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Part 1: Shoe Shopping (25 points) Gordon has reference-dependent preferences over pairs of shoes (cs) and money (cm). His utility takes the form: u(cs rs) + v(cm rm), where rs is Gordon's reference point for pairs of shoes and rm is his reference point for mone Gordon currently has 7 pairs of shoes (1 pair for each day of the week) and $100 in cash. 1. (3 points) Provide a brief interpretation of Gordon's preferences. In the gain domain (i.e., for cs rs and cm rm), is he risk-averse, risk-neutral, or risk-loving? In the loss domain (i.e., for cs < rs and cm < rm), is he risk-averse, risk-neutral, or risk-loving? Does he exhibit increasing or diminishing sensitivity? 2. (4 points) Suppose frst that Gordon's reference points refect the status quo, so that rs = 7 and rm = $100. Gordon is walking down the street when he sees an ad for a pair of Nike shoes priced at p = $20. Is Gordon willing to buy the pair of shoes at this price? 3. (4 points) Gordon continues walking down the street and runs into his friend Kemba. They begin discussing shoes, and Gordon learns that Kemba only owns 6 pairs of shoes (1 pair for each weekday and 1 pair for the weekend). Now self-conscious about how many shoes he owns, Gordon updates his shoe reference point to rs = 6. Is Gordon still willing to buy the advertised Nike shoes at p = $20? 4. (2 points) Compare your answers to questions 2 and 3. If your answers to questions 2 and 3 dier, explain why Gordon's decision about shoe buying changed. 5. (4 points) Gordon walks some more and runs into his other friend Jaylen. They begin discussing shoes, and Gordon learns that Jaylen also owns 7 pairs. No longer self-conscious about his shoe consumption, Gordon updates his shoe reference point back to rs = 7. Gordon and Jaylen decide to go to the Nike store to check out the advertised shoes. When Gordon walks into the store, what is his maximum willingness to pay for the pair of shoes? 6. (6 points) Gordon enters the Nike store and grabs the pair of shoes o the shelf. He's pleased about his impending shoe purchase and is excited to go home and try them out, so he updates his reference points to refect the new 1

status quo: rs = 8 and rm = $100 p = $80. Once at the register, Gordon is informed by the cashier that an additional $20 sur-"charging" fee applies to his purchase, so that the total price is now p + $20 = $40. (a) Is the new total price of $40 less than, equal to, or greater than the maximum willingness to pay that you found when Gordon entered the store in question 5? (b) Is Gordon willing to pay the new total price of $40, or does he prefer to leave the store without buying the shoes? 7. (2 points) Firms often impose unanticipated fees at the end of a transaction - e.g., service fees and small-order fees from food-delivery companies, booking fees on travel websites, and processing fees on secondary ticket exchanges like Ticketmaster and StubHub (including for Celtics tickets!). Use your answer to question 6 to explain why frms often fnd it optimal to charge such fees. Part 2: Social Preferences and Random Acts of Kindness (15 points) 1. We're lucky to be studying social preferences during MIT's Random Acts of Kindness Week. The idea of a random act of kindness is to perform a selfless act to either help or cheer up a random other person (possibly a stranger), for no reason other than making that person happier. To better understand how random acts of kindness might a ect you and others, please do the following (in this order!): (a) Pick a random act of kindness (RAK) and a person to whom you might want to perform it. Such random acts might include a wide range of actions, including (i) sending an encouraging note; (ii) expressing your appreciation; or (iii) expressing your gratitude to a friend, colleague, former teacher, or family member. Try to put some thought into your RAK and try to come up with something that you think could make the other person's day. To address any concerns about the coronavirus, try to avoid random acts that require physical contact. (b) Predict, on a scale from -5 to 5, how good you would feel after performing a random act of kindness for someone. On this scale, let -5 correspond to feeling much worse than normal, 0 correspond to feeling no di erent than normal, and 5 correspond to feeling much better than normal. (c) Predict, on a scale from -5 to 5, how the other person will react. On this scale, let -5 correspond to feeling much worse than normal, 0 correspond to feeling no di erent than normal, and 5 correspond to feeling much better than normal. (d) Perform the random act of kindness to the person you picked. (e) Think about how good you actually felt after performing the random act of kindness, and place this feeling on the same scale as in part (b). (f) What is your best guess of the other person's reaction after you performed the random act of kindness? Place this reaction on the same scale as in part (c). (g) As your written answer to this question, report (i) the random act of kindness that you performed, (ii) whether your answer to part (e) was greater than, equal to, or less than your answer to part (b), (iii) whether your answer to part (f) was greater than, equal to, or less than your answer to part (c). (h)

Question: Payday Lending Calvin is a fully naive hyperbolic discounter with = 0.5 and = 1 and = 1. Hobbes is a fully sophisticated hyperbolic discounter with = 0.5 and = 1 and = = 0.5. They lives for three periods: t = 0, 1, and 2. They derive utility from consumption in each period. They have the same instantaneous CRRA utility from consuming an amount ct 0 (i.e. ct < 0 is not possible) in period t : p u(ct) = ct for t = 0, 1, 2 Accordingly, their discounted lifetime utility from the perspective of period t = 0, 1 is given by p Ps=2 p Ut(c0, c1, c2) = ct + s=t+1 cs and their discounted lifetime utility at t = 2 is simply pc2. We also defne their long-term lifetime utility as p p p W(c0, c1, c2) = c0 + c1 + c2 which for instance captures their discounted lifetime utility from a period preceding 0, without distortion from present bias. Calvin and Hobbes start with wealth of e0 = $1500 at t = 0. They can keep their wealth in a checking account, which has no interest and would allow them to withdraw money at any time. That is, if they put $x into their account in period 0, they could withdraw up to $x at period 1. Similarly, if they put $x into their account in period 1, they could withdraw up to $x at period 2. They receive a paycheck of y = $1200 at t = 2, which is known and perfectly anticipated by both of them at all times. Finally, they have access to a payday lending service: they can borrow up to $600 in period 1, but they have to repay twice the borrowed amount on their payday in period 2 (i.e., they can borrow with an interest rate of 100% between these two periods). 1. Let's frst consider a third fctional character, Susie, who is not present biased, and does not discount the s=2 p future. Her utility at any period t = 0, 1, 2 is P cs Susie also starts with $1500 at t = 0, has access to s=t the checking account, and anticipates receiving $1200 in period 2, but has no access to payday lending. Derive Susie's consumption in period 0, 1 and 2. In particular, show that Susie does not use the checking account from period 1 to period 2. 2. Explain (with no formal derivation) why this means that neither Calvin nor Hobbes would use the checking account from period 1 to period 2. Given this result, we will now work under the (non-binding) assumption that the checking account is only available from period 0 to period 1, for simplicity. 1 3. Let e1 0 denote the amount of money in Calvin's (or Hobbes') checking account when he enters period 1. Assume e1 y. Derive the amount that he decides to borrow from the payday lending service, b, as a function of e1. Show that he will consume an equal amount in periods 1 and 2, i.e. c1 = c2. 4. Using the result from the previous question, derive the amount of money e that Hobbes, who is fully sophisti- S 1 cated, decides to put in his checking account in period 0. Hint: Do not worry about checking corner solutions, i.e. assume that eS y in order to use the answer to the previous question, and just verify that the value obtained 1 indeed verifes this inequality. 5. How much will Hobbes end up borrowing from the payday lending service and consuming in each period? 6. Now, let's consider Calvin, who is fully naive ( = 1). In period 0, how much does Calvin predict he will borrow from the payday lending service in period 1 if he were to leave e1 in his checking account? 7. Derive the amount e that Calvin decides to leave in his checking account in period 0. Hint: Do not worry N 1 about checking corner solutions, i.e. assume that 4eN y in order to use the answer to the previous question, 1 and just verify that the value obtained indeed verifes this inequality. 8. How much will Calvin end up borrowing from the payday lending service and consuming in each period? 9. Discuss how Calvin's and Hobbes' consumption paths dier. Compute their long-term lifetime utilities, compare them, and discuss intuitively why they are ordered in this way. 10. Now, assume that no payday lending service is available. Derive the amounts left in the checking account in period 0 by Calvin and Hobbes. 11. Derive the full consumption paths of Calvin and Hobbes in the absence of payday lending. Compare their long-term lifetime utilities to the values found in question 9. Discuss this comparison. 12. Suppose that in period 0, a referendum is organized to ask Calvin and Hobbes whether they want the government to implement a policy that shuts down payday lending. The policy would require some administrative costs which would result in a tax of $1 levied at the end of period 1. The two options to vote for are Yes and No. What would Calvin vote? What would Hobbes vote? (assuming they are both selfsh and only care about improving their own utility). Discuss what this example suggests for the real world problem of regulating payday lending. For the rest of the problem, we consider a world where a shock just hurt Calvin and Hobbes before the time analyzed in the problem, so that their initial wealth is now e0 = $200. Note that the conclusions from question 2 also apply here so it's still correct to simply assume that there is no checking account from period 1 to period 2. 13. Noting that answers to questions 3 and 6 are unchanged, show that neither Calvin nor Hobbes leave anything in their checking accounts in period 0. 14. Compute Calvin and Hobbes' resulting consumption path. 15. As in question 10, derive the amounts left in the checking accounts in period 0 by Calvin and Hobbes if no payday lending service is available. Derive the resulting consumption paths. 16. Compare the long-term lifetime utilities of Calvin and Hobbes with and without access to the payday lending service now that their initial wealth e0 is lower. Why is this comparison yielding a dierent conclusion than in question 11?

Research has shown that reflective practitioners are more skilled in areas of problem-solving and critical thinking. Throughout your program of study, you are asked to reflect on how you completed tasks and how this reflection will inform future decisions about similar tasks, providing ample opportunity to practice thinking skills ("thinking about thinking").

Briefly discuss the thinking strategies you used before beginning and as you worked through the assignment. What thinking strategies were most beneficial? How will you use or evidence these strategies in the future? Moving beyond this single experience, reflect on the process you use to complete tasks whether in school or in the workplace. Think about the major assignments you have completed thus far in your program of study. What strategies work best for you to produce a complete assignment that meets all of the instructor's expectations? Describe the process you use to ensure a quality work product grounded in ethical behavior. Why does this process work for you? Is there anything you might change the next time you are asked to do an major assignment? How might reflecting on the process you use to complete tasks help you in the workplace? How might critical thinking coupled with ethical behavior be important to your personal, professional, and educational development?

All documents should be typed in Microsoft Word. You should use a minimum of four scholarly resources, with at least one source from the Virtual Library.

[11:37 PM, 11/6/2021] Flo: 1a) A firm's estimated long-run total cost function is LRTC = 160Q - .6Q2 + .002Q3. Suppose the firm is producing 100 units of output. The cost elasticity is __ You can use Excel spreadsheet or otherwise to answer this question.

b) A research study published in Social Science Medicine, "Production Functions for General Hospitals," estimated the following general hospital production function in the Netherlands: Q = 5*Staff.34*Beds.64*Drugs.04*Specialists.02, where Q is a measure used by the authors for patient care. Suppose a hospital currently utilizes the following inputs: Staff =20, Beds = 120, Drugs = 60, Specialists =10. Use a spreadsheet to find the following or otherwise. If the hospital increases its specialists by one (1), that is, employs an ... [11:50 PM, 11/6/2021] Flo: You completed a $2.5M RFP for electronic components.

You will need 25 units over the next five (5) years and these items have a very long lead time.

It is mandatory that all suppliers are authorized distributors, anyone who is not will be disqualified.

The manufacturer is based in Germany and they alone will decide who will be an authorized distributor.

All Proponents were advised of their status, the successful Proponent was ABC Company. Their Proposal will save you close to $450,000 - this is the difference between ABC's price and the second place Proponent.

ABC has never done business with your organization, they will be a new supplier and they are located outside of the country.

The current supplier and incumbent is XYZ Company who has been a supplier for over 10 years and is a few blocks away from your warehouse. They came in second place.

You receive a telephone call from the Evaluation Committee Lead Evaluator advising you that they just learned that ABC is not an authorized distributor. If this is true then the warranty will be null and void.

You review the Evaluation Committee's Report and notice that there was an error in how the Evaluation Committee analyzed the pricing provided by the first place Proponent.

What are your next steps?