Dave is considering quitting smoking. Assume that Dave lives three periods (indexed by 0,1,2), and that...

 

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Dave is considering quitting smoking. Assume that Dave lives three periods (indexed by 0,1,2), and that he might quit in period 0 or in period 1. If he does not quit, he will receive a consumption value of 3 in each of the first two periods, then consumption -30 in the third period. If Dave decides to quit he will receive a consumption value of 3 for any period he is smoking, consumption of -10 during the period that he quits, and consumption of 6 every period after quitting. (a) Assume Dave has linear utility of consumption, i.e., u(c) = c. Write down a table showing the streams of utility Dave will receive under each possible choice he could make. (b) Assume that Dave is an exponential discounter. Find the values of & that make Dave indifferent between each pair of choices Dave might make. (c) Given the choices that he has, for which values of & will Dave go with each of the options? (d) Can it be rational for Dave not to quit? Why or why not? (e) Now assume Dave is a beta-delta discounter, with the delta that made him indifferent between quitting at time 0 and quitting at time 1 (in part B), as well as a B = 0.4. Given his utility function, what will Dave choose to do in period 0? How about in period 1? Dave is considering quitting smoking. Assume that Dave lives three periods (indexed by 0,1,2), and that he might quit in period 0 or in period 1. If he does not quit, he will receive a consumption value of 3 in each of the first two periods, then consumption -30 in the third period. If Dave decides to quit he will receive a consumption value of 3 for any period he is smoking, consumption of -10 during the period that he quits, and consumption of 6 every period after quitting. (a) Assume Dave has linear utility of consumption, i.e., u(c) = c. Write down a table showing the streams of utility Dave will receive under each possible choice he could make. (b) Assume that Dave is an exponential discounter. Find the values of & that make Dave indifferent between each pair of choices Dave might make. (c) Given the choices that he has, for which values of & will Dave go with each of the options? (d) Can it be rational for Dave not to quit? Why or why not? (e) Now assume Dave is a beta-delta discounter, with the delta that made him indifferent between quitting at time 0 and quitting at time 1 (in part B), as well as a B = 0.4. Given his utility function, what will Dave choose to do in period 0? How about in period 1?

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Assume Dave has linear utility of consumption ie uc c Write down a table showing the streams of util... View the full answer