Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 8, Problem 5DQ
To determine
Define examples for cognitive biases.
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Answer the given question with a proper explanation and step-by-step solution.
Angela and Betty are deciding how many nights to stay at a resort. Given above are the budget lines and indifference curves for both Angela and Betty. They are not travelling together and therefore will make independent decisions (they do not have to stay the same number ofnights) L1 is the budget line for each of them before any discounts are offered.
Each of them is offered a “Buy Three Nights Get One Free” deal, where if they stay for three nights the fourth night is free. This is just a one-time discount and all subsequent nights after the fourth night are at the undiscounted price. The budget line after the discount is the heavily shaded blue line L2. You may assume that each consumer wishes to maximize their utility (satisfaction) when determining the number of nights they will stay.
(a) With the budget line at L1 how many nights will Angela stay?(b) With L1 the budget line how many nights will Betty…
2. The effect of impatience on consumer choices
Suppose the Super Bowl is this week, and Sean is in need of a television to watch the big game. As a college student, Sean knows that he can either
buy his flat-screen television at the local electronics store, or he can shop online for a better deal but have to wait three days for the television to
arrive. The following problem uses the economic concept of rate of time preference to help determine which decision is better for Sean. Throughout
the question, assume that Sean pays for the good the day he buys it, so his wealth is affected in the initial time period no matter where he buys the
good. Also, assume the shipping cost and cost to travel to the store are incorporated into their respective given prices. Finally, assume the goods are
identical, and there's no cost to gaining information about prices-in other words, he knows the best price online and in the store without having to
search.
Suppose Sean receives a utility of 70.90…
Situation 1
Suppose you have won $1000 on a game
show.
In addition to these winnings, youare now
asked to choose between
Option A: 50% chance of winning $1000 and
50% chance of winning nothing
Option B: winning $500 for sure.
Situation 2 Suppose you have won $2000 on
a game show.
In addition to these winnings, youare noW
asked to choose between
Option C: 50% chance of losing $1000 and
50% chance of losing nothing
Option D: losing $500 for sure.
They found that respondents are much more
likely to choose Option B in the first case and
Option C in the second case.
Suppose the respondents are not indifferent
between options. Show that their choices are
inconsistent with the Expected Utility Theory.
Knowledge Booster
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