Question 1

Describe a commitment device designed to counteract time-inconsistent behavior.

Accepted Answer

The answer of Describe a commitment device designed to counteract...

Question 2

Which of the following is an example of a commitment device?

Accepted Answer

Lu-yin is committing to saving a portion of their paycheck for a specific purpose (vacation), which is an example of a commitment device. Option B is an example of time preference, and Option C is an example of delayed gratification, but neither involves a commitment device.

Question 3

A decision maker with hyperbolic preferences is very

Accepted Answer

A decision maker with hyperbolic preferences is generally more impatient than a decision maker with exponential preferences. This is because hyperbolic preferences lead to a higher discount rate in the short term, meaning the decision maker is willing to sacrifice more long-term gain for immediate gratification.

Question 4

Let K = search costs, P₂ = the second possible price for an iPhone, and E(P) = the average iPhone price in the market. If K > P₂ > E(P), then the decision maker's opportunity cost of time is

Accepted Answer

If K (search costs) is greater than P₂ (the second possible price for an iPhone), which in turn is greater than E(P) (the average iPhone price in the market), it implies that the decision maker is willing to incur a high cost (K) to find a price (P₂) that is still above the average market price (E(P)). This suggests that the decision maker values their time significantly, as they are willing to spend more on search costs than the savings they might achieve from finding a price below the average. Therefore, their opportunity cost of time is high.

Question 5

When shopping for the best price on a durable good, we are constantly worried about

Accepted Answer

When shopping for a durable good, it is important to find the best price possible. However, this can lead to two potential worries: stopping the search too soon and accepting a price that is too high or searching for too long and wasting time and money in the process. Therefore, both options A and B are correct and it is important to strike a balance between them in order to find the best deal without wasting excessive time and resources.

Question 6

You are a parent living in the 2010s with a child who continues to live in the 2020s after you die and a grandchild who lives in the 2030s and continues to live after your child dies. There are two goods, x and y. The utility function of your child is U₂ = 7x + 5y +

Accepted Answer

The answer of You are a parent living in the...

Question 7

To better understand the workings of the labor market and explain its unemployment statistics, we need to understand how workers

Accepted Answer

Understanding how workers search for jobs and accept them is crucial to understanding the dynamics of the labor market and its unemployment statistics. Workers may search for jobs through various means, including job postings, personal networks, or recruitment agencies. They must also consider factors such as location, pay, and benefits when deciding whether to accept a job offer. These decisions can have a significant impact on the overall unemployment rate and labor force participation rate.

Question 8

For Alice Hijr the passage of time does not reverse her decisions. She discounts deferred income streams by a constant fraction per unit of time. Alice is patient. How would a person with hyperbolic preferences differ from Alice?

Accepted Answer

The answer of For Alice Hijr the passage of time...

Question 9

Let K = search costs, P₂ = the second possible price for an iPhone, and E(P) = the average iPhone price in the market. If K < P₂ < E(P), then the decision maker's opportunity cost of time is

Accepted Answer

The opportunity cost of time is normal when the search costs are less than the second possible price, which is less than the average market price.

Question 10

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 is known as

Accepted Answer

The idea described in the question is Bellman's Principle of Optimality, which states that an optimal policy has the property that whatever the initial state and initial decision are, the remaining decisions must constitute an optimal policy with regard to the state resulting from the first decision. The other options, the Principle of Hyperbolic Preferences and Bellman's Exponential Discounting, are not related to this idea.

Question 11

For most economic decisions, an economic agent should continue doing any activity as long as the marginal benefits from persisting in that activity are _______________ or equal to the marginal _________.

Accepted Answer

An economic agent should continue doing any activity as long as the marginal benefits from persisting in that activity are greater than or equal to the marginal cost. This means that the benefits of the activity should exceed the costs incurred. Otherwise, it is not economically rational to continue with the activity.

Question 12

What type of dynamic intertemporal choice problem is solved using backward induction?

Accepted Answer

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Question 13

Imagine that, if you have preferred receiving a smaller reward today over a larger reward three months from today, then you will always prefer the smaller reward over the larger reward regardless of when the smaller reward is offered as long as the difference between the rewards remains three months. In Kirby and Herrnstein's experiments, you would be exhibiting

Accepted Answer

Exponential discounting implies a consistent preference over time, meaning if you prefer a smaller reward now over a larger reward later, you will always prefer the smaller reward regardless of when it's offered, as long as the time difference remains the same.

Question 14

Describe the stationarity axiom.

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Question 15

If search costs were to _______, the optimal reservation wage must _______.

Accepted Answer

The answer of If search costs were to _______, the...

Question 16

The first step in solving a problem involving searching for the lowest price or intergenerational giving is to use

Accepted Answer

Backward induction is a method used in decision making where you start with the goal (in this case, finding the lowest price or determining intergenerational giving) and work backwards to determine the best course of action to achieve that goal.

Question 17

Kirby and Herrnstein's experimental results indicate that people are ____________ in their choices and that ____________ gratification needs to be included in theory.

Accepted Answer

Kirby and Herrnstein's experiments suggest that people tend to make impulsive choices and prefer immediate gratification, highlighting the importance of considering immediate rewards in behavioral theories.

Question 18

Explain the important points about discounting.

Accepted Answer

The answer of Explain the important points about discounting....

Question 19

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 is known as the

Accepted Answer

The optimal reservation wage is the wage at which a worker is indifferent between accepting a job offer and continuing to search for a better one. It is the minimum wage that the worker will accept and is the best choice among the given options.

Quiz 12: Decision Making Over Time