Rubinstein2005-page146 - ) is not monotonically decreasing...

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October 21, 2005 12:18 master Sheet number 144 Page number 128 128 Review Problems Problem 8 (Tel Aviv 1998) A consumer with wealth w = 10 “must” obtain a book from one of three stores. Denote the prices at each store as p 1 , p 2 , p 3 . All prices are below w in the relevant range. The consumer has devised a strategy: he compares the prices at the Frst two stores and obtains the book from the Frst store if its price is not greater than the price at the second store. If p 1 > p 2 , he compares the prices of the second and third stores and obtains the book from the second store if its price is not greater than the price at the third store. He uses the remainder of his wealth to purchase other goods. 1. What is this consumer’s “demand function”? 2. Does this consumer satisfy “rational man” assumptions? 3. Consider the function v ( p 1 , p 2 , p 3 ) = w p i , where i is the store from which the consumer purchases the book if the prices are ( p 1 , p 2 , p 3 ) . What does this function represent? 4. Explain why v ( ·
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Unformatted text preview: ) is not monotonically decreasing in p i . Com-pare with the indirect utility function of the classic consumer model. Problem 9 (Tel Aviv 1999) Tversky and Kahneman (1986) report the following experiment: each participant receives a questionnaire asking him to make two choices, one from © a , b ª and the second from © c , d ª : a. A sure proFt of $240. b. A lottery between a proFt of $1000 with probability 25% and 0 with probability 75%. c. A sure loss of $750. d. A lottery between a loss of $1000 with probability 75% and 0 with probability 25%. The participant will receive the sum of the outcomes of the two lotteries he chooses. Seventy-three percent of participants chose the combination a and d . What do you make of this result? Problem 10 (Princeton 2000) Consider the following social choice problem: a group has n mem-bers ( n is odd) who must choose from a set containing 3 elements...
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This note was uploaded on 12/29/2011 for the course ECO 443 taught by Professor Aswa during the Fall '10 term at SUNY Stony Brook.

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