2. Mike lives for seven periods, t = 1, 2, 3, 4, 5, 6, 7. In...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
2. Mike lives for seven periods, t = 1, 2, 3, 4, 5, 6, 7. In period 7, he enjoys the fruits of the human capital, e, that he has amassed up to that point. In period 7 his instantaneous utility for human capital is u7(e) = e. Mike does not derive utility from his human capital in periods 1 through 6, nor does his stock of human capital depreciate in any way. At the beginning of period 1, he starts off with a stock of 250 units of human capital. During periods 1 through 6 Mike has three options: Option A Write no documents Option B Write documents in Microsoft Word Option C Write documents in ATEXusing Overleaf Mike starts period 1 in the default option A, which does not builds human capi- tal. Option B builds 5 units of human capital per period (up to period 6, i.e., no 1 additional human capital is built in period 7), and Mike can switch costlessly from option A to option B at the beginning of any period. Option C builds 40 units of human capital per period (up to period 6), but it takes a one-time immediate effort cost of 90 units to switch from option A to option C (because it is painful and tricky to set up LATEX). Suppose that there is no way to switch between options B and C, and that once Mike makes any switch he cannot switch again. Mike is a hyperbolic discounter with = /and 6 = 1. He cannot commit his future behavior. He decides at the beginning of each period, including period 1, whether to switch from option A to some other option, and if so, to which other option. If he switches at the beginning of period t, he will build human capital at the rate given by the new option during period t, e.g., if he switches to option C in period 3, he will build 40 units of human capital in periods 3, 4, 5, and 6. (a) [14pts] Suppose Mike only has access to options A and B. If he is naive, when does he switch to option B, if at all? What about if he is sophisticated? (b) [14pts] Suppose Mike only has access to options A and C. If he is naive, when does he switch to option C, if at all? What about if he is sophisticated? (e) [12pts] Suppose Mike has access to all three options. Show that if he is naive he waits until period 4 and then switches to option B at the beginning of that period. Explain intuitively why he waits so long to switch to a superior option when he could have costlessly switched all along. Show that if Mike were sophisticated he would switch to option C in period 1. 2. Mike lives for seven periods, t = 1, 2, 3, 4, 5, 6, 7. In period 7, he enjoys the fruits of the human capital, e, that he has amassed up to that point. In period 7 his instantaneous utility for human capital is u7(e) = e. Mike does not derive utility from his human capital in periods 1 through 6, nor does his stock of human capital depreciate in any way. At the beginning of period 1, he starts off with a stock of 250 units of human capital. During periods 1 through 6 Mike has three options: Option A Write no documents Option B Write documents in Microsoft Word Option C Write documents in ATEXusing Overleaf Mike starts period 1 in the default option A, which does not builds human capi- tal. Option B builds 5 units of human capital per period (up to period 6, i.e., no 1 additional human capital is built in period 7), and Mike can switch costlessly from option A to option B at the beginning of any period. Option C builds 40 units of human capital per period (up to period 6), but it takes a one-time immediate effort cost of 90 units to switch from option A to option C (because it is painful and tricky to set up LATEX). Suppose that there is no way to switch between options B and C, and that once Mike makes any switch he cannot switch again. Mike is a hyperbolic discounter with = /and 6 = 1. He cannot commit his future behavior. He decides at the beginning of each period, including period 1, whether to switch from option A to some other option, and if so, to which other option. If he switches at the beginning of period t, he will build human capital at the rate given by the new option during period t, e.g., if he switches to option C in period 3, he will build 40 units of human capital in periods 3, 4, 5, and 6. (a) [14pts] Suppose Mike only has access to options A and B. If he is naive, when does he switch to option B, if at all? What about if he is sophisticated? (b) [14pts] Suppose Mike only has access to options A and C. If he is naive, when does he switch to option C, if at all? What about if he is sophisticated? (e) [12pts] Suppose Mike has access to all three options. Show that if he is naive he waits until period 4 and then switches to option B at the beginning of that period. Explain intuitively why he waits so long to switch to a superior option when he could have costlessly switched all along. Show that if Mike were sophisticated he would switch to option C in period 1.
Expert Answer:
Answer rating: 100% (QA)
a If Mike only has access to options A and B and he is naive he will switch to option B when the discounted present value of the additional human capital gained by switching exceeds the utility cost o... View the full answer
Related Book For
Business Statistics In Practice
ISBN: 9780073401836
6th Edition
Authors: Bruce Bowerman, Richard O'Connell
Posted Date:
Students also viewed these economics questions
-
Discuss which organizational structure (i.e. functional, product-market divisional, matrix) you would recommend Guelph General Hospital implement, assuming the hospital moves forward with the...
-
A patient develops a blood clot in the femoral vein of the left lower limb. 14. Would you find a pulse in the left inguinal region- yes or no? Type answer as one of the two choices given using...
-
answer all questions as instructed below. attend all questions. 4 Computer Vision (a) Explain why such a tiny number of 2D Gabor wavelets as shown in this sequence are so efficient at representing...
-
Transform the following product by making the change of variable i = k + 1. k So when k and K +2 When k = 1, then i = n k II k +2 k = 1 = n+ 1 II i = 2 are expressed in terms of i, the results are k...
-
Suppose that within the open-economy version of the Keynesian model in Section 7, we now include taxes. Disposable income (YD = Y - T) therefore replaces GDP (Y) in the consumption function (24)....
-
What are the general guidelines used to determine where your business must pay sales taxes for sales made online?
-
Is flowcharting useful in analyzing the resources required to implement a system?
-
In Problem 12.9 on page 424, an agent for a real estate company wanted to predict the monthly rent for one bedroom apartments, based on the size of the apartments. Perform a residual analysis for...
-
Kilgore Natural Gas has a $ 1 , 0 0 0 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 1 2 percent. Use Appendix B and...
-
Chumpy Lighting Limited manufactures a wide variety of light bulbs which it sells to lighting shops and builders merchants through wholesale distributors. It also sells direct to the big UK...
-
Ross Company had the following inventory at the end of the year: Valves: Model Q Model R Model S Gaskets: Model Alpha Model Beta Model Gamma Quantity 130 190 150 50 40 30 Unit Price Cost $7 11 8 85...
-
Blossom Corporation adopted the dollar - value LIFO method of inventory valuation on December 3 1 , 2 0 2 4 . Its inventory at that date was $ 1 1 0 8 0 0 0 and the relevant price index was 1 0 0 ....
-
Problem 11. Certain business establishments furnished us their business data in April of the taxable year 2013 as follows: Merchants Dealer in Securities Lending Investor Gross sales P 291,500...
-
What are the two basic timing strategies? What is the intent of each? If nontax factors are irrelevant, what is the best course of action in timing strategy when you expect tax rate to increase in...
-
Greg Thomas purchased one - half of Ian Hamilton s interest in the Freidman and Hamilton partnership for $ 4 9 , 5 0 0 . Prior to the investment, land was revalued to a market value of $ 1 8 9 , 2 0...
-
Leonardo, who is married but files separately, earns $ 8 5 , 0 0 0 of taxable income. He also has $ 1 7 , 0 0 0 in city of Tulsa bonds. His wife, Theresa, earns $ 5 2 , 0 0 0 of taxable income. If...
-
Use Java To write this code: Enter a numeric score - grade of a test, your program should print a corresponding lettergrade that matches the score. For example, if you enter 89.3, the program should...
-
After graduating from college and working a few years at a small technology firm. Preet scored a high-level job in the logistics department at Amex Corporation. Amex sells high-quality electronic...
-
Suppose that we will take a random sample of size n from population having mean fx and standard deviation a. For each of the following situations, find the mean, variance, and standard deviation of...
-
Classify each of the following random variables as discrete or continuous: a. x = the number of girls born to a couple who will have three children. b. x = the number of defects found on an...
-
Consider the display panel situation in Exercise 11.3, and let A, B, and C (represent the mean times to stabilize the emergency condition when using display panels A, B, and C, respectively. Figure...
-
Indicate which type of data analytics, 1 through 4, is described in each of the following statements, a through \(h\). Data Analytics 1. Descriptive analytics 2. Diagnostic analytics 3. Predictive...
-
Match each item in the value chain, 1 through 7 , with an impact of an artificial intelligence initiative, choosing from items a through g. Value Chain 1. Research and development 2. Design 3. Supply...
-
Indicate whether the following items, a through j, are (1) typical characteristics of open-book management or (2) not typical characteristics of open-book management. a. Considered a large size...
Study smarter with the SolutionInn App