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Course: ECON 134A 62360, Spring 2012
School: UC Irvine
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Word Count: 333

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3 1. Homework Bob has a quasi-hyperbolic discounted utility U (c0 , c1 , c2 ) = u(c0 ) + u(c1 ) + 2 u(c2 ). Let u(c) = c. (a) Suppose that Bob is indierent between the three proles c0 = c1 = c2 = 10 c0 = 10, c1 = 9, c2 = 11 c0 = 20, c1 = c2 = 0. Find and . (b) Suppose that at t = 1, he has a quasi-hyperbolic discounted utility U1 (c1 , c2 ) = u(c1 ) + u(c2 ). Argue that Bobs preferences are time inconsistent....

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3 1. Homework Bob has a quasi-hyperbolic discounted utility U (c0 , c1 , c2 ) = u(c0 ) + u(c1 ) + 2 u(c2 ). Let u(c) = c. (a) Suppose that Bob is indierent between the three proles c0 = c1 = c2 = 10 c0 = 10, c1 = 9, c2 = 11 c0 = 20, c1 = c2 = 0. Find and . (b) Suppose that at t = 1, he has a quasi-hyperbolic discounted utility U1 (c1 , c2 ) = u(c1 ) + u(c2 ). Argue that Bobs preferences are time inconsistent. (Give an example when at t = 1 he reverts his previous choices that he made at t = 0.) 2. Ann has three days left before an exam. Each day she has a hyperbolic utility with = 1 and = 0.5. Each day she can either work hard and get a delayed reward of 10, or have fun with an immediate reward of 7. (Note that unlike the examples in the lecture she can work 1, 2, or 3 days and get 10, 20, or 30 in delayed rewards respectively.) (a) What will choose she to do in each of these days? (b) Suppose that on the rst day, she can promise to pay a ne if she does not work hard for the other two days. Suppose that paying the ne has an immediate cost of 10. Will she want to make this obligation? (c) What if the ne has an immediate cost 1? 3. Chris needs to decide whether to go home or go to the library. At home, his menu is H = {a, b, c} where a is study hard, b is play a video game, and c is surf the Internet. In the library, his menu is L = {a, c}. He has a costly self-control, and his utility is U (A) = max[u(x) max[v (y ) v (x)]] = max(u(x) + v (x)) max v (y ). xA y A xA y A Suppose that u(a) = 10, u(b) = u(c) = 0 and v (a) = 0, v (b) = 15 and v (c) = 5. Which of the two menus H and L will Chris choose? What choices does he plan to make in the menus H and L? 4. Case 6.3 on p. 263.
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UC Irvine - ECON 134A - 62360
Homework 41. Let x1 and x2 be the payos of agents 1 and 2 respectively. Suppose that agent1 has utility x2 + (1 )x1 if x1 x2U1 (x1 , x2 ) = x2 + (1 )x1 if x1 &lt; x2 .(a) Suppose that &lt; &lt; 0. Interpret the utility function of agent 1.(b) Suppose that =
UC Irvine - ECON 134A - 62360
Homework 51. Calculate the expected utility of a person who has wealth W = \$10000, faces apotential loss of C = \$5000 with probability and has a utility index u(x) overmoney:(i) = 0.01 and u(x) = x2 ;1(ii) = 0.01 and u(x) = x if x 5000 and u(x) = 2
UC Irvine - ECON 134A - 62360
Requirements1. Main Textbook (bookstore): Wilkinson, An Introductionto Behavioral Economics,2. Supplementary Reading (more advanced):Camerer, Behavioral Game Theory,Camerer, Lowenstein, Rabin, Advances in BehavioralEconomics,Kahneman and Tversky, C
UC Irvine - ECON 134A - 62360
Add/Drop CardsI cannot add people to a full class.That is a department policy.Keep trying to register electronically.No drop after two weeks.Standard vs Behavioral EconomicModels (SEM vs BEM)SEM describes how agents should behave.Behavioral Econom
UC Irvine - ECON 134A - 62360
Midterm ExamsFirst Midterm: October 26Second Midterm: November 16Each weighs 30%Multiple Choice Only (30-40 questions)First homework will be assigned today.Most general SEM: Utility MaximizationPeople make choices that maximize their utility.Utili
UC Irvine - ECON 134A - 62360
Homework and DiscussionsDiscussions start next week.You can attend any discussion, or more than one if youlike. (I ll post the entire schedule).Some questions (especially cases) do not have clear cutanswers.Therefore, you should attempt to augment T
UC Irvine - ECON 134A - 62360
Examples of DUMc0 = c1 = c2 = 10 = 0.5U(c0, c1, c2) = 10 + 0.5 * 10 + 0.5*0.5* 10 = 17.5c0 = 10 c1 = 0 c2 = 34U(c0, c1, c2) = 10 + 0.5 * 0 + 0.5*0.5* 34 = 18.25The second stream is preferred to first even though it leads to a rollercoaster in consu
UC Irvine - ECON 134A - 62360
Three Layers of Economic Models1. The top layer Standard Economic Models (utilitymaximization, DUM). These models are tractable inapplications and allow easy computations.2. The bottom layer data. Laboratory and naturalexperiments.3. The medium laye
UC Irvine - ECON 134A - 62360
BEM: Hyperbolic DiscountingThis model has the formU(c0, c1, ct) = t = 0, 1, t D(t) u(ct)where D(t) is called the discount function.D(t+1)/D(t) describes discounting between periods t+1and t.In the DUM, D(t) = t and D(t+1)/D(t) = = 1/(1+)Hyperbolic
UC Irvine - ECON 134A - 62360
Standard Economic Models utility maximization delayed payoffs are discounted in a time-consistentfashion (DUM) utility depends only on the personal consumptionStigler 81: when self-interest and ethical values with wideverbal allegiance are in confli
UC Irvine - ECON 134A - 62360
Fairness and Social PreferencesWhat do people care about? others welfare (charitable giving) fairness and inequality (pricing, entitlements, referencetransactions, games) intentions social and religious normsFairness and Inequality in ExperimentsD
UC Irvine - ECON 134A - 62360
Question 1People will prefer to commit if their future choices are time-inconsistent they are aware of thatTherefore Hyperbolic (or quasi-hyperbolic) discountingmodel with sophistication can explain commitments, butDUM or Hyperbolic DUM with naivete
UC Irvine - ECON 134A - 62360
Midterm Exam multiple choice (35-40) questions, 50 minutes bring your own scantron F-288-PAR-L one page of handwritten notes, two sides, not largerthan the usual letter-size printer paper no cooperation! Make your own mistakes. If twostudents make i
UC Irvine - ECON 134A - 62360
Midterm Exam answer key and grades will be posted tomorrow you can pick up your scantron and discuss solutions atmy office hours average was 23.5 out of 34 (one question dropped)85% - cutoff for solid A70-75% -cutoff for solid B60-65% -cutoff for s
UC Irvine - ECON 134A - 62360
Expected Value and Expected UtilityExpected Utility:Suppose that an action f delivers several monetary payoffs x1, x2, .,xn with probabilities p1, p2 , . pn respectively.Then the expected value isEV(f) = p1 x1 + p2 x2 + pn xnAnd expected utility is
UC Irvine - ECON 134A - 62360
Question 1For some events, neither symmetry nor frequencies canbe used to compute probabilities.Example: How likely is it that Lakers win the next title?Also many people do not understand probabilities(especially small ones) very well.It seems that
UC Irvine - ECON 134A - 62360
Prospect TheoryBEM: Kahneman and Tversky (79) proposed the prospect theoryThe simplest form of this theory applies to prospects written as(x, p; y, q)that deliver a gain x&gt; 0 with probability p and a loss y&lt;0 withprobability q. With the remaining pro
UC Irvine - ECON 134A - 62360
Question 1Prospect theory has the following features Loss aversion.v(-x) &lt; - v(x) where x&gt;0 diminishing sensitivity for gains and for losses. It impliesrisk aversion for gains and risk loving for losses. overweighing small probabilities and underwei
UC Irvine - ECON 134A - 62360
Standard Economic Model: Game TheoryGame theory is a tool for studying strategic behavior ofseveral players.The behavior of each player in a game should take intoaccount the behavior of others and the mutual recognitionof this interdependence.Applic
UC Irvine - ECON 134A - 62360
Standard Economic Model: Game TheoryGame theory is a tool for studying strategic behavior ofseveral players.The behavior of each player in a game should take intoaccount the behavior of others and the mutual recognitionof this interdependence.Applic
UC Irvine - ECON 134A - 62360
Standard Economic Model: Game TheoryGame theory is a tool for studying strategic behavior ofseveral players.The behavior of each player in a game should take intoaccount the behavior of others and the mutual recognitionof this interdependence.Applic
UC Irvine - ECON 134A - 62360
Second Midterm: Questions 1-8Charness, Rabin (02)Let x1 and x2 be the payoffs for agents 1 and 2.U1 (x1, x2) = x2 + (1 - ) x1 if x1 x2= x2 + (1 -) x1 if x1 &lt; x2Standard EM: = = 0altruism: &gt; &gt; 0Altruism and spite: &lt; 0 &lt; Fehr, Schmidt (99) : &lt; - &lt; 0
UC Irvine - ECON 134A - 62360
What happens in experiments?Dominant strategies are robust.In simple games, subjects pick the dominant strategy more90% of the time.One problem is fairness concerns, such as in the dictatorgames.What happens in experiments?Iterated dominant strateg
UC Irvine - ECON 134A - 62360
Final Exam Wed, Dec 11, 4-6pm multiple choice , 50-55 questions, two hours, less timepressure bring your own scantron F-288-PAR-L two pages of handwritten notes no cooperation! office hours: Tue 12-1:30 SSPA 3177 please, submit your electronic eva
UC Irvine - ECON 134A - 62360
Second Midterm, Behavioral Economics 115You have 50 minutes to 30 multiple choice questions. Good luck.1. The empirical evidence in the dictator games shows that people are typically willing to shareabout \$2 out of a \$10 endowment. This behavior can be
UC Irvine - ECON 134A - 62360
Midterm 1You have 50 minutes to answer 35 questions.1. Ann prefers x to y , and y to z . Then the function u(x) = 3, u(y ) = 1, u(z ) = 10000 is her(A) experienced utility; (B) decision utility; (C) anticipatory utility; (D) real-time utility.Answer:
UC Irvine - ECON 134A - 62360
NBER WORKING PAPER SERIESPSYCHOLOGY AND ECONOMICS:EVIDENCE FROM THE FIELDStefano DellaVignaWorking Paper 13420http:/www.nber.org/papers/w13420NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138September 2007I would l
UC Irvine - ECON 134A - 62360
QuizThe objective of this quiz is to help you evaluate your progress, and to provide a starting pointfor further discussion. This quiz will not aect your grade, and your answers need not be submitted.You have 15 minutes.1. Ann maximizes discounted uti
UC Irvine - ECON 134A - 62360
Quiz #1 Answers, Econ 115 Fall 2009This solution guide was written by Andy C. Chang. Any remaining errors aremy responsibility. Please direct any corrections to achang19@uci.edu1)Under the discounted utility model, Ann will try to maximize her utility
UC Irvine - ECON 134A - 62360
Quiz 2You have 20 minutes to answer the following questions.1. Ann prefers an improving sequence of annual wages 25K, 30K, 35K to the decreasing sequence35K, 30K, 25K. Her behavior can be explained by(A) discounted utility model with positive discount
UC Irvine - ECON 134A - 62360
Quiz 3You have 20 minutes to answer the following questions.1. Ann prefers to commit today to do a project tomorrow rather than to decide tomorrow. Herpreference for commitment can be explained by(A) discounted utility model;(B) hyperbolic discountin
UC Irvine - ECON 134A - 62360
Quiz 5You have 15 minutes to answer the following questions.1. The prospect theory accommodates(A) risk loving behavior over moderate losses;(B) loss aversion;(C) accommodates buying lottery tickets together with expensive product insurance;(D) all
UC Irvine - ECON 134A - 62360
Quiz 6You have 20 minutes to answer the following questions.1. Which of the following concepts of equilibrium in game theory is most robust in experiments(i.e. most accurately describes relevant empirical data)(A) dominant strategy equilibrium;(B) it
UC Irvine - ECON 134A - 62360
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ProgrammingFundamental UsingCSE0421, Summer 2009Lecturer: Dao Trong Nghianghia@ieee.orgCourse Objectives At the completion of this course, you willbe familiar with: The fundamentals of computer programming. Subset of the C language is used as th
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