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 fromtoday 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 fromtoday 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 perhour for the next 4 hours, because it gives you indigestion and makes you feel lethargic. If yourhourly 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?stv11MacBook AirDIIDD80F8F9F10F6F7F2F3F4@#&2345678.WRTYSDFHJKZCV BMcommandcommand.. .-* CO

Answered: Suppose you observe a person's answer…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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
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80
F8
F9
F10
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F7
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F3
F4
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6
7
8.
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.. .-
* CO

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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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