Please answer thuroughly and with clear handwriting FALL 2017 Problem Set #7 (In
ID: 1115303 • Letter: P
Question
Please answer thuroughly and with clear handwriting
FALL 2017 Problem Set #7 (In-Class) November 3, 2017 Instructions: Answer all of the questions below. Your responses should be as compre- hensive as necessary, and should include an appeal to the relevant economic principle(s)_ computational or otherwise-that rationalizes the written response 1. Suppose for a student producing"Study Hours" Q. Total Benefit = 40Q, and Total Cost 2.5Q2. Assume that the student is rational, that the Total Benefit and Total Cost of Q are the "actual" Benefit and Cost of studying, and the student desires to maximize the Net Economic Benefit of studying. How many hours will the student spend studying? Why? 2. Suppose the student in #1 underestimates the benefit of studying such that it is 50 per- cent of its actual benefit, as a result of overconfidence in his ability to successfully negotiate exams in the absence of studying. How many hours will the student spend studying? Why? In what sense is this situation a departure from the rationality assumed in #1? 3. Refer back to #1. Suppose the student has a girlfriend that values spending time with him, whom he loves and cares about dearly, and there is a 50 percent chance she values each hour of his time at $40. How many hours will the student spend studying? Why? In what sense is this situation a departure from the rationality assumed in #171 4. Suppose the decision problems in #1 and #2 constituted two investment projects, with the returns to #1 being available 1 year from now, and the returns from #2 being available immediately. What positive interest rate would make you indifferent between the outcomes in #1 and #2? Why? What can you conclude about the effects of interest rates on choices and decisions? This choice problem can be viewed as a lottery"in which there are two possible Net Economic Benefit Outcomes, with probability p and (1 - p) respectivelyExplanation / Answer
Q1:
The net benfit function is defined as Total benefit – total cost
NB = 40Q-2.5Q^2.
The student maximizes NB wrt Q.
Differentiate NB wrt Q:
dNB/dQ = 40-05Q = 0
40= 5Q
Q = 8.
The student chooses to study 8 hours because at this level of Q is his NB maximized