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behavioral economics

Questions and Answers of Behavioral Economics

Use Figure 8.2 to answer the following questions: (a) If 8 1/ 3? U(x) au 1-1 b
Suppose that Alexandra, at time zero, is indifferent between utility streams a (2 utiles at t = 0) and b (6 utiles at t = 1). What is her discount factor 8? U(x) U a high a low t-2 1-1 Figure 8.1
For each of the following, identify whether the person's 8 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
Suppose instead that 8 = 0.1. (a)Compute the utility of each of the four utility streams from the point of view of t = 0. (b) What would you choose if given the choice between all four? (c) What if
Suppose that 8 = 0.9, and that each utility stream is evaluated from t=O. If so, ll11(a)=u0 =1, LJ1l(b) =8111 =0.9*3=2.7, LJ1l(c) =82u2 = 0.92 * 4 = 3.24, and U0(d) = u0 + 8111 + 82 1t2 = 1 + 2.7 +
imagine that you borrow $61 from a payday 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
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
Imagine, again, that you use a credit card to borrow $100 and that the monthly interest rate is 18 percent. In contrast to the previous example, however, you do not make monthly interest payments.
Imagine that you use a credit card to borrow $100, and that every month the credit-card company will charge you an interest rate of 18 percent of the principal. Every month, you pay only interest,
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
Suppose that somebody offers to lend you $105 on condition that you pay them back $115 one year later. What is the interest rate (r)implicit in this offer?
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?
Suppose you need to invest $1000 in a new car for one year. If you charge it to the Silver Axxess Visa Card, what is the total cost of the credit, taking into account the fact that you would be
Suppose you borrow $100 for a year at an annual interest rate of 9 percent. At the end of the process, how much interest will you owe the lender?
Match each of the vignettes below with one of the following phenomena: ambiguity aversion, ca11cel/ation, certainty effect, competence hypothesis, silt>er li11i11g, and ,11e11fal accounting. lf in
You are lucky enough to have 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
The book Frenko11omics discusses the economics of crack-cocaine. Contrary to what many people think, the vast majority of crack dealers make little money- frequently less than the federally mandated
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. ln game 2, two extraordinarily poor tennis players are up
Which of the follow ing options do you prefer:(A) A sure win of $30; (8) 80 percent chance to win $-15? Which of the following options do you prefer: (C) 25 percent chance to win S30; (D) 20 percent
Suppose that you face the options in Table 7.2,md that you must choose first behveen (la) and (lb), and second between (2a) and(2b). What choice pattern is ruled out by the sure-thing principle?
Suppose that you face the following options, and that you must choose first between (la) and (lb), and second between (2a) and (2b).What would you choose?
For this question, suppose your value function is v(x) = Jxfi for gains and ti(x) = -2./ixi for losses. Last night, you lost $9 in a bet.There was a silver lining, though: on your way home, you found
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
Yesterday, you had a decent day: you first received a $-18 tax refund, and then an old friend repaid a $27 loan you had forgotten about. Suppose that your value function vO is defined by:(a) If you
A person's value function is v(x) = ./x!1. for gains and v{x) = -2Jixi 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
This exercise refers to Example 7.5 on the previous page. Suppose that your value function v(·) is defined by:By the way, I.ti is the absolute value of x: that is, x with the minus sign removed (if
Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the
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
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
Compute the certainty equivalent of the Lotto 6/49 ticket from Exercise -l.27 on page 70 if 11(x) = ./x.
Suppose that your utility function is 11(x) = ./x, and that you are offered a gamble which allows you to win $16 if you are lucky and $-l if you are not.(a) Suppose, first, that the probability of
Suppose that your utility function is 11(x) = ./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, first, that the probability of
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) =
Compute the certainty equivalent of the gamble in Figure 6.8, using the utility function 11(x) = x2.
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.
Tfie certainty equivalent of a galllble C is /1,e 1111111ber CE tJ,at satisfies tJ,is equation: 11 (CE)= EU (G).The certainty equivalent represents what tJ,e gamble is worth to you. The certainty
As far as you can tell, are the following people risk prone, risk averse, or risk 11e11trnl?(a) People who invest in the stock market rather than in savings accounts.(b) People who invest in bonds
Consider, again, the gamble in Figure 6.8. Now,uppose that your utilitv function is 11(,·) = x~. Lnlike the previous utility function, which gets flatter when amounts mcrease, this utility function
Suppose you own $2 and are offered a gamble gi, ing you cl SO percent chance of winning a dollar and a SO percent chance of losing a dollar.This decision problem can be represented as in Figure 6.8.
This question refers to Table 6.2. Let p denote the probability that 51 obtains. (a) If an expected-utility maximizer is indifferent between A and B, what is his p? (b) lf another expected-utility
This question refers to Table 6.l(b), that is, the umbrella problem from Section 6.2. If the probability of rain is p, what does p need to be for the expected utility of taking the umbrella to equal
The French seventeenth-century mathematician 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
Suppose you are contemplating whether to go home for Thanksgiving. You wouJd 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
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. lf she does have the surgery, there is an 85 percent
Assume again that your utility function is 11(x) =,Ix.Compute (i) the expected value and (ii) the expected utility of the following gambles:(a) C: You have a 1/ -l chance of winning $25 and a 3/-l
Assume s till that your utility function is 11(.r) = fi.(a) Given your answer to Exercise 4.27 on page 70, what is the expected utility of a Lotto ticket?(b) What is the expected utility of the
Suppose instead that your utility function is u(x) = r 1.(a) What is the expected utility of rejecting the gamble?(b) What is the expected uhlity of accepting the gamble?(c) What should you do?
Consider, again, the gamble from Figure 6.3(c).Suppose that your utility function is 11(.r) = ./x. Should you accept or reject the gamble?11,e utility of rejecting the gamble is EU (Rl = 1114) =A= 2.
A tablet computer costs $325; the optional one-year,, ., rrnnty, which will replace the tablet computer at no cost if it breaks, costs $79.\Vhat does the probability p of the tablet computer breaking
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
Given what you pay for parki11g and given what parking.fines are in your area, what does tl1e probability of getting a ticket need to be for the expected value of parking legally to equal the
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 legaJJy to equal the expected value of
If a parking ticket costs $30, and it costs $5 to park legally, what does the probability of getting a ticket need to be for the expected value of parking legally to equal the expected value of
You are on the show Deal or No Deni, where you are facing so many boxes, each of which contains some (unknown) amount of money(see Figure 6.6). At this stage, you are facing three boxes. One of them
Suppose somebody intends to roll a fair die and pay you 51 if she rolls a one, $2 if she rolls a two, and so on. What is the expected value of this ga mble?
You are offered the following gamble: if a (fair) coin comes up heads, vou receive $10; it the coin comes up tails, you pay $10. What is the expected value ol thh gamble?The expected \'alue of this
You are considering whether to park legally or illegally and decide to be rational about it. Use negative numbers to represent costs in your expected-value calculations.(a) Suppose that a parking
For the following questions, refer to Figure 6.3(c).(a) What is the expected Villue of accepting the. gamble? (bl What is the expected, aluc of rejecting it?
What wo11ld yo11 pay to piny this gamble? If yo11 arc willing to pay to pflly this Slllllt!, i1 1/tnt do 1/011 hope to nc/11t•Pt'?
What is the expected value of a Lotto 6/49 ticket, if the grand prize is a million dollars?
Repre~nt the gamble accepted by someone who plays Lotto 6/49 (from Exercise 4.27 on page 70) as in Figure 6.2(a) and (b). Assume that the grand prize is a million dollars.
Suppose you live in New York City and are offered two jobs ,H the same time. One is a tedious and badly paid job in New York City itself, while the other is a \'Cry interesting and well-paid job in
Imagine that you are considering whether or 11ot to ask somt'body out 011 a date. (a) Give11 your utility f11nctio11, what course of action would be fatl()red by (i) the 111axi111i11 criterion, (ii)
This exercise refers to the utility matrix of Table 6.2. What course of action would be favored by (a) the maximin criterion, (b) the maximax criterion, and (c) the minimax-risk criterion? As part of
Drawing on your ow111•xperiencc, make up stories like those in Exercise 5.31 lo 1/111sl rnte tlte mrious ideas that you fume read about in this chapter.
Match each of the vignettes below with one of the following phenomena: m•ai/11/lility l1i11s, l,ase-rat1111eglect, co11ftr11111tio11 bias, co11i1111ctio11 fallacy, 1iisj1111ctio11 fallacy,
In October 2010, National Public Radio (NPR) fired commentator Juan Williams ,1fter he made the following remark on Fox News:"When I get on a plane ... if l see people who are in Muslim garb and I
lntl'lligence -;erviccs arc deeply interested in how people think, both when they think correctly and incorn.-ctly. The following exercise is borrowed from the book P,11cl10lo:(•t of /11tdligmce
In July 2011, the state of Florida started testing all welfare recipients for the use of illegal drugs. Statistics suggest that some 8 percent of adult Floridians use illegal drugs; let us assume
In vitro fertilization (IVF) is a procedure by which egg cells are fertilized by sperm outside the womb. Let us assume that any time the procedure is performed the probability of success (meaning a
Imagine that your friend Anne has a coin that has a 2/3 probability of coming up heads (H) and a 1 /3 probability of coming up tails(T). She intends to flip it three times and give you a dollar for
Your optometrist tells you that your new contacts are so good that you can wear them night and day for up to 30 days straight. She warns you that there is some chance that you will develop serious
In some populations, brain tumors in children are rare:the base rate is only about 1/10, 000. A child with a tumor is very likely to have occasional headaches: 99 out of 100 do. But there are many
From literature or life, you may be familiar with the character of the jealous lover, who refuses to accept any evidence that his or her affections are reciprocated and who everywhere finds evidence
Imagine that John is suffering from confirmation bias. Which of the curves labeled A, B, and C in Figure 5.3 best represents the manner in which his probabilities change over time as the evidence
Let w, take it for granted that the behavior-detection test (from Ext.?rcise 5.19) is not diagnostic. The test may still be diagnostic in another setting, say, at a checkpoint .:it the US embassy in
The following passage is from USA Today:Doug Kinsev .,tand., near the security line at Dulles International Airport, watching the pas.,ing crowd in silence. Suddenly, his eyl''> loci-.. on a pas~nger
In the aftermath of the July 21, 2005, terrorist attacks in London, British police received the authority to shoot terrorism suspects on sight. On July 22, plainclothes police officers shot and
The probability of having a baby with Down syndrome increases with the age of the mother. Suppose that the following is true. For women 34 and younger, about one baby in 1000 is affected by Down
At an Auburn-Alabama game, 80 percent of attendees wore Alabama gear and 20 percent wore Auburn gear. During the game, one of the attendees apparently robbed a beer stand outside the stadium. A
A cab company was involved in a hit-and-run accident at night. Two cab companies, the Green and the Blue, operate in the city. You are given the following data: 85 percent of the cabs in the city are
Men can get breast cancer too, although this is very unusual. Using the language of "base rates" and "diagnosticity," explain why men are not routinely tested for breast cancer
Doctors often encourage women over a certain age to participa te in routine mammogram screening for breast cancer. Suppose that from past statistics about some population, the following is known. At
Suppose you are fortunate (or delusional)enough to be ... hopping for a pri,·ah.' jet. You h,1\ e to decide \\ hethcr to get a jet with one or two engines. Use p to denote the probability that an
In the preface to your new book, you write th,1t vou are convinced th.:it everv sentence m vour book is true. )et vou recognl/e th.it for each 'lentence there 1-. ,1 I percent chance that the
Suppose that there are 30 students in your behavioral economics class. What is the probability that no hvo students h,we the-.a me birthday? To make things easier, assume that every student was born
What is the probability of drawing at least one ace when dra1,ving cards from an ordinary deck, "'ith replacement, when you draw: (a) 1 card, (b) 2 cards, (c) 10 cards, and (d) 52 ca rds?
Compute the probability that at least one major terrorist attack occurs over the course of the next ten years, given that there are approximately 365 days a year, if the probability of an attack on
Imagine that you live in an a rea where floods occur on average every ten years. The probability of a flood in your area is constant from year to year. You are considering whether to live in your
You plan to go on a hike in spite of the fact that a tornado watch is in effect. The national weather service tells you that for every hour in your area, there is a 30 percent chance that a tornado
Compute the probability of getting at least one six when rolling(a) one die, (b) two dice, (c) three dice, (d) ten dice.(a) The probability of rolling at least one six when rolling one die equals one
Boeing 7-l7---l00 has around 6 million parts. Suppose that each part is very reliable and only fails with probability 0.000,001.Assuming that failures are independent events, what is the probability
Suppose that Langford from Exercise -1.-lS on page 78 has just won two jackpots in a row and is about to play a third time. What is the probability that he will win a third time, so as to make it
Let us assume that whenever one gets pregnant, there is a 1/100 chance of having twins, c1nd th«t being pregnant with twins once ·will not affect the probability of bemg pregnant with twins
Carefully note the difference between the following two questions:(a) You intend to Hip a fair coin eight times. What is the probability that you end up with eight heads?(b) You have just flipped a
You are marketing a new line of pregnancy tests. The test is simple. You flip a fair coin. If the coin comes up heads, you report that the customer is pregnant. If the coin comes up tails, you report
Max is ,1bout to take ,1 multiple-choice test. The test has ten que!>ti nm,, ,ind ea,h has two p~'>tble cln'>\Vl'r!>: " true" ,rnd "false." 1\1,1\ d oes not have the faintest idea of what the right
Multiple lawsujts allege that area gambling establishments, on multiple occasions, doctored equipment so as to give Birmingham mayor Larry Langford tens of thousands of dollars in winnjngs.Langford,
After vetoing ii bill from the California State Assembly in 2009, California Governor Arnold Schwc1rzencgger published a letter(Ssperson s,1id: " It was just a weird coincidence."(,1) Assuming that a
When you take the SAT test, you may think that the correct answers to the various questions would be completely random. In fact, they are not.The authors of the test want the answers to seem random,

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