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
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
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question

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.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you


Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON

Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON


Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON

Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON

Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning

Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning

Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education