Time consistent preferences

Problem 1a

Adwoa's friend tells her that2001: A Space Odysseyis good. Adwoa is trying to decide between reading the book and watching the movie. Assume that the movie yields an immediate utility of 1 in the single period (single day) during which Adwoa watches it, and a utility of 0 thereafter. Assume that the book yields a utility of 0.1 for each of 100 periods during which she reads it, and a utility of 0 thereafter.

Adwoa's utility function at timeis=()+₌₊₁ (), representing the fact that she discounts the utility of future consumption. First, suppose that=0.5 and=0.92.

What is Adwoa's present value of seeing the movie today?

unanswered

What is Adwoa's present value of reading the book, starting today?

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Problem 1b

1 point possible (graded)

Which will she choose today?

a) She is indifferent

b) The book

c) The movie

Problem 2a

1) What is Adwoa's present value of seeing the movie tomorrow (one period from now)?

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2) What is Adwoa's present value of reading the book, starting tomorrow (one period from now)?

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Problem 2b

Which does she plan to choose tomorrow?

a) She is indifferent

b) The book

c) The movie

unanswered

Problem 3

Which does she actually choose tomorrow?

a) She is indifferent

b) The book

c) The movie

unanswered

This utility function is time inconsistent. Did this particular example actually demonstrate time inconsistency?

Yes

No

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Problem 4a

Now suppose that=0.92

and=0.5.

What is Adwoa's present value of seeing the movie today?

unanswered

What is Adwoa's present value of reading the book, starting today?

unanswered

Problem 4b

Which will she choose today?

a) She is indifferent

b) The book

c) The movie

unanswered

Problem 5a

2 points possible (graded)

What is Adwoa's present value of seeing the movie tomorrow (one period from now)?

unanswered

What is Adwoa's present value of reading the book, starting tomorrow (one period from now)?

unanswered

Problem 5b

Which does she plan to choose tomorrow?

a) She is indifferent

b) The book

c) The movie

unanswered

Problem 6

Which does she actually choose tomorrow?

a) She is indifferent

b) The book

c) The movie

unanswered

This utility function is time inconsistent. Did this particular example actually demonstrate time inconsistency?

a) Yes

b) No

unanswered