This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Economics 119 Midterm 2, Spring 2007 Suggested Solutions (Please see Matt Levy for questions on grading and solutions for this midterm.) Please answer all three questions. Question 1. [42 points] When undergoing labor (during which she experiences pain), a woman will have to decide whether she wants anaesthesia. She believes that anaesthesia will relieve any pain of labor, and that it may have an adverse effect on her and the babys health later on. [Whether this is accurate is not important for the purposes of the question.] For each of the six situations below, answer the following three questions: (i) if the woman made the decision regarding future anaesthesia today, what would she tend to decide? (ii) if the woman had to predict what decision she will make in the future, what would she tend to predict? (iii) would the woman want to commit now to a decision regarding future anaesthesia, or would she think this is unnecessary? For one of the six parts of your choice, explain your answers carefully; for the other five parts, do not explain your answer. The idea behind this question is that anaesthesia is viewed as having an immediate benefit (relief of pain) and a deferred cost (potential adverse future health effects). Depending on her biases and her current state, she will trade these off differently. Assuming that one force or the other would always dominate, though its theoretically possible, would lead to an un-insightful answer and would therefore not receive full credit. Part a. The woman is currently not undergoing labor and is not in pain, and she is a naive hyperbolic discounter. (i) Because hyperbolic discounters are patient about future decisions, she would likely choose [no anaesthesia] for the future. (ii) Naive hyperbolic discounters do not realize that their preferences will change over time. She believes her future self will implement whatever is optimal from her current selfs standpoint, and from (i) we know this is [no anaesthesia]. (iii) As in (ii), naive hyperbolic discounters do not realize that their preferences change over time and therefore believe their future selves will do whatever is optimal from the current selfs standpoint. She would therefore think a commitment device is [unnecessary]. Part b. The woman is currently not undergoing labor and is not in pain, and she is a sophisticated hyperbolic discounter. (i) Because hyperbolic discounters are patient about future decisions, she would likely choose [no anaesthesia] for the future. (ii) Hyperbolic discounters realize that they will have a taste for immediate gratification once again in the future. In this case, she realizes that her future self will regard anaesthesia as providing an immediate benefit and a deferred cost. Realizing that her future self will be impatient, she correctly predicts that she would wind up choosing [anaesthesia]....
View Full Document
This homework help was uploaded on 04/20/2008 for the course ECON 119 taught by Professor K during the Spring '08 term at University of California, Berkeley.
- Spring '08