Problem Set 11 Solutions


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Unformatted text preview: in period two. From period zero perspective this gives us utility of ½*(‐9/4) = ‐9/8, which is worse than just doing it immediately (a utility of ‐1). (e) Self‐control problems may also explain why people borrow so much on credit cards (at very high interest rates), smoke and drink too much, and have difficulty dieting and exercising. However, the welfare‐maximizing policy response typically depends on whether individuals are sophisticated or naïve about their self‐control problems. Hence economists are very interested in understanding whether individuals are sophisticated or naïve. In a recent paper, economists at UC Berkeley found that members of a gym expected to use the gym 9.5 times per month, and so they paid a monthly membership fee of $70. However, these individuals ended up actually going to the gym an average of 4.2 times per month. As a result, they paid an average price of $70 / 4.2 ≈ $16.67 per visit, even though they could have paid $10 per visit on a pay‐ per‐visit basis. Explain why these facts are consistent with gym‐goers having a self‐control problem getting themselves to go the gym and being naïve about that self‐control problem. [ This evidence is from Della Vigna, Stefano, and Ulrike Malmendier (2006), “Paying Not to Go to the Gym,” American Economic Review, 96, 694‐719. If you’re interested, you can look at the paper: ] Going to the gym requires an immediate effort cost and provides a distant reward (that six pack of abs you’ve always dreamed of). When both the cost of going to the gym and the benefits of improved 3 health are in the future, the gym members think that going to the gym is a good idea. But when the time comes to actually go, the gym goers are experiencing self‐control problems because they stay on their couch to avoid incurring the immediate cost of walking to the gym. They overvalue the cost re...
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