Question 1

Odysseus' inability to avoid temptation without a commitment mechanism means he can be best described as a naïf.

Accepted Answer

A) True 
 B)False  False

Question 2

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=1$, that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$. In which time period does the sophisticate act?

Accepted Answer

At $t=2$ the sophisticate solves the following problem, $\max \{\beta(20-9),-\beta\}=$ $\max \left\{5.5,-\frac{1}{2}\right\}$. And so the sophisticate chooses $t=2 . \ln t=1$, the sophisticate solves $\max \{\beta 8, \beta(20-9)\}=\max \{4,5.5\}$ and so the sophisticate chooses to act in $t=2$.

Question 3

Time consistent individuals are always better off than either sophisticates or naïfs.

Accepted Answer

A) True 
 B)False  True

Question 4

Commitment mechanisms

Accepted Answer

A)   Force the individual into a specific action plan.
B)   Must be enforced by an objective party.
C)   Cannot be broken.
D)   Reduce the possible the number of choices available in the future.

Question 5

Erin has time consistent preferences must decide when to go to the doctor over the next 4 days. She knows she must go one of these four days. She knows that using backward induction to decide when to go will yield the optimal solution.

Accepted Answer

A) True 
 B)False

Question 6

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$, that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$. In which time period does the naïf act?

Accepted Answer

The answer of Consider the example given on pages 3-12...

Question 7

Scenarios in which costs are experienced later than the action to incur the cost are called,

Accepted Answer

A)   Immediate costs.
B)   Today's costs
C)   Delayed costs.
D)   Current costs

Question 8

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$, that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$. In this setting, the naïf obeys the Independence of Irrelevant Alternatives.

Accepted Answer

A) True 
 B)False

Question 9

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$, that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$. Suppose the decision-maker is partially naïve and believes $\hat{\beta}>\beta$. For which value of $\hat{\beta}$ does the decision-maker's choice violate the dominance property?

Accepted Answer

A)    β^=12\hat{\beta}=\frac{1}{2}β^​=21​ 
B)    β^=811\hat{\beta}=\frac{8}{11}β^​=118​ 
C)    β^=411\hat{\beta}=\frac{4}{11}β^​=114​ 
D)    β^=1\hat{\beta}=1β^​=1 .

Question 10

A naif cannot solve the inter-temporal problem recursively because

Accepted Answer

A)   A naif does not realize there will be future time periods.
B)   A naif is unable to predict how their future plans are connected to their current plans.
C)   A naif does not know his risk preferences in the future.
D)   A naïf does not know his loss aversion in the future.

Question 11

Naifs and sophisticates always violate either the dominance property or the property of independence of irrelevant alternatives.

Accepted Answer

A) True 
 B)False

Question 12

Fiona must decide when to go to the doctor. There are four possible days she could go, each incurring a higher cost and the same benefit. Fiona must go to the doctor on one of these days. Fiona solves the problem using backward induction. This means she begins solving the problem from the point of view of

Accepted Answer

A)   Day 1
B)   Day 2
C)   Day 3
D)   Day 4

Question 13

Joy needs to clean the house before her parents come on Sunday. Today is Friday. This means Joy can clean either Friday, Saturday or Sunday. The reward for cleaning the house is that Joy gets to enjoy a clean home, but the cost is that she will have to give up planned activities with her friends. Let $v_{t}=\{10,0,0\}$ be the reward for cleaning the house on Friday, Saturday, Sunday, respectively. Let $c_{t}=\{0,2,1\}$ be the cost of cleaning the house on Friday, Saturday, Sunday, respectively. The Dominance Property requires Joy to clean the house on which day?

Accepted Answer

The answer of Joy needs to clean the house before...

Question 14

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$, that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$. In this setting, the naif violates the dominance property.

Accepted Answer

A) True 
 B)False

Question 15

Joy needs to clean the house before her parents come on Sunday. Today is Friday. This means Joy can clean either Friday, Saturday or Sunday. The reward for cleaning the house is that Joy gets to enjoy a clean home, but the cost is that she will have to give up planned activities with her friends. Let $v_{t}=\{10,0,0\}$ be the reward for cleaning the house on Friday, Saturday, Sunday, respectively. Let $c_{t}=\{0,2,1\}$ be the cost of cleaning the house on Friday, Saturday, Sunday, respectively. Suppose her parents call and inform Joy that they are coming home on Saturday as opposed to Sunday. Does this change Joy's optimal action if she is time consistent and why?

Accepted Answer

The answer of Joy needs to clean the house before...

Question 16

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=1$, that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$. In this setting, the sophisticate obeys the Independence of Irrelevant Alternatives.

Accepted Answer

A) True 
 B)False

Question 17

Fiona has time inconsistent preferences and must when to go to the doctor over the next 4 days. She is a sophisticate and so she uses backward induction to decide when to go because this method will yield the optimal solution.

Accepted Answer

A) True 
 B)False

Question 18

Sophisticates are always better off than naïfs.

Accepted Answer

A) True 
 B)False

Question 19

A sophisticate will never complete an identical task after a naïf.

Accepted Answer

A) True 
 B)False

Question 20

The optimal amount of savings for time consistent, naifs and sophisticates occurs where the marginal utility of savings is zero.

Accepted Answer

A) True 
 B)False

Exam 13: Committing and Uncommitting

Odysseus' inability to avoid temptation without a commitment mechanism means he can be best described as a naïf.

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=1$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . In which time period does the sophisticate act?

Time consistent individuals are always better off than either sophisticates or naïfs.

Commitment mechanisms

Erin has time consistent preferences must decide when to go to the doctor over the next 4 days. She knows she must go one of these four days. She knows that using backward induction to decide when to go will yield the optimal solution.

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . In which time period does the naïf act?

Scenarios in which costs are experienced later than the action to incur the cost are called,

A naif cannot solve the inter-temporal problem recursively because

Naifs and sophisticates always violate either the dominance property or the property of independence of irrelevant alternatives.

Fiona has time inconsistent preferences and must when to go to the doctor over the next 4 days. She is a sophisticate and so she uses backward induction to decide when to go because this method will yield the optimal solution.

Sophisticates are always better off than naïfs.

A sophisticate will never complete an identical task after a naïf.

The optimal amount of savings for time consistent, naifs and sophisticates occurs where the marginal utility of savings is zero.