A Course In Behavioral Economics 3rd Edition Erik Angner - Solutions

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Value functions Suppose that you are loss averse, and that your value function is v (x) 5 x for gains and v (x) 5 3x for losses. (a) Represent the value function graphically, in the manner of Figure 3.12. (b) Represent your indifference curves graphically, in the manner of Figure 3.14(b), assuming
Salary comparisons Insofar as you use other people’s salaries as a reference point, what does value theory seem to say about maximizing value in your life?
Exam scores Assume that Alysha and Billy have the follow ing value function over exam scores: v (x) 5 x/2 for gains and v (x) 5 2x for losses. Both of them use the expected exam score as their reference point.(a) Alysha expects to score 75 out of 100 on her upcoming midterm exam. She does better
Latte discounts Many coffee shops give customers a small discount if they bring their own reusable mug. The coffee shops could equiva lently lower all prices and add a small penalty to the bill of customers who do not bring their own mugs. Yet, few coffee shops go for the latter solution. Why?
The tax cut Suppose Alex and Bob are loss averse, so that their value function is v (x) 5 x/2 for gains and v (x) 5 2x for losses. Because of an upcoming election, politician R promises a tax cut which would give each citizen an additional two dollars in his or her pocket every day. Politician D
Thievery A thief steals $100 from a victim. Let us suppose that the thief and victim have the same value function over money: v (x) 5 x/2 for gains and v (x) 5 2x for losses.(a) How much, in value terms, does the thief gain as a result of his robbery?(b) How much, in value terms, does the victim
The stock market Alicia, Benice, and Charlie own stock in the same company. When they bought the stock, it was worth $10. It later rose to$17, but then dropped to $12 before they sold it. The three are loss averse and have the same value function: v (x) 5 x/2 for gains and v (x) 5 2x for losses.(a)
The bond market An ill-fated investment of yours in the junk bond market just decreased from $1 to $0. Your value function is v (x) 5 x/2 for gains and v (x) 5 2x for losses.(a) Suppose, first, that your reference point is $0. In value terms, how large is the loss you just experienced?(b) Suppose,
Having and losing In fact, it is possible to be worse off in value terms even if you are better off in dollar terms. Working with the same value func tion, compute the net effect in value terms of gaining $6 and subsequently losing$4. Assume that you incorporate the $6 into your endowment
Toy Yoda, cont. Suppose that the same value function cap tures the waitress’s value function over cars in Example 3.34. What is the total change in value she experiences after she gains a car and then loses it? Assume that she incorporates it into her endowment and therefore adjusts her refer
Third-party candidates, cont. Suppose that politician A in E 3.29 above wanted to win elections instead by harnessing the power of the compromise effect. What sort of platform must the third-party politician endorse to have this effect?
Speed vs. safety, cont. Suppose that you want to harness the power of the compromise effect to sell more Bugattis (see Exercise 3.26). What sort of vehicle would you need to introduce to do so?
Wingmen and wingwomen To improve your chances on the dating scene, you have decided to recruit a wingman or wingwoman.(a) How, in general terms, should you choose your wingman or wingwoman?(b) Imagine that your attractiveness and intelligence are both rated 9 on a 10-point scale. You have two
Third-party candidate Politician A has decided to run for polit ical office on a platform promising lower taxes and cuts in public services. His opponent B promises higher taxes and more funding for public services. All things equal, the voters prefer low taxes and generous public services. Now,
Decoy effect For this question, refer to Figure 3.8. (a) If you are in charge of marketing the target product, in what area would you want to put the decoy?(b) Assuming the decoy works as anticipated, does the figure show the indiffer ence curves the way they look before or after the introduction
Revenge When wronged, many people feel a strong urge to take revenge. Assuming revenge is costly, would not a revenge simply be a matter of honoring the sunk cost of whatever injury they have already sustained? Or are there conditions under which taking revenge can be rational?
Course selection Students at an expensive liberal arts col lege may take courses at a nearby public university at no additional charge.One of their professors tells them that it would make no sense to do so, since they would be losing the money they paid for tuition at the more pricey col lege.
The fridge When cleaning out your fridge, you find some food obviously rotting in the back. You have no trouble throwing away the cheap mass-produced cheese somebody gave you, but you just cannot bring yourself to toss the amazing cheese you brought back from Paris. So you put it back in the back
Sunk costs Draw decision trees for people who (a) hold on to failed investments and (b) stay in bad relationships, in such a way that it becomes clear that the people in question are committing the sunk-cost fallacy.
The opportunity cost of an economics education What is (or would be) the opportunity cost, for you, of taking a course in behavioral eco nomics? Upon reflection, is it (or would it be) worth it?
War or terror Imagine that a new terrorist group is threat ening the lives of innocent civilians, and that all things equal, it would be a good thing if the group vanished. Does this necessarily make it a good idea to launch military action to destroy it?
Advertising campaigns Your latest efforts to boost revenue led to an advertising campaign that turned out to be hugely successful: an investment of $1000 led to a $5000 boost in revenue. Does this mean that the investment in the advertising campaign was rational?
Whatever it takes Politicians sometimes promise to do “what ever it takes” to eliminate poverty, defeat terrorism, etc. Use the concept of opportunity cost to explain why that is not be the best idea.
Room service Suppose that you are staying at an expensive hotel that offers in-room dining for $60. Ordinarily you would not pay that kind of money for a meal, but you say to ourself: “I already paid $220 for this room, so what’s $60 more?” Explain in what way your decision to pay $60 for
Opportunity costs, cont. Using the language of opportunity cost, explain why highly paid people are less likely than poor people to mow their own lawns, clean their own houses, maintain their own cars, and so on.
Opportunity costs What is the opportunity cost of (a) staying in an unfulfilling relationship, (b) pursuing a course of study that does not excite you, and (c) sleeping until noon?The concept of opportunity cost has considerable explanatory power.
Opportunity costs This exercise refers to Figure 3.3. Suppose that a fifth act (call it a5 ) becomes available. Assume that a5 has a utility of 9. (a) What would the tree look like now? (b) What would happen to the opportunity costs of the different alternatives?
Investment problem (a) Draw a decision tree illustrating this decision problem. (b) What is the opportunity cost of buying real estate? (c) What is the opportunity cost of buying bonds?
Irrationality Explain (in words) why each of the charac ters below is irrational according to the theory you have learned in this chapter.(a) In the drama Sophie’s Choice, the title character finds herself in a Nazi concentration camp and must choose which one of her children is to be put to
As part of your answer to the following questions, make sure to specify what the universe is.(a) Give an example of a relation that is complete but not transitive.(b) Give an example of a relation that is transitive but not complete.
More properties of the preference relation Here are two relations: “is married to” and “is not married to.” Supposing the universe is the set of all living human beings, which of these is…(a) reflexive(b) irreflexive(c) symmetric(d) asymmetric(e) anti-symmetric
For each of the relations and properties in Table 2.1, use a check mark to identify whether or not the relation has the property.Table 2.1 Properties of weak preference, indifference, and strong preference Property Definition f , s(a) Transitivity xRy & yRz SxRz (for all x, y, z)(b) Completeness
Misguided criticism Many criticisms of standard economics are quite mistaken. Explain where the following critics go wrong. (a) An otherwise illuminating article about behavioral economics in Harvard Magazine asserts that “the standard model of the human actor – Economic Man – that classical
Prove Proposition 2.34(ii).
Budget sets Suppose that your budget is $12. Use a graph to answer the following questions:(a) What is the budget set when apples cost $3 and bananas cost $4?(b) What is the budget set when apples cost $6 and bananas cost $2?(c) What is the budget set when apples always cost $2, the first banana
The menu, cont. If you can also choose to eat an appetizer only, or an entrée only, or nothing at all, what would the new menu be? There is no assumption that a menu is small, or even finite, though we fre quently assume that it is. In economics, the menu is often referred to as the budget set.
Indifference curves Represent the following sets of indiffer ence curves graphically.(a) Suppose that an apple for you is always as good as two bananas.Heavenly Bliss Coke Pepsi Eternal Suffering(b) Suppose that one apple is always as good, as far as you are concerned, as a banana.(c) Suppose that
Cycling preferences, cont. By contrast, it is possible for the weak preference relation to cycle. This is to say that there may well be an x, y, and z such that xfy & yfz & zfx. If this is so, what do we know about the agent’s preferences over x, y, and z? Prove it.In cases of indifference, the
Cycling preferences Using the definitions and propositions discussed so far, show that it is impossible for a rational strict preference rela tion to cycle. To do so, suppose (for the sake of the argument) that x s y &ysz & zsx and show that this leads to a contradiction.
Tea cups Imagine that there are 1000 cups of tea lined up in front of you. The cups are identical except for one difference: the cup to the far left (c1 ) contains one grain of sugar, the second from the left (c2 ) con tains two grains of sugar, the third from the left (c3 ) contains three grains
Vacations Suppose that you are offered two vacation pack ages, one to California and one to Florida, and that you are perfectly indif ferent between the two. Let us call the Florida package f and the California packagec. So f ,c. Now, somebody improves the Florida package by adding an apple to it.
Negative transitivity Prove the following two principles. You might already have been tempted to invoke these two in your proofs. But remember that you may not do so before you have established them.(a) If ¬ xfy and ¬ yfz, then ¬ xfz(b) If ¬ x sy and ¬ ysz, then ¬ xsz The last two exercises
Prove that if x , y and y , z, then ¬ x s z.
Establish the following important and intuitive principles.(For the record, some of them are logically equivalent.)(a) If x s y then x f y(b) If x s y then ¬ y f x(c) If x f y then ¬ y s x(d) If x s y then ¬ x , y(e) If x , y then ¬ x s y(f) If ¬ x f y then y f x(g) If ¬ x f y then y s x(h)
Prove the following principle: x s y & yfz S xsz (for all x, y, z). Notice that this proof has two parts. First, prove that xfz; second, prove that ¬ zfx.
Prove Proposition 2.16(iii). Prove it by contradiction, by first assuming that there is an x such that x s x.
Iterated transitivity In this exercise you will prove the follow ing principle in two different ways: x , y & y , z & z , p S x , p.(a) First prove it by applying the transitivity of indifference (Proposition 2.12(iii)).(b) Then prove it without assuming the transitivity of indifference. (You may
Prove the following principle: xfy & y , z S xfz.In your various proofs, it is always acceptable to rely on propositions you have already established. The following exercise shows how useful this can be.
Preferences and the universe Use your understanding of transitivity and completeness to answer the following questions.(a) If the universe is {apple, banana, starvation}, what does the transitivity of the preference relation entail?(b) If the universe is {apple, banana}, what does the completeness
Assuming the universe is the set of all natural numbers, mean ing that U 5 {1, 2, 3, 4, …}, are the following relations transitive? Are they complete?(a) “is at least as great as” ($)(b) “is equal to” (5)(c) “is strictly greater than” (.)(d) “is divisible by” (|)
The enemy of your enemy Suppose it is true, as people say, that the enemy of your enemy is your friend. What does this mean for the transitivity of “is the enemy of”? (Assume there are no true frenemies: people who are simultaneously friends and enemies.)
Assuming the universe is the set of all people – past, present, and future – are the following relations transitive? Are they complete? (a) “is the mother of” (b) “is an ancestor of” (c) “is the sister of” (d) “detests” (e) “weighs more than” (f) “has the same first name
Preferences Suppose d denotes “enjoying a cool drink on a hot day” and r denotes “getting roasted over an open fire.”(a) How would you state your preference over these two options?(b) How would you express a masochist’s preference over these two options?
The universe Suppose we are talking about all countries that are members of the United Nations. How would that be written?
Relations Assume that f denotes France and n denotes Norway, and that B means “is bigger than.” (a) How would you write that France is bigger than Norway? (b) How would you write that Norway is bigger than France? (c) How would you write that Norway is bigger than Norway?
Numeracy In a recent study on financial decision-making, peo ple’s answers to three quick mathematics questions were strong predictors of their wealth: households where both spouses answered all three questions correctly were more than eight times as wealthy as households where neither spouse
Descriptive vs. normative Which of the following claims are descriptive and which are normative? (Answers to this and other exercises can be found in the Appendix.) (a) On average, people save less than 10 percent of their income for retirement. (b) People do not save as much for retirement as they
Be able to prove important principles of probability, including Bayes’s theorem, on the basis of fundamental rules of probability.
Know the theory of probability
Apply the (normative) theory of rationality in the real world – but also appreciate how demanding the theory is.
Know some building blocks of the (descriptive) behavioral theories, including the biases-and-heuristics program and prospect theory.
Be able to identify common behavior patterns that violate the theory of rational choice under certainty.
Appreciate the variety of methods used by behavioral economists.
Understand how behavioral economics differs from standard (neoclassical) economics – and why.
Know the difference between descriptive and normative theories of decision.
Be able to prove theorems on the basis of axioms and definitions.
Understand the concept of rationality built into this theory.
Know the theory of choice under certainty.
Understand how analytical game theory can be used for descriptive and normative purposes – and what its limitations are.
Be able to find Nash equilibria (and some refinements) in a variety of games.
Know the difference between parametric and strategic decision-making.
Identify three features of your car, computer, or any other device that constitute nudges
Google Google wants to encourage its employees to eat healthily. Fast Company reports: “In pursuit of that healthiness, happiness, and innovation, the software giant has turned to ‘nudges’: simple, subtle cues that prompt people to make better decisions.” Borrowing ideas from behavioral
The Bloomberg ban As part of a 2013 public-health initiative spearheaded by then-mayor Michael Bloomberg, New York City banned the sale of sodas larger than 16 ounces (or about 0.5 liters) in restaurants, movie theaters, and the like. (The law was later struck down by the state’s highest court.)
Apples or fries? US hamburger chains have started serving apple slices instead of French fries with their “meal” options. Fries are still available, but the customer has to ask to have fries substituted for apples. Preliminary reports suggest that as a result, customers end up eating more
Traffic signals What kind of policy is represented by (a) a stop sign; (b) a lane-ending sign; (c) a red light; (d) a yellow light; (e) a parking meter labeled “¢25 per hour”; and (f) a no-parking sign? Behavioral welfare economists have proposed a number of specific interventions that they
Kong Ming The Game Theorist’s Guide to Parenting, by Paul Raeburn and Kevin Zollman, may be the most useful parenting book of all time. In passing, it tells the story of famed Chinese military strategist Kong Ming, also known as Zhuge Liang. In 149 BC, Kong Ming and his forces were under siege
The watch collection In the interest of acquiring yet another hobby you cannot afford, you have decided to start collecting fine Swiss watches. You find that there are some watches that you like and some that you do not. Now, you only want to buy watches that will appreciate over time, so you
That fridge There’s a fridge in the office that needs to be cleaned out once a week. Nobody does, though, and you hate it. You do not hate it enough to clean it every week yourself. But you would gladly clean it out once in a while, if only your colleagues took turns with you. Anyway, you decide
In the volunteer’s dilemma, at least one person has to volunteer to provide some good in order for everyone to enjoy it. For example, in order for you and your friends to have snacks while watching a movie, somebody has to bring snacks. We will assume for simplicity that snacks are shared, and
Egoists, utilitarians, and enviers Consider the game in Table 11.3, expressed in dollar terms.(a) Suppose, first, that this game is played by two egoists, for whom u(x, y) = x. Compute all Nash equilibria. (b) Suppose, next, that this game is played by two utilitarians, for whom u(x, y) = x + y.
Gandhi A leader of India’s independence movement and advocate of non-violent social change, Mahatma Gandhi is supposed to have said: “The true measure of any society can be found in how it treats its most vulnerable members.” If we interpret this line as an expression of social preferences,
Explain how positive offers in the ultimatum game are consistent with Nash-equilibrium predictions. (There are many misconceptions about this, so it is good to make sure you understand.)
Rock-paper-scissors, cont. The game rock-paper-scissors has a unique Nash equilibrium, in which both players randomize with probability 1/3, 1/3, and 1/3, and in which both players have an equal probability of winning (see Exercise 10.13 on page 228). So it might surprise you to hear that there is
Investment decisions Suppose that you have the opportunity to invest in a promising business venture, but that you have no way to recover your expenses in case your business partner turns out to be unreliable. In order to capture the gains from trade, you simply must trust the partner to do the
The Stora Rör Swimming Association The Stora Rör Swimming Association is a non-profit organization teaching open-water swimming skills and water safety to kids in the Baltic. The Association is funded in large part by means of an annual auction, where members donate home-baked goods, and the
Social preferences and the prisoners’ dilemma Find the Nash equilibria in pure strategies in Table 11.2, when played by: (a) Two egoists, for whom u (x, y) = √x. (b) Two utilitarians, for whom u (x, y) = √x + √y. (c) Two enviers, for whom u (x, y) = √x − √y. (d) Two Rawlsians, for
Altruism and the ultimatum game Imagine the ultimatum game from Figure 11.1 played by two utilitarians with u (x, y) = √x + √y. Find the unique subgame-perfect equilibrium in this game. The literature on social preferences underscores a point from the previous chapter, namely that the game
Charitable donations One example of a dictator game played in the real world involves a person’s decision about whether to give money to charity. Whenever you walk by a beggar, for example, you are in effect playing a dictator game in which you must allocate some share of the money in your pocket
Dividing the cake When two children have to divide a cake, they sometimes follow a procedure in which the first child splits the cake in two and the second chooses first. Given that Kid II will choose the largest piece, Kid I will want to divide the cake as evenly as possible, thereby guaranteeing
Paradoxes of rationality Experimental economists have invited students with different majors to play prisoners’-dilemma games against each other. In an experiment pitching economics majors against economics majors, and non-majors against non-majors, who would you expect to do better?
Find all subgame-perfect equilibria in the game in Figure 10.6. The game has two players and three stages. Player I moves at the first and third stages, and Player II moves at the second stage.
For each of the games in Table 10.14, identify the Nash equilibria in mixed strategies (if any). Assume Player I plays U with probability p and Player II plays L with probability q.
Which of the Nash equilibria in pure strategies are Pareto-optimal outcomes in the relevant game?
Which of the Nash equilibria in pure strategies are trembling-hand perfect (if any)?
For each of the games in Table 10.14, identify the Nash equilibria in pure strategies (if any).
Lunch date Suppose you have to meet a friend at noon tomorrow somewhere in your town, but you forgot to specify the exact location. Where would you go? Ask your friends where they would go. Would you succeed in coordinating?
The centipede game The centipede game has four stages (see Figure 10.5). At each stage, a player can Take, thereby ending the game, or Pass, thereby increasing the total payoff and allowing the other player to move. (a) Use backward induction to find the unique subgame-perfect equilibrium. (b)
Subgame perfection Use backward induction to find the unique subgame-perfect equilibrium in the game in Figure 10.4. Recall that a strategy is a complete plan of action, which means that a strategy for Player II will have the form “L at the first node and L at the second (LL),” “R at the
MAD Mutually assured destruction (MAD) is a military doctrine according to which two superpowers (such as the US and the USSR) can maintain peace by threatening to annihilate the human race in the event of an enemy attack. Suppose that the US moves first in a game like that in Figure 10.3. The US

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A Course In Behavioral Economics 3rd Edition Erik Angner - Solutions

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