Mary’s local gym has two pricing options. If you pay by the day, the charge is $10 per day. Alternatively, you can pay an annual membership fee that allows you to exercise as often as you like U = 1Income for $1,000. On average, Mary predicts that she would use the gym once a week and the value of the 50 times per year she would go is not enough to warrant a membership. Instead, Mary decides to pay by the day.

a. At the end of the year, Mary finds that she went to the gym only 25 times rather than the 50 she had predicted. She is still sure, however, that with a membership, she would go 50 times and insists that economic logic supports her prediction. What principle is she thinking about?

b. Mary’s employer has read a new health study that suggests that people who work out at least once a week perform better at work. The firm decides to give Mary and her coworkers a cash bonus of $40 per week to cover the costs of going to the health club four times a month. Do you think this policy would be effective? If not, suggest an alternative that would achieve the firm’s goal.