A Course In Behavioral Economics 2nd Edition Erik Angner - Solutions

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List four questions about the economy and economic policy that you would like to have answered in an introductory course on economics such as this.
Outline the contemporary economic policy stance in a country such as the UK and indicate how closely it approximates the prescriptions of the new policy consensus.
A feature of the modern economy is the growing share of the services sector in national production (e.g. financial services, recreation, information technology and communication). Discuss how the services sector has been affected by the three main elements of the new policy consensus in terms of
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?
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,
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)5 !x.(b) Two utilitarians, for whom u(x, y)5 !x 1!y.(c) Two enviers, for whom u(x, y)5 !x2 !y.(d) Two Rawlsians, for which u(x, y)5 min
Altruism and the ultimatum game Imagine the ultimatum game from Figure 11.1 played by two utilitarians with u(x, y)5 !x1 !y. Find the unique subgame-perfect equilibrium in this game.One important insight underscored by the literature on social preferences is that the game people are playing depends
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?
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)
Battle of the sexes, cont. Are the two pure-strategy equilib ria in the battle of the sexes (Table 10.8) trembling-hand perfect?
The stag hunt This game is due to Jean-Jacques Rousseau, the eighteenth-century French philosopher. Rousseau describes a scenario in which two individuals go hunting. The two can hunt hare or deer but not both. Anyone can catch a hare by himself, but the only way to bag a deer is for both hunters
Chicken The game of chicken was popularized in the 1955 f ilm Rebel Without a Cause, starring James Dean. The game is played by two peo ple who drive cars straight at each other at high speed; the person who swerves f irst is called “chicken” and becomes an object of contempt. In this game, the
Rock-paper-scissors (a) Draw the payoff matrix for the game rock-paper-scissors. Suppose that a win gives you 1 utile, a tie 0, and a loss −1. (b) What is the unique Nash equilibrium in this game?
Pure vs. mixed equilibria Find all Nash equilibria (in pure and mixed strategies) in the games depicted in Table 10.9.
Mixed-strategy equilibrium Find the mixed-strategy Nash equilibria in Tables 10.4(a) and (b).
Nash equilibrium in pure strategies Find all Nash equilibria in the games in Table 10.4, where Player I chooses between Up (U), (Middle (M)), and Down (D) and Player II chooses between Left (L), (Middle (M)), and Right (R). Table 10.4 Nash equilibrium exercises L R U 2,2 0,0 D 0,0 1,1 (a) (b) (c)
Match each of the vignettes below with one of the fol lowing phenomena: hyperbolic discounting, preference over profiles, and choosing not to choose. If in doubt, pick the best fit.(a) Allie goes to bed at night fully intending to get up at 5 am and study hard before noon. When the alarm goes off,
Weights and shackles Seneca offered the following advice:[Reflect] that prisoners at first find the weights and shackles on their legs hard to bear, but subsequently, once they have determined to endure them rather than chafe against them, necessity teaches them to bear them bravely, habit to bear
Addiction Suppose that life has three periods: youth, middle age, and old age. In every period you decide whether to do drugs(“hit”) or not (“refrain”). The utility of hitting depends on whether you are addicted (“hooked”) or not. If you are not hooked, the utility from hitting is 10
Retirement savings When young, many people fully intend to save for retirement. However, when they start making money after college, they are often tempted to spend it immediately. Assume that Ximena and Yves have the choice between the following two options:(a) saving for retirement at time 1 (u1
Happiest professions Table 9.3 shows the result of a recent survey about the happiness of people in various professions: the middle col umn lists the five happiest professions, and the right-hand column the five unhappiest. You might think that you would be happiest if you were a lawyer or a doctor
Buffet lines Perhaps you too have the following experience when picking up dinner from a buffet, where you can serve yourself exactly what kind of food you want. At the end of the meal, people find there is food on their plate they have no interest in eating. This is puzzling: if people were able
Sidgwick What kind of misprediction is described in the following passage, by the nineteenth-century moral philosopher Henry Sidgwick?
College Many adults will tell you that their college years were the best years of their lives. This is puzzling since actual college students are not, on the average, fantastically happy. Use the concept of the peak–end rule to explain why people remember their college years so fondly.
The peak–end rule, cont. This exercise refers to Figure 9.6.Would a person who follows the peak–end rule choose the episode repre sented by the solid line or the episode represented by the dashed line?
The peak–end rule Suppose you add a pleasant tail to an already pleasant episode. If people assess the episode as a whole in accord ance with the peak–end rule, will this make people think of the episode as a whole as more or less pleasant?
Cleaning the house It is Sunday morning (t 5 0), and you are determined to accomplish two things today: cleaning the apartment and going to the movies. You can either clean during the morning (at t 5 0), and go to the movies during the afternoon (at t 5 1) or go to the movies during the morning (at
Johnny Depp 2 This exercise refers to Example 9.10. Suppose instead that you can only watch one of the four movies. Will you watch a the mediocre, b the good, c the great, or d the fantastic movie? (a) Show that an exponential discounter will watch d the fantastic movie. (b) Show that a naive
Wicksteed’s blanket The theologian and economist Philip Wicksteed offers the following observation: “[We] lie awake (or what we call awake next morning) half the night consciously suffering from cold, when even without getting out of bed we could reach a blanket or a rug which would secure
Suppose that you discount the future hyperbolically. Assume that both b and d are strictly greater than zero but strictly smaller than one. At t 5 0, you are given the choice between the following three options: a (2 utiles at t 5 0), b (5 utiles at t 5 1), and c (10 utiles at t 5 2). As a matter
Suppose that you discount the future hyperbolically. Assume that both b and d are strictly greater than zero but strictly smaller than one. At t 5 0, you are given the choice between the following three options: a (1 utile at t 5 0), b (2 utiles at t 5 1), and c (3 utiles at t 5 2). As a matter of
Suppose that you discount the future hyperbolically, that is, in accordance with the beta–delta function, and that from the point of view of Thursday you are indifferent between options a (1 utile on Thursday) and b(3 utiles on Friday).(a) If b 5 1/2, what is d?(b) If d 5 4/9, what is b?
Cancer screening Most colon cancers develop from polyps. Because early screening can detect polyps before they become cancerous and colon cancer in its early stages, many doctors advise patients over a certain age to have a colonoscopy. Unfortunately, colonoscopies are experienced as embarrassing
Impulsivity and impatience Suppose you are offered the choice between option a (8 utiles on Thursday) and b (12 utiles on Friday). (a) Assume that b 5 1 and that d 5 5/6. From the point of view of Thursday, which one would you choose? From the point of view of Wednesday, which one would you choose?
The beta–delta function Suppose that you are facing a utility stream of 1 utile at t 5 0, 3 utiles at t 5 1, and 9 utiles at t 5 2. For each of the following parameter values, apply the beta–delta function to determine the discounted utility of the stream. (a) b 5 1/3 and d 5 1. (b) b 5 1 and d
Time discounting and interest rates Whether you should spend or save will depend not just on your time preference, but on the interest you can get when putting your money in a savings account.Suppose you have the option of spending $w now or saving it until next year. If you save it, the bank will
Credit scores A study in the journal Psychological Science by two economists from the Federal Reserve Bank in Boston found a connection between people’s discount factor d and their credit score.A credit score is a number representing a person’s creditworthiness: the higher the score the better.
Youth sports In a 2014 interview, basketball star Kobe Bryant discussed the importance of making sports fun for young people. “It’s hard to tell a kid that you need to get out there and compete because it’s going to decrease your chance of having diabetes 30–40 years from now,” he said.
Suppose instead that the utility function is u (x) 5 x2. What would Table 8.4(b) look like, and what would d be?Table 8.4 Time-discounting problem (in dollars and utiles) t 5 0 t 5 1 a b $9 $1 $4 $25 (a) In dollar terms Discount rates t 5 0 t 5 1 a b 3 1 2 5 (b) In utility terms
As a financial advisor, you offer your clients the possibility to invest in an asset that generates a utility stream of 1 utile this year (t 5 0), 0 utiles next year (t 5 1), and 1 utile the year after that (t 5 2). For each of the following clients, determine their ∂.(a) Client P is indifferent
For each of the three decision problems in Table 8.3, compute d on the assumption that a person is indifferent between a and b at time zero.Table 8.3 Time-discounting problems t 5 0 t 5 1 ab 35 41(a)t 5 0 t 5 1 t 5 2 ab 63 14 t 5 0 t 5 1 t 5 2 ab 11 5(b) (c)
This exercise refers to the utility streams in Table 8.2. For each of the following people, compute d.(a) At t 5 0, Ahmed is indifferent between utility streams a and b.(b) At t 5 0, Bella is indifferent between utility streams b and c.(c) At t 5 0, Cathy is indifferent between utility streams a
Use Figure 8.3 to answer the following questions:(a) If d , 1/3, what would the curve look like?(b) What if d . 1/3?
A stitch in time “A stitch in time saves nine,” people say when they want you to do something now rather than later. But not everyone will be swayed by that sort of concern. Suppose that you can choose between one stitch at time zero and nine stitches at time one, and that each stitch gives you
The impartial spectator Adam Smith’s Theory of Moral Sentiments made a big deal of the differences between an “impartial specta tor” and our actual selves. An impartial spectator, Smith wrote, “does not feel the solicitations of our present appetites. To him the pleasure which we are to
Discount factors For each of the following, identify whether the person’s d is likely to be high (as in close to one) or low (as in close to zero):(a) A person who raids his trust fund to purchase a convertible.(b) A person who enrolls in a MD/PhD program.(c) A person who religiously applies
The ant and the grasshopper According to the fable, the grasshopper chirped and played all summer while the ant was collecting food. When winter came, the ant had plenty of food but the grasshopper died from hunger. What can you surmise about their deltas?Economists believe discount factors can be
Exponential discounting, cont. Suppose instead that d 5 0.1. (a) Compute the utility of each of the four utility streams from the point of view of t 5 0. (b) What would you choose if given the choice between all four? (c) What if you had to choose betweena, b, and c?
Payday loans, cont. Imagine that you borrow $61 from a pay day loan establishment. After one week, it wants the principal plus 10 percent interest back. But you will not have that kind of money; so, instead, you go to another establishment and borrow the money you owe the first one. You do this for
Savings Suppose that you put $100 into a savings account today and that your bank promises a 5 percent annual interest rate.(a) What will your bank’s liability be after 1 year?(b) After 10 years?(c) After 50 years?
Payday loans Payday loan establishments offer short-term loans to be repaid on the borrower’s next payday. Fees fluctuate, but such an establishment may offer you $400 on the 15th of the month, provided you repay $480 two weeks later. Over the course of the two weeks, what is the interest rate
Cost of credit, cont. What would it cost to borrow $1000 for one year using one of the other credit cards in Table 8.1? What if you need$100 or $10,000?Fees and APRs fluctuate; never make decisions about credit cards without looking up the latest figures.
Lotto 6/49, cont. What is the expected value of a Lotto 6/49 ticket, if the grand prize is a million dollars?We know from Exercise 4.28 that the ticket is a winner one time out of 13,983,816. The means that the ticket holder will receive, on the average, in the 1/2 1/2(a)T H$1
Match each of the vignettes below with one of the follow ing phenomena: ambiguity aversion, cancellation, certainty effect, competence hypothesis, silver lining, and mental accounting. If in doubt, pick the best fit.(a) Abraham is seriously depressed after his girlfriend of several years leaves him
Life coaching Life coaches are people whose job it is to help you deal with challenges in your personal and professional life.(a) If you spend too much money, life coaches will sometimes suggest that you cut up your credit cards and pay cash for everything. Use the language of integration and
Zero expected value Prospect theory is consistent with the result that people frequently reject gambles with an expected value of zero. Suppose you are facing a gamble G with a 1/2 probability of winning $10 and a 1/2 probability of losing $10. According to prospect theory, would you prefer the
Savings decisions You are lucky enough to have a million dollars in the bank. You have decided that there are only three serious investment options: putting it in your mattress, investing in stocks, and investing in bonds. Your utility function over total wealth is u(x)5 !x. There is no
Lotteries as rewards Behavioral economists have found that using lotteries is an effective way to incentivize behavioral change. Thus, a person may be more likely to fill in a survey or take a pill if offered a lottery ticket with a 1/1000 probability of winning $1000 than if offered a cash pay
Nevada’s boom and bust Las Vegas entrepreneur Andrew Donner does not gamble at the casinos. Instead, he invests in real estate in the city’s downtown. Interviewed on Marketplace, Donner said: “Well, you know casinos, you somewhat know the odds, and I think there’s something beauti ful about
Tennis You have been invited to bet on one of three tennis games. In game 1, two extraordinarily good tennis players are up against each other. In game 2, two extraordinarily poor tennis players are up against each other. In game 3, one very good and one very bad player are up against each other,
The coins Suppose that you have the opportunity to bet on the outcome of a coin toss. If the coin comes up heads, you win; if it comes up tails, you lose. Suppose also that you are ambiguity averse. Would you rather bet on a fair coin (with equal probabilities of coming up heads and tails) or on a
Certainty effect, cont. Show that it is a violation of expected-util ity theory to choose (A) over (B) and (D) over (C) in Example 7.23. Notice that (C) and (D) can be obtained from (A) and (B) by dividing the probabilities by four.
Sure-thing principle, cont. Suppose that you face the options in Table 7.2(c) and that you must choose first between (1a) and (1b), and sec ond between (2a) and (2b). What choice pattern is ruled out by the sure-thing principle?
Sure-thing principle(a) Suppose that you face the options in Table 7.2(a). Which state of the world does the sure-thing principle tell you to ignore?(b) Suppose that you face the options in Table 7.2(b). What does the sure thing principle tell you about this decision problem?
Silver linings For this question, suppose your value function is v(x)5 !x/2 for gains and v(x)5 22!0x0 for losses. Last night, you lost $9 in a bet. There was a silver lining, though: on your way home, you found $2 lying on the sidewalk. (a) If you integrate the loss and the gain, what is the total
The pain of paying taxes The previous paragraph suggests that how you feel about paying your taxes will depend on whether you inte grate that cost with the money you made or not. (a) If you are a politician known for favoring high taxes, should you encour age voters to integrate or segregate? How
Evaluation of losses Yesterday, you had a terrible day: you got a $144 speeding ticket on your way to the opera, and then had to pay $25 for a ticket you thought would be free. Suppose your value function remains that of Exercise 7.12. (a) If you integrate the two losses, what is the total value?
Air fares If you are old enough, you may remember the good old days when all sorts of conveniences were included in the price of an air line ticket. Under pressure to reduce the sticker price of their tickets, airlines have started charging less for the tickets themselves, but made it a habit to
The opposite arrangement Suppose that the opposite were true: whenever you purchase something, you have to pay cash on the spot, but your purchases are not delivered until the end of the month in a giant box containing everything you bought in the last four weeks.(a) Would you make more or fewer
Evaluation of gains Yesterday, you had a decent day: you f irst received a $48 tax refund, and then an old friend repaid a $27 loan you had forgotten about. Suppose that your value function v(·) is defined by: v(x)5 !x/3 for gains (x$0) and v(x)5 23!0x0 for losses (x , 0) (a) If you integrate the
Relative income It is well known that poor people, who can least afford to play the lottery, are most likely to do so. In a 2008 study, researchers wanted to know whether manipulating people’s perceptions of their income can affect their demand for lottery tickets. Half of the participants were
Another person with the same value function is facing the choice between a sure $2 and a 50–50 gamble that pays $5 if he wins and $1 if he loses.(a) If he takes the worst possible outcome as his reference point, what is the value of the sure amount and the gamble? Which would he prefer?(b) If he
A person’s value function is v (x) 5 !x/2 for gains and v (x) 5 22!0x0 for losses. The person is facing the choice between a sure $2 and a 50–50 gamble that pays $4 if she wins and $0 if she loses.(a) Show algebraically that this person is loss averse, in the sense that she suffers more when
Prospect evaluation, cont. This exercise refers to Example 7.7 above. Suppose that your value function v(?) is defined by: v(x)5 !x/ 2 for gains (x $0) and v(x)5 22!0x0 for losses (x , 0) (a) Draw the curve for values between 24 and 14. Confirm that it is concave in the domain of gains and convex
The ostrich farm Jen and Joe have an ostrich farm. They have just learned that the farm has been struck by an unusual virus. According to their vet, if they do nothing only 200 of the 600 animals will live. However, the vet offers an experimental drug. If this drug is used, the vet says there is a
Jacket/calculator problem, again Consider again the classic jacket/calculator example from Section 3.2. Recall that many people were willing to make the drive when they could save $5 on a $15 calculator but not when they could save $5 on a $125 calculator. Using the same value function, show that
Curvatures, cont. Given the same value function, which is greater: the absolute difference between v (60) and v (210) or the absolute dif ference between v (21000) and v (21010)?
Misguided criticism Some critics attribute to neoclassi cal economists the view that human beings have the ability to compute solutions to every maximization problem, no matter how complicated, in their heads and on the fly. For example: “Traditional models of unbounded rationality and
The humiliation show You are on a game show where people embarrass themselves in the hope of winning a new car. You are given the choice between pressing a blue button and pressing a red button.(a) If you press the blue button, any one of two things can happen: with a probability of 2/3, you win a
Deal or No Deal, cont. You are on Deal or No Deal again, and you are facing three boxes. One of the three contains $1,000,000, one contains $1000, and one contains $10. Now the dealer offers you $250,000 if you give up your right to open the boxes.(a) Assuming that you use expected value as your
Lotto 6/49, cont. Compute the certainty equivalent of the Lotto 6/49 ticket from Exercise 4.28 if u(x)5 !x.
Suppose that your utility function is u(x)5 !x, and that you are offered a gamble which allows you to win $16 if you are lucky and $4 if you are not.(a) Suppose that the probability of winning $16 is 1/4 and the probability of winning $4 is 3/4. What is the expected utility of this gamble?(b)
Suppose that your utility function is u(x)5 !x, and that you are offered a gamble which allows you to win $4 if you are lucky and $1 if you are not.(a) Suppose that the probability of winning $4 is 1/4 and the probability of winning $1 is 3/4. What is the expected value of this gamble?(b) Suppose
Suppose that you are offered the choice between $4 and the following gamble, G: 1/4 probability of winning $9 and a 3/4 probability of winning $1.(a) Suppose that your utility function is u(x)5 !x . What is the utility of $4?What is the utility of G? What is the certainty equivalent? Which would
Compute the certainty equivalent of the gamble in Figure 6.8, using the utility function u(x) 5 x2.We end this section with a series of exercises.
Certainty equivalents Demonstrate how to find the certainty equivalent of the same gamble in the case when the utility function bends upwards. Confirm that the certainty equivalent is greater than the expected value.
Attitudes to risk As far as you can tell, are the following peo ple risk prone, risk averse, or risk neutral? (a) People who invest in the stock market rather than in savings accounts. (b) People who invest in bonds rather than in stocks. (c) People who buy lottery tickets rather than holding on to
Risk proneness Consider, again, the gamble in Figure 6.8.Now suppose that your utility function is u (x) 5 x2. Unlike the previous utility function, which gets flatter when amounts increase, this utility function gets 1/2 AH 1/2$2 R
Indifference This question refers to Table 6.2. Let p denote the probability that S1 obtains. (a) If an expected-utility maximizer is indifferent between A and B, what is his p? (b) If another expected-utility maximizer is indifferent between B and C, what is her p? (c) If a third expected-utility
Pascal’s wager The French seventeenth-century mathemati cian and philosopher Blaise Pascal suggested the following argument for a belief in God. The argument is frequently referred to as Pascal’s wager. Either God exists (G), or He does not (¬ G). We have the choice between believing (B)or not
Thanksgiving indecision Suppose you are contemplating whether to go home for Thanksgiving. You would like to see your family, but you are worried that your aunt may be there, and you genuinely hate your aunt. If you stay in town you are hoping to stay with your roommate, but then again, there is
Hearing loss A patient with hearing loss is considering whether to have surgery. If she does not have the surgery, her hearing will get no better and no worse. If she does have the surgery, there is an 85 percent chance that her hearing will improve, and a five percent chance that it will
Expected utility, again Suppose that you are facing three gam bles. A gives you a 1/3 probability of winning $9. B gives you a 1/4 probabil ity of winning $16. C gives you a 1/5 probability of winning $25.(a) What is the expected utility of each of these gambles if your utility func tion is u(x)5
Lotto 6/49, cont. Assume still that your utility function is u(x)5 !x, that the probability of winning at Lotto 6/49 is one in 13,983,816, and that the prize is a million dollars.(a) What is the expected utility of holding a Lotto ticket?(b) What is the expected utility of the dollar you would have
Expected utility, cont. Suppose instead that your utility func tion is u(x) 5 x2. (a) What is the expected utility of rejecting the gamble? (b) What is the expected utility of accepting the gamble? (c) What should you do? When the curve bends upwards as you move from left to right, like the utility
Warranties A tablet computer costs $325; the optional one year warranty, which will replace the tablet computer at no cost if it breaks, costs $79. What does the probability p of the tablet computer breaking need to be for the expected value of purchasing the optional warranty to equal the expected
Lotto 6/49, cont. Suppose a Lotto 6/49 ticket costs $1 and that the winner will receive $1,000,000. What does the probability of winning need to be for this lottery to be actuarially fair, that is, for its price to equal its expected value?
Parking, cont. Assume that the cost of parking legally is still $5. (a) If the parking ticket costs $100, what does the probability need to be for the expected value of parking legally to equal the expected value of park ing illegally? (b) What if the ticket costs $10?

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A Course In Behavioral Economics 2nd Edition Erik Angner - Solutions

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