## Questions

1. Consider a high school student who is given $3 every school day by her parents as “lunch money.” The student works a part time job after school, earning a small amount of “spending cash.” In addition to her lunch money, the student spends$5 from her own
earnings each week on lunch. Suppose her parents
reduced her lunch money by $2 per day but that she simultaneously receives a$10-per-week raise at her
job, requiring no extra effort on her part. What would
the rational choice model suggest should happen to her
spending on lunch? Alternatively, what does the
mental accounting framework predict?
2. Suppose you manage a team of employees who manufacture
widgets. You know that profits depend
heavily on the number of widgets produced and on the
quality of those widgets. You decide to induce better
performance in your team members by providing a
system of pay bonuses for good behavior and pay
penalties for bad behavior. How might hedonic framing
be used to make the system of rewards and penalties
more effective? How does this framing differ
from the type of segregation and integration suggested
by hedonic editing?
3. Suppose you are a government regulator who is concerned
with the disposition effect and its potential
impact on wealth creation. What types of policies could
be implemented to reduce the sale of winning stocks
and increase the sale of losing stocks? The government
currently provides a tax break for the sale of stocks at a
loss. This tax break tends to encourage the sale of losing
stocks only in December. What sorts of policies could
encourage more regular sales of losing stocks?
Both truly enjoy video gaming. However, both have
reduced their budget on these items because of the
temptation that they can cause. Dana is tempted to buy
expensive games when they are first on the market
rather than waiting to purchase the games once prices
are lower. Thus, Dana has limited himself only to
purchase games that cost less than $35. Alternatively, Avery is tempted to play video games for long periods of time, neglecting other important responsibilities. Thus, Avery has limited herself to playing video games only when at other people’s homes. Would Dana be better off receiving a new game that costs$70 or a gift
of $70 cash? Would Avery be better off receiving a video game or an equivalent amount of cash? Why might these answers differ? 5. Suppose Akira has two sources of income. Anticipated income, y1 is spent on healthy food, represented by x1, and clothing, x2. Unanticipated income, y2 is spent on dessert items, x3. Suppose the value function is given by v x1, x2, x3 = x1x2x3 13 , so that marginal utility of good 1 is given by v x1, x2, x3 x1 = 13 x −23 1 x2x3 13 , marginal utility for good 2 is v x1, x2, x3 x2 = 13 x −23 2 x1x3 13 , and marginal utility of good 3 is given by v x1, x2, x3 x3 = 13 x −23 3 x1x2 13 . Suppose y1 =8 and y2 =2, and that the price of the goods is given by p1 = 1, p2 =1, p3 = 2. What is the consumption level observed given the budgets? To find this, set the marginal utility of consumption to be equal for all goods in the same budget, and impose that the cost of all goods in that budget be equal to the budget constraint. Suppose Akira receives an extra$4 in anticipated income, y1 =12 and y2 = 2;
how does consumption change? Suppose alternatively
that Akira receives the extra $4 as unanticipated income, y1 =8 and y2 =6; how does consumption change? What consumption bundle would maximize utility? Which budget is set too low? 6. Consider the problem of gym attendance as presented in this chapter, where Jamie perceives the value of attending the gym to be va xn − pδt n + vt − pδt +pr n , where xn is the monetary value to Jamie of experiencing the n th single attendance event at the gym, p is the price paid once every six months, δ is the monthly rate of depreciation, t is the number of months since the last payment was made, n is the number of times Jamie has attended the gym since paying, including the attendance event under consideration, and pr n is the price Jamie considers fair for attending the gym n times. Suppose that the cost of gym membership is$25. Further, suppose Jamie considered
the value of attending the gym n times in a sixmonth
window to be va n = 5n− n2 − δt25 n. Also,
suppose that Jamie considers the fair price for a visit
to be \$4, so the transaction utility is equal to
vt n = −25δt +4n. Payments depreciate at a rate of
δ= .5. Determine the number of visits necessary in
each of the six months in order to obtain a positive
account. How much time would have to pass before
only a single visit could close the account in the black?