1. Consider the following simple three-period addiction model. The three periods are "youth", "middle age" and "old age". In each period, the person decides whether or not to consume an addictive good. The preferences in each of the three periods can be represented as follows: when unhooked when hooked utility from consuming | utility from abstention 0 -11 5 -4 A person is hooked in period t, if and only if she has consumed the addictive good in period t-1. This implies that a single period of restraint gets a person completely unhooked. Suppose that the person is unhooked initially. a) Determine the behavior of a time-consistent person for 8 = 1. b) Consider a naive hyperbolic discounter with 6 = 1.3=1. When does the person choose to consume the addictive good? c) Consider a sophisticated hyperbolic discounter with 8 = 1.8=. When does the person choose to consume the addictive good? d) Compare the behavior of naive and sophisticated persons? Why can the awareness of self-control problems hurt a person?

1. Consider the following simple three-period addiction model. The three periods are "youth", "middle age" and "old age". In each period, the person decides whether or not to consume an addictive good. The preferences in each of the three periods can be represented as follows: when unhooked when hooked utility from consuming | utility from abstention 0 -11 5 -4 A person is hooked in period t, if and only if she has consumed the addictive good in period t-1. This implies that a single period of restraint gets a person completely unhooked. Suppose that the person is unhooked initially. a) Determine the behavior of a time-consistent person for 8 = 1. b) Consider a naive hyperbolic discounter with 6 = 1.3=1. When does the person choose to consume the addictive good? c) Consider a sophisticated hyperbolic discounter with 8 = 1.8=. When does the person choose to consume the addictive good? d) Compare the behavior of naive and sophisticated persons? Why can the awareness of self-control problems hurt a person?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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