. The strategies for mitigating adverse selection include screening on the part of the principal and signaling on the part of the agent. Examples of screening include requiring someone who is applying for health insurance, life insurance, or an annuity to have a medical exam, banks running credit scores on mortgage applicants prior to granting credit, etc. Also, the agent can credibly convey important information by signaling. Signaling typically takes the form of utilizing third party certification (this is what makes the signal credible). So EMBA students take time out of their busy schedules to earn MBA degrees from Baylor University (here Baylor provides credible certification concerning quality of human capital!), used car sellers pay for vehicle inspections, etc. However, even after people have invested resources in screening and signaling, there still may exist some residual information asymmetry, and it’s here that one utilizes contract design as a strategy for incenting people to reveal their “true” types. The example I used in class involved insurance, where we know that some people are good risks whereas others are bad risks; the problem is that we can’t figure out who’s who. Therefore, we limit contract choices so that it will be in the agent’s self interest to effectively reveal truth by the contract choice. In the insurance example, risky drivers are attracted to expensive contracts that offer high levels of coverage, whereas safe drivers selfselect into cheaper contracts that offer lower levels of coverage.
In summary, the definitive test for differntiating between moral hazard and adverse selection involves asking the following questions: 1) is there asymmetric information?, and 2) does a contractual relationship already exist? If the answer to 1 is yes and to 2 is no, then you need to be worried about adverse selection. If the answer to 1 is yes and the answer to 2 is yes, then you need to be worried about moral hazard.
]]>Sample Final  
count  34 
mean  88.53 
Standard Deviation  7.96 
minimum  70 
maximum  100 
range  30 
1st quartile  80.00 
median  93.33 
3rd quartile  93.33 
interquartile range  13.33 
mode  93.33 
In order to solve this problem, the first step involves setting up an equation for the expected number of voters (E(voters)). One hundred percent of the time, I.M. Hogg gets 500,000 votes; this represents his “core” base of voters. The probability that the ads backfire is 0.2n, in which case he fails to obtain any more votes beyond his base of 500,000 voters. However, the probability that the ads don’t backfire is 10.2n, in which case he gets an additional 100,000 + 40,000n votes (over and above his base of 500,000 voters). Anyway, once you have your equation for E(voters), you can maximize it by differentiating it with respect to n, setting the resulting equation equal to 0, and solving for n. Since n will not likely be an integer, simply round it to the nearest integer value.
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