Suppose you observe a person's answer to two decision problems. Problem 1: You are offered $40 today. What is the minimum amount x you demand one month from today in order to be willing to give up the $40 now? Answer: x = 52. Problem 2: Your are offered $40 today. What is the minimum amount x you demand one year from today in order to be willing to give up the $40 now? Answer: $60. 1. Demonstrate that the rational model of time preferences is violated for this choice pattern. 2. Derive this individual's B and d for the hyperbolic time discounting model. 3. Suppose the utility you get from eating ice cream now is 10 utils. But you pay a cost of -4 utils per hour for the next 4 hours, because it gives you indigestion and makes you feel lethargic. If your hourly B and d for this problem are B = .6 and d = .9, ... 1. What is the total discounted utility of eating ice cream now? 2. What is your total discounted utility now of planning to eat ice cream after lunch tomorrow? 3. Do you eat ice cream now? 4. Do you plan to eat ice cream tomorrow? stv 11 MacBook Air DII DD 80 F8 F9 F10 F6 F7 F2 F3 F4 @ # & 2 3 4 5 6 7 8. W R T Y S D F H J K Z C V B M command command .. .- * CO

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Suppose you observe a person's answer to two decision problems.
Problem 1: You are offered $40 today. What is the minimum amount x you demand one month from
today in order to be willing to give up the $40 now? Answer: x = 52.
Problem 2: Your are offered $40 today. What is the minimum amount x you demand one year from
today in order to be willing to give up the $40 now? Answer: $60.
1. Demonstrate that the rational model of time preferences is violated for this choice pattern.
2. Derive this individual's B and d for the hyperbolic time discounting model.
3. Suppose the utility you get from eating ice cream now is 10 utils. But you pay a cost of -4 utils per
hour for the next 4 hours, because it gives you indigestion and makes you feel lethargic. If your
hourly B and d for this problem are B = .6 and d = .9, ...
1. What is the total discounted utility of eating ice cream now?
2. What is your total discounted utility now of planning to eat ice cream after lunch tomorrow?
3. Do you eat ice cream now?
4. Do you plan to eat ice cream tomorrow?
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Transcribed Image Text:Suppose you observe a person's answer to two decision problems. Problem 1: You are offered $40 today. What is the minimum amount x you demand one month from today in order to be willing to give up the $40 now? Answer: x = 52. Problem 2: Your are offered $40 today. What is the minimum amount x you demand one year from today in order to be willing to give up the $40 now? Answer: $60. 1. Demonstrate that the rational model of time preferences is violated for this choice pattern. 2. Derive this individual's B and d for the hyperbolic time discounting model. 3. Suppose the utility you get from eating ice cream now is 10 utils. But you pay a cost of -4 utils per hour for the next 4 hours, because it gives you indigestion and makes you feel lethargic. If your hourly B and d for this problem are B = .6 and d = .9, ... 1. What is the total discounted utility of eating ice cream now? 2. What is your total discounted utility now of planning to eat ice cream after lunch tomorrow? 3. Do you eat ice cream now? 4. Do you plan to eat ice cream tomorrow? stv 11 MacBook Air DII DD 80 F8 F9 F10 F6 F7 F2 F3 F4 @ # & 2 3 4 5 6 7 8. W R T Y S D F H J K Z C V B M command command .. .- * CO
Expert Solution
Step 1

Rational decision making is a multi-step process for making choices between alternatives. The process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. The word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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