Question 4. (17 Points)

In a study conducted in year 2020, a participant was given the following problem.

Question 1. Specify the amounts in A and C that would leave you indifferent between options A, B, and C:

A: $______ in 2020

B: $100 in 2021

C: $______ in 2022

The participant specified the amounts $80 for option A and $120 for option C.

1.(2 Points) Suppose the participant is an exponential discounter. Based on her responses, calculate the implied discount factor from 2020 to 2021 and the implied discount factor from 2021 to 2022.

2.(2 Points) Can this behaviour be explained by the model of exponential discounting? Why?

3.(3 Points) Suppose the participant is a hyperbolic discounter. Based on her responses, calculate the implied discount factor and degree of present bias.

4.(6 Points) Suppose the same participant will participate another study in 2021, in which she will be asked the following question.

Question 2. Specify the amounts in A and C that would leave you indifferent between options A, B, and C:

A: $______ in 2021

B: $100 in 2022

C: $______ in 2023

The participant is asked (in 2020) how she predicts to respond Question 2 in a year (in 2021). How does she respond if she is a nave hyperbolic discounter? How does she respond if she is a sophisticated hyperbolic discounter?

5.(4 Points) Suppose that a year has passed. The participant is asked Question 2 in 2021. How does she respond if she is a nave hyperbolic discounter? How does she respond if she is a sophisticated hyperbolic discounter?