Deck 12: Decision Making Over Time

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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

A) hyperbolic
B) time consistent
C) time inconsistent

Question 5

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.

Question 6

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

A) stationery axiom
B) stationarity axiom
C) hyperbolic axiom

Question 7

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

A) zero
B) positive infinity
C) negative infinity

Question 8

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.

Question 9

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

Question 10

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

A) D(1 + r) pesos
B) D(1 + r)² pesos
C) D(1 + r) dollars

Question 11

The discount factor equals

A) 1/(1 + r)
B) (1 + r)
C) 1/(1 + r)^t

Question 12

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.

Question 13

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

A) stays constant
B) equals -
C) changes

Question 14

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.

Question 15

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

A) 77.3%
B) 50.0%
C) 7.3%

Question 16

Experimental and real world data support

A) hyperbolic discounting models
B) exponential discounting models
C) time-consistent discounting models

Question 17

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

Question 18

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.

Question 19

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

A) flat stream
B) declining stream
C) increasing stream

Question 20

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

A) decreasing
B) constant
C) increasing

Question 21

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

Question 22

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

A) Lu-yin has part of each paycheck deposited in a vacation savings account
B) Tassili is indifferent between (a) paying $1 in three years and receiving $2 in four years or (b) paying $1 today and receiving $2 next year
C) Frank eats a piece of cake today and saves the rest of the cake for eating later

Question 23

A decision maker with hyperbolic preferences is very

A) patient
B) impatient
C) patient or impatient depending on a random distribution

Question 24

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) low
B) high
C) normal

Question 25

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

A) stopping our search too soon and, as a result, accepting a price that is too high
B) searching too long and wasting time and money in the process
C) Both answers are correct

Question 26

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 +

A) U₁
B) U₃
C) U₂₀₃₀

Question 27

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

Question 28

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?

Question 29

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) normal
B) high
C) astronomical

Question 30

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

A) the Principle of Hyperbolic Preferences
B) Bellman's Principle of Optimality
C) Bellman's Exponential Discounting

Question 31

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 _________.

A) greater than, cost
B) less than, cost
C) less than, benefits

Question 32

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

Question 33

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

A) exponential discounting
B) hyperbolic discounting
C) time-inconsistent discounting

Question 34

Describe the stationarity axiom.

Question 35

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

A) rise, rise
B) rise, fall
C) fall, fall

Question 36

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

A) backward induction
B) backward discounting
C) forward deduction

Question 37

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

A) patient, delayed
B) impulsive, immediate
C) impulsive, delayed

Question 38

Explain the important points about discounting.

Question 39

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

A) optimal reservation wage
B) optimal acceptance wage
C) maximum discounted wage