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Exam 12: Decision Making Over Time

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Question 21

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Describe a commitment device designed to counteract time-inconsistent behavior.

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Student answers will vary. The examples ...

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Question 22

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To better understand the workings of the labor market and explain its unemployment statistics, we need to understand how workers

A) search for jobs and accept them
B) grant inheritances to successive generations
C) weigh their opportunity costs of time when shopping for durable goods

D) All of the above
E) B) and C)

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Question 23

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Loewenstein and Sicherman suggest that the participants in experiments show a preference for an increasing wages profile, even though this preference is different from what present value maximizing theory predicts.

Given a positive discounting factor, the best wage stream for a present value maximizing subject is the

A decision maker with hyperbolic preferences is very

Signing up for an automatic retirement savings plan at work is an example of a commitment device that would help you control your time inconsistency.

The axiom that states that, given two goods separated by a fixed time but both in the future, relative preference between those goods is unaffected by how far in the future they may be is called the

Describe the stationarity axiom.

The idea that, in a dynamic economic problem, at any point in time the decision maker can choose an optimal action by comparing the value of stopping versus continuing in an optimal fashion is known as

For Alice Hijr the passage of time does not reverse her decisions. She discounts deferred income streams by a constant fraction per unit of time. Alice is patient. How would a person with hyperbolic preferences differ from Alice?

In the Loewenstein and Sicherman survey specifying different wage streams, what percentage of respondents exhibited present value maximization behavior?

You are a parent living in the 2010s with a child who continues to live in the 2020s after you die and a grandchild who lives in the 2030s and continues to live after your child dies. There are two goods, x and y. The utility function of your child is U₂ = 7x + 5y +

For most economic decisions, an economic agent should continue doing any activity as long as the marginal benefits from persisting in that activity are _______________ or equal to the marginal _________.

When shopping for the best price on a durable good, we are constantly worried about

The wage set by a worker searching for a job such that, if that wage or more if offered, it will be rejected, and the worker will continue searching is called the optimal reservation wage.

Given two goods separated by a fixed time but both in the future, relative preference between those goods is unaffected by how far in the future they may be. This is the stationarity axiom of standard economic theory.

The first step in solving a problem involving searching for the lowest price or intergenerational giving is to use

Which of the following is an example of a commitment device?

Let K = search costs, P₂ = the second possible price for an iPhone, and E(P) = the average iPhone price in the market. If K > P₂ > E(P) , then the decision maker's opportunity cost of time is