Suppose both Elaine and Afras each have a $5 bill in their pockets. Afras says he would
Question:
Suppose both Elaine and Afras each have a $5 bill in their pockets. Afras says he would like to buy lunch and both Elaine and Dmitry believe Afras has $0 in his pocket (and Afras knows they believe this). Dmitry wants to encourage reciprocity amongst his GSIs so he tells Elaine that if she chooses to give her $5 to Afras, he will add another $5 so that Afras gets $10 for lunch. Before Elaine makes her decision, Afras can reveal that he actually has $5 already.
To summarize, the timing is: (I) Elaine and Afras have $5 in their pockets, (II) Afras says he would like to buy lunch, (III) Dmitry offers to match Elaine's donation to Afras's lunch, (IV) Afras chooses whether or not to tell Elaine he actually already has $5, and (V) Elaine decides whether or not to donate to Afras's lunch.
1. Suppose Elaine has distributional social preferences (and Afras knows this). That is, her utility function is: UE (xA, xE ) = xA + (1 )xE , [0, 1] where xA is the amount of money Afras has, and xE is the amount of money Elaine has. First assume Afras did not tell Elaine about his $5 bill in step (IV), so she believes he has $0. For what values of will Elaine choose in step (V) to give her $5 bill to Afras?
2. Remember, Afras can choose in step (IV) whether to tell Elaine he already has $5 before she makes her decision. Suppose Afras only cares about the amount of money he has after step (V). Assume Elaine's preferences are as above. Argue that for any [0, 1], Afras is indifferent between telling and not telling Elaine about the money he already has. 3. Suppose instead that Elaine has intentions-based social preferences (and Afras knows this). That is, Elaine's utility function is: UE (xA, xE ) = xA + (1 )xE , where = 0 if she thinks Afras is a jerk, and = (0, 1] if she thinks Afras is nice. Elaine thinks Afras is a jerk if she finds out at step (IV) that Afras actually had $5 all along and didn't say so before Dmitry made his kind offer in step (III). Otherwise she thinks Afras is nice. Suppose Afras only cares about the amount of money he has after step (V). In step (IV), should Afras tell Elaine about the $5 in his pocket, or is he indifferent? (Note: your answer should be a decision rule based on ; i.e., tell us what Afras will do at different values of ).
4. Now suppose Elaine's friend Zac knows Afras has $5. Zac can tell Elaine this in step (IV). Continue to assume Afras only cares about the amount of money he has. Assume = 0.5. How much would Afras be willing to pay Zac to not tell Elaine? 5. Now suppose that Afras has face-saving concerns and no other type of social preferences. That is, his utility function is given by: UA(xA, F ) = xA F, 0 where F = 0 if Elaine thinks Afras is nice and F = 1 if Elaine thinks Afras is a jerk. Assume that Elaine's preferences have not changed from part 3, Zac knows about Afras's $5, = 0.5, and = 5. Is Afras's willingness to pay Zac to not tell Elaine more, less, or the same as in part 4? (You can do the math or explain in words.)
Taxation Of Individuals And Business Entities 2015
ISBN: 9780077862367
6th Edition
Authors: Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver