Exam 29: What Is Good Challenges From Psychology and Philosophy

In a society in which everyone lives at the subsistence level, the Gini coefficient is 0.

Normative economics often takes a consequentialist philosophical approach to determine whether a policy is good.

Comment on the following: "Present-biased people are impatient, but impatient people don't necessarily have to be present-biased."

Suppose an individual faces a decision of whether or not to make an investment 2 years from now.The investment will cost $10,125, and it will yield a benefit b 2 years later. a.Suppose the individual treats a dollar 1 year from now the same way as $0.90 now.How low can b be for this individual to plan to make the investment in two years? b.Now suppose that the individual's tastes are better characterized by the beta-delta model.Suppose delta is 0.9.For what values of beta will the individual plan the same course of action 2 years from now as he would in the typical delta model (with the same delta)? c.Suppose beta is 0.9 (with delta also equal to 0.9).How low can b be in order for the individual to be willing to undertake the investment when he faces the choice in 2 years? d.For what range of values for b does the individual from (c) plan to undertake the investment but then decides not to when the time comes?

Positive neoclassical economists are different from positive behavioral economists in that positive behavioral economists place more value on having models accurately represent people's true happiness.

Positive economics does not require us to believe that actual happiness is the same as utility as modeled in economic theory.

In the presence of compensating wage differentials, explain why the consumption possibility frontier is not a good approximation of the utility possibility frontier.

Any consequentialist approach to normative economics that uses standard indifference maps as social indifference maps (over utilities or consumption) will choose efficient outcomes in the first-best case.

What do you think of the following statement: To the extent to which individuals are aware of their self-control problems, markets can address the issue successfully.

When a self-aware, present-biased individual invests in a commitment device that will bind him in the future, he will resent that commitment device when the future becomes the present.

Do you agree or disagree with the following statement: "If, in the neoclassical model of decision making, the discount factor changes over time, the predictions of the beta-delta model could be mimicked in the neoclassical model." Explain.

Since it lies in 2-dimensions, one of the drawbacks of using Lorenz curves to think about inequality is that we are restricted to thinking about only two types of individuals.

Of all the constant elasticity of substitution social welfare function, only the one with elasticity of infinity will always choose the efficient outcome from a second-best consumption possibility frontier.

In the absence of commitment devices, present-biased individuals are never as patient as they intend to be.

Suppose an individual has to make a decision at time t without having all the information relevant for making the decision.At time (t+1), the relevant information is revealed.We will say that the individual made a mistake if his decision in time t would have been different had he known what he knows at time (t+1).True or False: Without behavioral economics, we would not be able to explain mistakes.

Suppose $100 invested next year results in a return of b two years from now.If individuals do not discount the future but have a beta of 0.5 (in the beta-delta model), for what range of b will an individual plan to make the investment but then reverse course next year?

If social indifference curves are straight lines with slope of -1, the ethical standard for judging outcomes places all weight on the sum of outcomes and no weight on the distribution of outcomes.

What's the Easterlin Paradox -- and in what sense does it suggest reference-dependent preferences?

Suppose that the consumer side of the market for good x can be modeled using a representative consumer with (initially - until part (d)) non-quasilinear preferences, and suppose the industry that produces x is perfectly competitive with identical firms. a.Illustrate a demand and supply graph with the market clearing price and quantity. b.Would a social planner who takes the distribution of income as given and seeks to maximize social surplus choose the same output quantity as the market clearing quantity in (a)? c.Does your answer to (b) change if the social planner initially redistributes income in a lump-sum way and then maximizes social surplus? d.Next, suppose tastes are quasilinear in the good x and identical for all individuals.But there are two different types of consumers (represented in equal proportion in the population) - rich type 1 consumers and poor type 2 consumers.At their current income levels, type 2 consumers consume only the good x (at quantity x′ ) and no "other goods".For what type of lump-sum redistribution will we no longer be able to represent the consumer side as if it arose from choices by a representative consumer? e.Continuing with (d), suppose further that utility for an individual is given by the utility level associated with her consumption of x plus the dollar value of all other goods she consumes.Let type 2's utility level at her current consumption x′ be given by u′.If she were to then also consume $10 worth of other goods, her utility would be (u′ + 10).If a social planner could redistribute "$'s of other goods" from type 1 to type 2 in a lump-sum way, what shape would the utility possibility frontier have in the range where individuals get at least u′.f.Continuing with (e), draw the entire (first-best) utility possibility frontier (all the way to the horizontal and vertical axes) assuming that the utility possibility set has the feature you discovered in (e) and is convex.Indicate where on that utility possibility frontier we currently are in the absence of any redistribution.Which utility combination would be preferred to this by a Rawlsian social planner? Would a social planner who only cares about total utility object to the Rawlsian choice? g.Now suppose that every dollar that is redistributed entails a penny of deadweight loss.How would your answer to (f) change? What would have to be true for the Rawlsian social planner to let go of his desire for full equality?

Prospect theory implies that individuals are risk loving over losses and risk averse over gains.