In period 1, Mr. Consistent and Mr. Hyperbolic are each trying to come up with a plan
Question:
According to this table, Mr. Consistent's weight on future utility falls by half each period. Mr. Hyperbolic's weights are related to Mr. Consistent's; the difference is that Mr. Hyperbolic's are reduced a further 30% for periods after the current one.
a. Would Mr. Consistent plan to exercise in period 1? Would he follow through on this plan in period 2?
b. Show that Mr. Hyperbolic would not follow through on his exercise plan.
c. Suppose Mr. Hyperbolic could sign a contract in period 1 that forced him to give up an amount of money valued at x utils in period 2 if he does not stick with his exercise plan. How high would x have to be to help him commit to his plan?
Step by Step Answer:
Intermediate Microeconomics and Its Application
ISBN: 978-1133189039
12th edition
Authors: Walter Nicholson, Christopher M. Snyder