Deck 29: What Is Good Challenges From Psychology and Philosophy

Question 1

Any consequentialist approach to normative economics that uses standard indifference maps as social indifference maps (over utilities or consumption)will choose efficient outcomes in the first-best case.

Answer 1

True
The utility (or consumption)possibility frontier is like a budget -- and,in the first best case,contains all efficient outcomes.Any social indifference map will choose from that frontier -- and will thus choose an efficient outcome.

Question 2

Positive neoclassical economists are different from positive behavioral economists in that positive behavioral economists place more value on having models accurately represent people's true happiness.

Answer 2

False
Positive economists of all stripes -- neoclassical or behavioral -- judge models by their power to predict,not by their "accuracy" in terms of assumptions.

Question 3

Since it lies in 2-dimensions,one of the drawbacks of using Lorenz curves to think about inequality is that we are restricted to thinking about only two types of individuals.

Answer 3

False
The axes on the graph for the Lorenz curve are not individual specific -- rather they give the percentage of the population from 0 to 100 without any reference to different types.

Question 4

If social indifference curves are straight lines with slope of -1,the ethical standard for judging outcomes places all weight on the sum of outcomes and no weight on the distribution of outcomes.

Question 5

In a society in which everyone lives at the subsistence level,the Gini coefficient is 0.

Question 6

In the absence of commitment devices,present-biased individuals are never as patient as they intend to be.

Question 7

Comment on the following: "Present-biased people are impatient,but impatient people don't necessarily have to be present-biased."

Question 8

When a self-aware,present-biased individual invests in a commitment device that will bind him in the future,he will resent that commitment device when the future becomes the present.

Question 9

Suppose an individual has to make a decision at time t without having all the information relevant for making the decision.At time (t+1),the relevant information is revealed.We will say that the individual made a mistake if his decision in time t would have been different had he known what he knows at time (t+1).True or False: Without behavioral economics,we would not be able to explain mistakes.

Question 10

What do you think of the following statement: To the extent to which individuals are aware of their self-control problems,markets can address the issue successfully.

Question 11

One way to think of ideas coming out of behavioral economics is to map the ideas into either impacting "tastes" or "constraints".Can you give an example of each?

Question 12

Because wealth is more concentrated than income,the Gini coefficient for the wealth distribution is greater than the Gini coefficient for the income distribution.

Question 13

Of all the constant elasticity of substitution social welfare function,only the one with elasticity of infinity will always choose the efficient outcome from a second-best consumption possibility frontier.

Question 14

Suppose an individual faces a decision of whether or not to make an investment 2 years from now.The investment will cost $10,125,and it will yield a benefit b 2 years later.
a.Suppose the individual treats a dollar 1 year from now the same way as $0.90 now.How low can b be for this individual to plan to make the investment in two years?
b.Now suppose that the individual's tastes are better characterized by the beta-delta model.Suppose delta is 0.9.For what values of beta will the individual plan the same course of action 2 years from now as he would in the typical delta model (with the same delta)?
c.Suppose beta is 0.9 (with delta also equal to 0.9).How low can b be in order for the individual to be willing to undertake the investment when he faces the choice in 2 years?
d.For what range of values for b does the individual from (c)plan to undertake the investment but then decides not to when the time comes?

Question 15

Suppose $100 invested next year results in a return of b two years from now.If individuals do not discount the future but have a beta of 0.5 (in the beta-delta model),for what range of b will an individual plan to make the investment but then reverse course next year?

Question 16

Do you agree or disagree with the following statement: "If,in the neoclassical model of decision making,the discount factor changes over time,the predictions of the beta-delta model could be mimicked in the neoclassical model." Explain.

Question 17

Prospect theory implies that individuals are risk loving over losses and risk averse over gains.

Question 18

What's the Easterlin Paradox -- and in what sense does it suggest reference-dependent preferences?

Question 19

In the presence of compensating wage differentials,explain why the consumption possibility frontier is not a good approximation of the utility possibility frontier.

Question 20

Positive economics does not require us to believe that actual happiness is the same as utility as modeled in economic theory.