Solutions Manual For Behavioral Economics 1st Edition By Brandon Lehr

lOMoAR cP SD| 24 22 0 86 6 SOLUTIONS MANUAL FOR BEHAVIORAL ECONOMICS 1ST EDITION BY BRANDON LEHR. Solution 2.1 Calculating Discount Rates. Applying the discount rate formula, we have: Alex: (1) = 0.9 1 = 0.11 (2) = 0.8 0.9 = 0.125 0.9 (3) = 0.7 0.8 0.14 0.7 0.8 Betty: (1) = 0.7 1 0.43 (2) = 0.6 0.7 = 0.16 0.7 (3) = 0.2 0.6 = 2 0.2 0.6 Carlos: (1) = 0.5 1 = 1 (2) = 0.25 0.5 = 1 0.5 (3) = 0.125 0.25 = 1 0.125 0.25 Solution 2.2 Discounting Profits. Let k indicate Muhammeds annual profits in period k without the investment. a. His total discounted utility in the two cases are: U 0(No Invest) = 0 + 1 + 22 + 33 U 0(Invest) = 0 I + (1 + R) + 2(2 + R) + 3(3 + R) so that U 0(Invest) U 0(No Invest) I ( + 2 + 3)R Therefore, Muhammed prefers to make the investment if and only if R/I 1/( + 2 + 3) = 1/(0.9 + 0.92 + 0.93) = 0.41, or 41%. b. Let T be last period of the time horizon. Then: T