Question 1

The wage set by a worker searching for a job such that, if that wage or more if offered, it will be rejected, and the worker will continue searching is called the optimal reservation wage.

Accepted Answer

The optimal reservation wage is the wage set by a worker searching for a job such that, if that wage or more is offered, it will be accepted, and the worker will stop searching.

Question 2

Hyperbolic preferences are a particular way to discount future payoffs that leads to time-inconsistent behavior.

Accepted Answer

Hyperbolic preferences involve a rapidly declining discount rate for near-future payoffs, which can lead individuals to make choices that are inconsistent over time.

Question 3

Loewenstein and Sicherman suggest that the participants in experiments show a preference for an increasing wages profile, even though this preference is different from what present value maximizing theory predicts.

Accepted Answer

Loewenstein and Sicherman's research found that participants in experiments preferred an increasing wages profile, which contradicts present value maximizing theory.

Question 4

Today , a friend asks you to agree to pay $y in 5 years and receive $x in year 7. Your analysis concludes that x[1 / (1 + r)⁷] > y[1 / (1 + r)⁵] and, furthermore, that x[1 / (1 + r)²] > y. Your decisions are
A) hyperbolic
B) time consistent
C) time inconsistent

Accepted Answer

The decision is time consistent because the analysis is based on the present value of money, comparing the value of $x and $y at different points in time using a consistent discount rate (r). This approach does not change over time, indicating that the decision-making process is consistent across different time periods.

Question 5

Signing up for an automatic retirement savings plan at work is an example of a commitment device that would help you control your time inconsistency.

Accepted Answer

Signing up for an automatic retirement savings plan at work is a commitment device because it helps you control your time inconsistency by making regular contributions to your retirement savings without having to rely on your willpower to save money. This commitment device ensures that you are saving consistently and helps you avoid the temptation to spend your money on other things.

Question 6

The axiom that states that, given two goods separated by a fixed time but both in the future, relative preference between those goods is unaffected by how far in the future they may be is called the
A) stationery axiom
B) stationarity axiom
C) hyperbolic axiom

Accepted Answer

The axiom described is commonly known as the "stationarity axiom." The other options, "stationery" and "hyperbolic," are not commonly used terms in economics.

Question 7

When calculating present value, as t becomes larger and because r≥0, a_t / (1 + r)ᵗ goes to A) zero B) positive infinity C) negative infinity

Accepted Answer

As t becomes larger, the denominator of the fraction (1+r)^t approaches infinity while the numerator remains constant. Thus, the fraction approaches zero.

Question 8

To obtain X dollars t years from now, you would have to put only X / (1 + r)ᵗ dollars in the bank today, where r is the interest rate per year.

Accepted Answer

This is the formula for calculating present value of a future amount, taking into account the effects of interest. So, if you want to have X dollars after t years, you should invest X / (1 + r)ᵗ dollars today, assuming a constant interest rate of r per year.

Question 9

The important point of discounting is that it matters when you get your money and not just how much you will be getting.

Accepted Answer

Discounting takes into consideration the time value of money, which means the timing of when you receive the money is equally important as the actual amount of money you receive.

Question 10

A decision maker has D pesos and puts this amount in the bank for one year at an interest rate of r percent a year. At the end of one year, the decision maker will have A) D(1 + r) pesos B) D(1 + r)² pesos C) D(1 + r) dollars

Accepted Answer

The formula for simple interest is I = Prt, where P is the principal (initial amount), r is the interest rate, and t is the time period. Since the time period is one year, we have I = Pr. The total amount in the bank after one year is the sum of the principal and the interest earned, which is D + I = D + Pr = D(1 + r). Therefore, the correct answer is A.

Question 11

The discount factor $\delta$ equals A) 1/(1 + r) B) (1 + r) C) 1/(1 + r)^t

Accepted Answer

The discount factor is the present value of a future payment or cash flow. It is calculated using the equation DF= 1/(1+r)^n, where r is the discount rate and n is the number of time periods. So, option A is the correct choice as it represents the formula for calculating the discount factor. Option B represents the future value factor, and option C is not a valid formula.

Question 12

The optimal reservation wage is the idea that, in a dynamic economic problem, at any point in time the decision maker can choose an optimal action by comparing the value of stopping versus continuing in an optimal fashion.

Accepted Answer

The answer of The optimal reservation wage is the idea...

Question 13

The slope of a hyperbolic discount function ________________ as we move through time.
A) stays constant
B) equals -$\delta$
C) changes

Accepted Answer

The slope of a hyperbolic discount function changes as we move through time, according to the formula: k/(1 + $\delta$t), where k is a constant and $\delta$ is the discount rate. As t increases, the denominator becomes larger, causing the slope to decrease. Therefore, the discount function becomes less steep over time.

Question 14

When shopping for the best price on a durable good, the only thing you have to worry about is stopping your search too soon and, as a result, accepting a price that is too high.

Accepted Answer

While stopping your search too soon and accepting a high price is a concern, other factors such as shipping costs, warranty, product quality, and after-sales service are also important considerations when shopping for durable goods.

Question 15

In the Loewenstein and Sicherman survey specifying different wage streams, what percentage of respondents exhibited present value maximization behavior?
A) 77.3%
B) 50.0%
C) 7.3%

Accepted Answer

In the Loewenstein and Sicherman survey, only 7.3% of respondents exhibited present value maximization behavior, indicating a low prevalence of this behavior among the participants.

Question 16

Experimental and real world data support
A) hyperbolic discounting models
B) exponential discounting models
C) time-consistent discounting models

Accepted Answer

Hyperbolic discounting models are supported by both experimental and real-world data, showing that people tend to prefer smaller, immediate rewards over larger, delayed ones, and this preference decreases over time in a non-linear way.

Question 17

A decision maker exhibits time consistency if, when faced with identical intertemporal choices that are simply separated by time, the choices made differ.

Accepted Answer

If a decision maker exhibits time consistency, their choices should remain the same regardless of when the decision is made.

Question 18

Given two goods separated by a fixed time but both in the future, relative preference between those goods is unaffected by how far in the future they may be. This is the stationarity axiom of standard economic theory.

Accepted Answer

The stationarity axiom asserts that if there are two goods that occur in the future, the relative preference between them will not be affected by the length of time between their occurrence. This axiom is a fundamental assumption of standard economic models of intertemporal choice.

Question 19

Given a positive discounting factor, the best wage stream for a present value maximizing subject is the
A) flat stream
B) declining stream
C) increasing stream

Accepted Answer

The answer of Given a positive discounting factor, the best...

Question 20

Exponential discounting functions imply that a deferred good is discounted in value by a ___________ fraction per unit time.
A) decreasing
B) constant
C) increasing

Accepted Answer

Exponential discounting functions imply that a deferred good is discounted in value by a constant fraction per unit time, reflecting a consistent rate of time preference over different periods.

Quiz 12: Decision Making Over Time

The wage set by a worker searching for a job such that, if that wage or more if offered, it will be rejected, and the worker will continue searching is called the optimal reservation wage.

Hyperbolic preferences are a particular way to discount future payoffs that leads to time-inconsistent behavior.

Loewenstein and Sicherman suggest that the participants in experiments show a preference for an increasing wages profile, even though this preference is different from what present value maximizing theory predicts.

Today , a friend asks you to agree to pay $y in 5 years and receive $x in year 7. Your analysis concludes that x[1 / (1 + r) ⁷] > y[1 / (1 + r) ⁵] and, furthermore, that x[1 / (1 + r) ²] > y. Your decisions are

Signing up for an automatic retirement savings plan at work is an example of a commitment device that would help you control your time inconsistency.

The axiom that states that, given two goods separated by a fixed time but both in the future, relative preference between those goods is unaffected by how far in the future they may be is called the

When calculating present value, as t becomes larger and because r≥0, a_t / (1 + r) ᵗ goes to

To obtain X dollars t years from now, you would have to put only X / (1 + r)ᵗ dollars in the bank today, where r is the interest rate per year.

The important point of discounting is that it matters when you get your money and not just how much you will be getting.

A decision maker has D pesos and puts this amount in the bank for one year at an interest rate of r percent a year. At the end of one year, the decision maker will have

The discount factor $\delta$ equals

The optimal reservation wage is the idea that, in a dynamic economic problem, at any point in time the decision maker can choose an optimal action by comparing the value of stopping versus continuing in an optimal fashion.

The slope of a hyperbolic discount function ________________ as we move through time.

When shopping for the best price on a durable good, the only thing you have to worry about is stopping your search too soon and, as a result, accepting a price that is too high.

In the Loewenstein and Sicherman survey specifying different wage streams, what percentage of respondents exhibited present value maximization behavior?

Experimental and real world data support

A decision maker exhibits time consistency if, when faced with identical intertemporal choices that are simply separated by time, the choices made differ.

Given two goods separated by a fixed time but both in the future, relative preference between those goods is unaffected by how far in the future they may be. This is the stationarity axiom of standard economic theory.

Given a positive discounting factor, the best wage stream for a present value maximizing subject is the

Exponential discounting functions imply that a deferred good is discounted in value by a ___________ fraction per unit time.

Quiz 12: Decision Making Over Time

The wage set by a worker searching for a job such that, if that wage or more if offered, it will be rejected, and the worker will continue searching is called the optimal reservation wage.

Hyperbolic preferences are a particular way to discount future payoffs that leads to time-inconsistent behavior.

Loewenstein and Sicherman suggest that the participants in experiments show a preference for an increasing wages profile, even though this preference is different from what present value maximizing theory predicts.

Today , a friend asks you to agree to pay $y in 5 years and receive $x in year 7. Your analysis concludes that x[1 / (1 + r) ⁷] > y[1 / (1 + r) ⁵] and, furthermore, that x[1 / (1 + r) ²] > y. Your decisions are

Signing up for an automatic retirement savings plan at work is an example of a commitment device that would help you control your time inconsistency.

The axiom that states that, given two goods separated by a fixed time but both in the future, relative preference between those goods is unaffected by how far in the future they may be is called the

When calculating present value, as t becomes larger and because r≥0, at / (1 + r) ᵗ goes to

To obtain X dollars t years from now, you would have to put only X / (1 + r)ᵗ dollars in the bank today, where r is the interest rate per year.

The important point of discounting is that it matters when you get your money and not just how much you will be getting.

A decision maker has D pesos and puts this amount in the bank for one year at an interest rate of r percent a year. At the end of one year, the decision maker will have

The discount factor δ\deltaδ equals

The optimal reservation wage is the idea that, in a dynamic economic problem, at any point in time the decision maker can choose an optimal action by comparing the value of stopping versus continuing in an optimal fashion.

The slope of a hyperbolic discount function ________________ as we move through time.

When shopping for the best price on a durable good, the only thing you have to worry about is stopping your search too soon and, as a result, accepting a price that is too high.

In the Loewenstein and Sicherman survey specifying different wage streams, what percentage of respondents exhibited present value maximization behavior?

Experimental and real world data support

A decision maker exhibits time consistency if, when faced with identical intertemporal choices that are simply separated by time, the choices made differ.

Given two goods separated by a fixed time but both in the future, relative preference between those goods is unaffected by how far in the future they may be. This is the stationarity axiom of standard economic theory.

Given a positive discounting factor, the best wage stream for a present value maximizing subject is the

Exponential discounting functions imply that a deferred good is discounted in value by a ___________ fraction per unit time.

When calculating present value, as t becomes larger and because r≥0, a_t / (1 + r) ᵗ goes to

The discount factor $\delta$ equals