Imagine a person has projection bias. For every domain she has the same alpha = .75 and therefore estimates her future utility to be:

U*(c, s|s*) = (1 - alpha)*u(c; s) + alpha*u(c, s*) where s is the future state, s* is the current state, and c is her consumption.

a. She goes to the store to purchase a candy bar. She is buying the candy bar now, but does not plan to eat the candy bar until later when she will be full. She gets disutility from paying money such that U(p) = -p where p is the price. If U(c; h) = 27 (utility of eating candy bar when hungry) and U(c; f) = 16 (utility of eating candy bar when full), how much would she be willing to pay if she was shopping when full? How much would she be willing to pay if she was shopping when hungry?

b. She gets an offer to present later in the week, when she will be busy. She gets u(p; b) = -2 (utility of doing the presentation if busy) and u(p; f) = 5 (utility of doing the presentation if free). She gets a utility of zero if she does not present. Would she choose to present later in the week if she was busy now? What about if she is free now?

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a To determine how much she would be willing to pay for the candy bar in each scenario we can calcul... View the full answer