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Ec323 Final Exam 2021

Instructions

· This test consists of 10 multiple choice questions followed by 6 short answer questions, with a total of 105 points available.

· You have 120 minutes to complete the test.

· Make sure to put your name and BU ID 

· This is a open book test but no access to the internet is allowed. You may use any course notes as well as a phone/calculator for calculations. If you are found to have accessed the internet you will receive a grade of zero.

· You must wear your mask in accordance with university rules (above the nose) throughout the full exam period. There are no exceptions. If you violate this rule you will be asked to leave. If you feel an urge to do otherwise, I suggest you leave the exam room.

· Please enter your multiple choice answers on the first page of your blue book.

· For the short answer questions, don’t write random stuff: You’ll be rewarded for correct answers and penalized for irrelevant/incorrect content.

Good luck!

Multiple Choice (2 points each)

1. Suppose you are a participant in an ultimatum game with $10 at stake (fractions of a dollar may not be offered). You know that the recipient has Rawlsian preferences but does not get direct utility from punishment (If the recipient is indifferent between two options, assume he picks at random between them, so you have a 50-50 chance of getting either outcome). Your only goal is to maximize the amount of money you earn in the experiment. What split do you propose (where the first number is the amount you propose keeping and the second amount is how much you propose to give)?

a. (10,0)

b. (9,1)

c. (5,5)

d. (1,9)

e. (0,10)

2. If credit card holders are attentive to interest rates but completely inattentive to late fees, then we may expect that government caps on late fees will lead to:

a. Higher interest rates and a decline in credit card demand

b. Higher interest rates and no change in credit card demand

c. A decline in credit card demand, but no change in interest rates

d. No change in credit card demand, nor any change in interest rates

3. Surveys done immediately after school shootings (such as the one that recently occurred at Oxford High School in Michigan) show that Americans vastly overestimate the increase in gun-related deaths over the past 20 years (relative to their estimates at other times). This is an example of:

a. The base rate fallacy

b. The hot hand fallacy

c. The availability heuristic

d. The representativeness heuristic

e. None of the above

4. Consider an exponential discounter who, when offered a choice between $90 today and $100 in 5 weeks, chooses $100. This choice implies that the individual’s time preferences at the weekly level are given by:

a. 

b. 

c. 

d. 

e. We need information on  to answer this question

5. Suppose that the price elasticity of demand for shampoo is -1.5. In class, we estimated that consumers are 75 percent inattentive to sales tax in drugstore purchases. Suppose that the sales tax increases from 8 percent to 12 percent. What do we expect will be the change in shampoo purchases?

a. 1.5 percent decline

b. 4.5 percent decline

c. 13.5 percent decline

d. There should be no change in shampoo purchases

6. Consider an individual who, when hungry late on Tuesday afternoon, is offered a choice between an apple and a chocolate bar the follow Tuesday, right after lunch. He chooses an apple. The following Tuesday when it comes time to get his snack, he is given the chance to change to a chocolate bar at a cost of $0.25. He pays the fee to get chocolate instead of an apple. This is consistent with an individual who:

a. Is present-biased

b. Exhibits attribution bias

c. Exhibits projection bias

d. Both (a) and (b)

e. Both (a) and (c)

7. Suppose that John bought his house for $400,000. The real estate market has done poorly and its current valuation is $300,000. According to the findings of Genesove and Mayer, we may expect that he will list his house for approximately:

a. $400,000

b. $300,000

c. $330,000

d. $370,000

8. A risk-loving individual is given the opportunity to accept at most one of the following gambles:
Gamble A: a 50-50 chance of winning $110 or losing $100
Gamble B: a 25 percent chance of winning $110, a 25 percent chance of losing $100, and a 50 percent chance of winning nothing.
She will:

a. Take Gamble A

b. Take Gamble B

c. Reject both gambles

9. Suppose someone is offered a choice between $100 today and $120 in two months, and takes $100 today. She is then offered a choice between $120 in a month and $140 in two months and takes $120. We may conclude that:

a. She is an exponential discounter

b. She is present-biased and naïve about her preferences

c. She is present-biased and sophisticated about her preferences

d. All of the above are consistent with these choices

10. When the CARD Act was enacted:

a. Interest rates on credit cards increased

b. The number of credit cards issued went up

c. The average balances of credit card holders went down

d. Fees paid by credit card holders went up

e. Fees paid by credit card holders went down

f. None of the above

Short Answer Questions

[Please make sure to explain your answers carefully and concisely, i.e. do not simply write a numeric answer without an explanation of how you arrived at this answer. Answers without adequate explanation will not receive full credit.]

1. Consider the following variant on a dictator game. The dictator starts with $10. For each dollar he gives up, the recipient gets $3. (So if the dictator keeps $9, the recipient will get $3, etc). Answer the following questions below and, for each case, for each of these cases, provide on a graph the budget line implied by the above game and indifference curves for the dictator that illustrate his choice.

a. (4 points) How much will a selfish dictator give to the recipient?

b. (4 points) How much will a utilitarian (who puts the same weight on self and other) dictator give to the recipient?

c. (4 points) How much will a Rawlsian dictator give to the recipient?

2. A coin is equally likely to be fair or unfair. If it is unfair the probability that it comes up heads is 75%.

a. (6 points) Suppose you flip the coin and it comes up heads twice in a row. What is the probability that it is a fair coin?

b. (4 points) Do you think most people would overestimate or underestimate the probability that the coin is fair?

c. (4 points) Suppose the coin is to be flipped again, and you ask a friend give the probability that the next flip will be a head. Do you think he is likely to overestimate or underestimate this probability?

d. (4 points) Suppose instead that after the two HH flips your friend is told that the coin is in fact fair. He then has a chance to pick heads or tails on the next flip and if he’s right he will receive a small payment. What do you think he will pick?

3. Today is Wednesday. Erin has a paper that is due on Monday at 9am. It will take her a day to write the paper. If she does it on Wednesday or Thursday, that makes her quite a bit happier, so we’ll call the utility cost -10. If she has to do it on Friday or Saturday night, that is less desirable – let’s call the utility cost -16. If she ends up doing it on Sunday, she gets anxious about all the work she has for next week, so we’ll say the utility cost is -24. If she waits till Monday to do it, the professor will penalize her for late submission, and we’ll call the utility cost -60. She cannot hand it in after Monday night, in which case she fails out of school and goes on to lead a completely miserable life. Finally, Erin has, in a way, a short time horizon, which we’ll capture by quasi-hyperbolic discounting with daily β=0.5 and δ=1. (If Erin is indifferent between two options, you can assume she’ll prefer the later one to break the tie, if you like.)

a. (6 points) If Erin is sophisticated about her present bias, when will she complete the assignment?

b. (6 points) If Erin is naïve about her present bias, when will she complete the assignment?

c. (4 points) Suppose that Erin has a roommate who offers to take $1,000 from Erin, which the roommate will keep if the assignment isn’t done by Wednesday night (assume that the offer is credible and that it has a very, very large utility loss associated with it). If Erin is sophisticated about her present bias, will she accept the offer? What is she is naïve about her present bias?

4. Consider Ella, who has wealth of $100,000. An acquaintance approaches her with an investment in a small business in which she will be required to put in $1,000. If the investment is successful, she will get her $1,000 back, plus an extra $1,500. If it is unsuccessful, she will lose everything. Each possibility is equally likely to happen.

a. (4 points) Assume that Ella’s preferences satisfy the conditions of expected utility theory, but that she is fairly close to risk-neutral. Will she accept the offer?

b. (4 points) Suppose instead that you only know that Ella’s preferences satisfy the conditions of expected utility theory (i.e., you don’t know the extent of her risk aversion). Now suppose you learn that she was offered a 50-50 gamble of losing $10 versus winning $11 and she turned down the offer. In fact, she tells you that even if she becomes incredibly rich, she believes she would never accept such a gamble. Can you say whether she will take the above investment opportunity? Why or why not?

c.  (4 points) Finally, suppose that Ella has reference-dependent preferences with a reference point of $100,000. You know that she turns down the gamble in (b). Can you say whether she will take the above investment opportunity? Why or why not?

5. (5 points each) Answer True, False, or Uncertain for each of the following, and provide a few sentences of explanation, ideally using an example, counterexample, or discussion from class:

a. A present biased person will always delay undertaking an unpleasant task longer than an exponential discounter (assume they both have the same value for ).

b. Overall, the weight of the evidence we discussed in class suggests that credit card borrowers are relatively inattentive to late fees.

c. The results in Sydnor’s analysis of insurance deductible choice imply that policyholders satisfy expected utility theory and are extremely risk averse.

6. [This one may be harder…] A Trust Game works as follows: The investor is given $10. He may give as much as he wishes to the trustee. Whatever is given to the trustee is tripled. The trustee may then return to the investor however much he wishes.
To illustrate, here is an example. Suppose the investor keeps $2 for himself and passes $8 to the trustee. That $8 is then tripled to $24 that is available to the trustee. Suppose the trustee then gives $5 back to the investor. Then at the end of the game, the trustee has earned $7 ($2 + $5) while the trustee has earned $19.

a. (4 points) If both players are selfish and forward-looking (think about how we analyzed the repeated prisoner’s dilemma under ‘standard’ assumptions) how much do you expect that the investor will offer to the trustee?

b. (4 points) Suppose the investor is a utilitarian, who puts the same weight on his own payoff as well as that of the trustee. How much do you expect the investor to pass to the trustee? How, if at all, does it depend on the trustee’s preferences?

c.  (4 points) Now suppose that the investor is a Rawlsian and knows the trustee is a Rawlsian as well. How much do you expect the investor will pass to the trustee?