Exam 12: Decision Making Over Time

Exponential discounting functions imply that a deferred good is discounted in value by a ___________ fraction per unit time.

The optimal reservation wage is 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.

If search costs were to _______, the optimal reservation wage must _______.

The slope of a hyperbolic discount function ________________ as we move through time.

Imagine that, if you have preferred receiving a smaller reward today over a larger reward three months from today, then you will always prefer the smaller reward over the larger reward regardless of when the smaller reward is offered as long as the difference between the rewards remains three months. In Kirby and Herrnstein's experiments, you would be exhibiting

When shopping for the best price on a durable good, the only thing you have to worry about is stopping your search too soon and, as a result, accepting a price that is too high.

The important point of discounting is that it matters when you get your money and not just how much you will be getting.

The discount factor $\delta$ equals

To obtain X dollars t years from now, you would have to put only X / (1 + r)ᵗ dollars in the bank today, where r is the interest rate per year.

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

A decision maker exhibits time consistency if, when faced with identical intertemporal choices that are simply separated by time, the choices made differ.

Hyperbolic preferences are a particular way to discount future payoffs that leads to time-inconsistent behavior.

When calculating present value, as t becomes larger and because r≥0, a_t / (1 + r)ᵗ goes to

Kirby and Herrnstein's experimental results indicate that people are ____________ in their choices and that ____________ gratification needs to be included in theory.

The wage set by a worker searching for a job such that, if that wage or more is offered, it will be accepted, and the worker will stop searching is known as the

Experimental and real world data support

A decision maker has D pesos and puts this amount in the bank for one year at an interest rate of r percent a year. At the end of one year, the decision maker will have

Explain the important points about discounting.

Today , a friend asks you to agree to pay $y in 5 years and receive $x in year 7. Your analysis concludes that x[1 / (1 + r)⁷] > y[1 / (1 + r)⁵] and, furthermore, that x[1 / (1 + r)²] > y. Your decisions are

What type of dynamic intertemporal choice problem is solved using backward induction?