Magnitude effect Suppose that the utility function is given by u(z, t) = 8^TZ ^a, 0 < a < 1; Z, T is an outcometime pair, and 8 is a discount factor. Consider two alternative prizes z, zo z < zo. Suppose that a, b are the compensations required by the decision maker to delay the respective. rewards, z, zo, by one time period. Show that EDU implies that z/(z+a) = z /(z'+b'), while the magnitude effect implies that z'/(z'+b) < z/(z+a). 1

Magnitude effect Suppose that the utility function is given by u(z, t) = 8^TZ ^a, 0 < a < 1; Z, T is an outcometime pair, and 8 is a discount factor. Consider two alternative prizes z, zo z < zo. Suppose that a, b are the compensations required by the decision maker to delay the respective. rewards, z, zo, by one time period. Show that EDU implies that z/(z+a) = z /(z'+b'), while the magnitude effect implies that z'/(z'+b) < z/(z+a). 1

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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