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Question 4 Imagine that you have an MG207 class at 9am on Monday morning. If you don't nish your assignment by then, you incur a
Question 4 Imagine that you have an MG207 class at 9am on Monday morning. If you don't nish your assignment by then, you incur a cost of negative innity. You can do your assignment on Friday night at a cost of 2, Saturday night at a cost of 1.5, or Sunday night at a cost of 2.5 (where, in this case, the costs are in terms of lost utility from using your time in other ways). Your objective is to minimize the cost of doing the assignment to you in present value terms. Part a Assume you are an exponential discounter with a discount factor of 6 = 0.9. At the start of Eiday night, when do you plan to do the assignment? When do you actually do the assigmnent? Part b Assume instead that you always value any costs incurred tomorrow at a rate of ,36, and any costs incurred in two days time at a rate of ,652. Moreover, assume ,8 = 0.5, while 5 = 0.9. At the start of Friday night, when do you plan to do the assignment? When do you actually do the assignment? (Note: this functional form for your discount factor differs from the example of the hyperbolic function we discussed in lecture. The discounting factor is known as quasi-hyperbolic discounting. It models the similar idea that a consumer always has a particularly large discount for the next period relative to the current period.) Part c Given the discounting prole you have in part (b) , how much would you willingly spend on Friday night to purchase a binding commitment to complete the assignment on Saturday night? Part (1, for introspection... On what day are you doing this MG207 assignment
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