30. Behavioural Economics - Solutions

30. Behavioural Economics - Solutions - Chapter 30 NAME...

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Chapter 30 NAME Behavioral Economics Introduction. In this section we present some problems designed to help you think about the nature of rational and not-so-rational choice. You will meet a hyperbolic procrastinator and an exponential procrastinator. Do these people remind you of anyone you know? You will meet Jake, who is aware that he has a self-control problem with beer-drinking. For those who have not experienced Jake’s problem, have you ever avoided putting a full plate of chocolate chip cookies in front of you, because you know what will happen if you start eating them? Have you ever had trouble making a choice because there are too many options available? How would you react if Harriet Hardnose had you over a barrel? How rationally do you think the other people that you deal with are likely to behave? 30.1 (2) It is early Monday morning and Darryl Dawdle must write a term paper. Darryl’s instructor does not accept late papers and it is crucial for Darryl to meet the deadline. The paper is due on Thursday morning, so Darryl has three days to work on it. He knows that it will take him 12 hours to do the research and write the paper. Darryl hates working on papers and likes to postpone unpleasant tasks. But he also knows that it is less painful to spread the work over all three days rather than doing it all on the last day. For any day, t ,le t x t be the number of hours that he spends on the paper on day t ,and x t +1 x t +2 the number of hours he spends on the paper the next day and the day after that. At the beginning of day t , Darryl’s preferences about writing time over the next 3 days are described by the utility function U ( x t ,x t +1 t +2 )= x 2 t 1 2 x 2 t +1 1 3 x 2 t +2 . (a) Suppose that on Monday morning, Darryl makes a plan by choosing x M , x T x W to maximize his utility function U ( x M T W x 2 M 1 2 x 2 T 1 3 x 2 W subject to the constraint that he puts in a total of 12 hours work on the paper. This constraint can be written as x M + x T + x W = 12. How many hours will he plan to work on Monday? x M = 2 hours. Tuesday? x T = 4 hours. Wednesday? x W = 6 hours. (Hint: If he is maximizing his utility subject to this constraint, his marginal disutility for working must be the same on each day. Write two equations, one that sets his marginal disutility for working on Tuesday equal to that of working on Monday and one that sets his marginal disutility for
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374 BEHAVIORAL ECONOMICS (Ch. 30) working on Wednesday equal to that of working on Monday. Use these two equations plus the budget constraint x M + x T + x W =24toso lvefor x M , x T ,and x W .) (b) On Monday, Darryl spent 2 hours working on his term paper. On Tuesday morning, when Darryl got up, he knew that he had 10 hours of work left to do. Before deciding how much work to do on Tuesday, Darryl consulted his utility function. Since it is now Tuesday, Darryl’s utility function is U ( x T ,x W Th )= x 2 T 1 2 x 2 W 1 3 x 2 , where x T , x W x are hours spent working on Tuesday, Wednesday and Thursday. Of course work done on Thursday won’t be of any use.
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This note was uploaded on 07/16/2010 for the course ECON 21 taught by Professor Johng.sessions during the Summer '09 term at Dartmouth.

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30. Behavioural Economics - Solutions - Chapter 30 NAME...

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