Y5

a) Imagine that exponential discounters Alpha and Bravo are facing a choice between a small reward in the short-run (SS) and a larger reward in the long-run (LL). Whereas Alpha discounts the future very much, Bravo barely discounts the future at all. Draw a graph to capture Alpha's and Bravo's preferences over the two rewards SS and LL.

b) Imagine that hyperbolic discounter Charlie is facing the same two rewards, SS and LL. Before either option is available to him, he prefers LL. However, when SS becomes available, he feels compelled to choose SS (prefers SS over LL). Draw a graph that captures Charlies preferences over the two rewards. Explain how the graph depicts the observed preference reversal. (Hint: use the graphs on page 194 as examples).