Question 1

Since it lies in 2-dimensions, one of the drawbacks of using Lorenz curves to think about inequality is that we are restricted to thinking about only two types of individuals.

Accepted Answer

Lorenz curves represent the distribution of income or wealth among the population, not types of individuals. They show the proportion of total income earned by cumulative percentages of the population, allowing for analysis of inequality across the entire population, not just between two types of individuals.

Question 2

When a self-aware, present-biased individual invests in a commitment device that will bind him in the future, he will resent that commitment device when the future becomes the present.

Accepted Answer

A self-aware, present-biased individual understands their tendency to prioritize immediate gratification over long-term benefits. When the future becomes the present, their preference for immediate gratification resurfaces, leading them to resent the commitment device that now restricts their choices.

Question 3

Suppose $100 invested next year results in a return of b two years from now.If individuals do not discount the future but have a beta of 0.5 (in the beta-delta model), for what range of b will an individual plan to make the investment but then reverse course next year?

Accepted Answer

From $100 to $200.

Question 4

Any consequentialist approach to normative economics that uses standard indifference maps as social indifference maps (over utilities or consumption) will choose efficient outcomes in the first-best case.

Accepted Answer

This statement is true. Consequentialism is a normative ethical theory that evaluates the rightness or wrongness of an action by its consequences. In normative economics, consequentialism implies that economic policies should be evaluated based on their outcomes. Standard indifference maps are graphical representations of people's preferences over different combinations of goods or services. Social indifference maps aggregate individual preferences into a single map that represents social preferences. If a consequentialist approach uses standard indifference maps as social indifference maps, it will choose the efficient outcome in the first-best case. The efficient outcome is the one that maximizes overall social welfare, given the available resources and technology. In other words, it is the outcome where no one can be made better off without making someone else worse off. Hence, a consequentialist approach that uses standard indifference maps as social indifference maps will favor efficiency over equity or other normative objectives.

Question 5

Do you agree or disagree with the following statement: "If, in the neoclassical model of decision making, the discount factor changes over time, the predictions of the beta-delta model could be mimicked in the neoclassical model." Explain.

Accepted Answer

The answer of Do you agree or disagree with the...

Question 6

Normative economics often takes a consequentialist philosophical approach to determine whether a policy is good.

Accepted Answer

Normative economics is concerned with what ought to be, rather than what is. It often considers the consequences of a policy to determine whether it is good or preferable. This consequentialist approach is based on the belief that the value of an action or policy should be judged by its outcomes, rather than its intentions or inherent qualities.

Question 7

One way to think of ideas coming out of behavioral economics is to map the ideas into either impacting "tastes" or "constraints".Can you give an example of each?

Accepted Answer

The answer of One way to think of ideas coming...

Question 8

Because wealth is more concentrated than income, the Gini coefficient for the wealth distribution is greater than the Gini coefficient for the income distribution.

Accepted Answer

This is true because wealthy individuals hold a larger share of total wealth compared to those with lower incomes, thus increasing the concentration of wealth and resulting in a higher Gini coefficient for the wealth distribution. In contrast, the income distribution may be more evenly spread out, leading to a lower Gini coefficient.

Question 9

In a society in which everyone lives at the subsistence level, the Gini coefficient is 0.

Accepted Answer

In a society in which everyone lives at the subsistence level, there is no inequality in income distribution, which means that the Gini coefficient is 0. The Gini coefficient is a measure of income inequality in which 0 represents perfect equality (everyone has the same income) and 1 represents perfect inequality (one person has all the income). Therefore, if everyone has the same income, the Gini coefficient is 0.

Question 10

What's the Easterlin Paradox -- and in what sense does it suggest reference-dependent preferences?

Accepted Answer

The answer of What's the Easterlin Paradox -- and in...

Question 11

In the absence of commitment devices, present-biased individuals are never as patient as they intend to be.

Accepted Answer

Present-biased individuals tend to prioritize immediate gratification over long-term benefits, even if they intend to be patient. Without commitment devices or external factors that incentivize patience, they are likely to give in to their present bias and act impatiently.

Question 12

What do you think of the following statement: To the extent to which individuals are aware of their self-control problems, markets can address the issue successfully.

Accepted Answer

The answer of What do you think of the following...

Question 13

Comment on the following: "Present-biased people are impatient, but impatient people don't necessarily have to be present-biased."

Accepted Answer

The answer of Comment on the following: "Present-biased people are...

Question 14

Positive neoclassical economists are different from positive behavioral economists in that positive behavioral economists place more value on having models accurately represent people's true happiness.

Accepted Answer

The answer of Positive neoclassical economists are different from positive...

Question 15

Positive economics does not require us to believe that actual happiness is the same as utility as modeled in economic theory.

Accepted Answer

Positive economics is concerned with studying and predicting economic behavior and outcomes based on empirical evidence and logical reasoning, without making value judgments. Utility, which refers to the satisfaction or usefulness a person derives from consuming a good or service, is a concept commonly used in economic models to explain individual decision-making. However, positive economics does not necessarily assume that utility and actual happiness are the same, as happiness is subjective and difficult to measure objectively.

Question 16

If social indifference curves are straight lines with slope of -1, the ethical standard for judging outcomes places all weight on the sum of outcomes and no weight on the distribution of outcomes.

Accepted Answer

Social indifference curves with a slope of -1 indicate that individuals are willing to give up an equal amount of one outcome in order to gain an equal amount of another outcome. This means that the ethical standard for judging outcomes would place all weight on the total amount of outcomes achieved, rather than the distribution of outcomes among individuals. Therefore, the statement is true.

Question 17

Social preferences chosen from behind the veil of ignorance are likely to value efficient outcomes and are likely to treat individuals symmetrically.

Accepted Answer

Social preferences chosen from behind the veil of ignorance are based on the concept of fairness and impartiality, which values efficient outcomes and treats individuals symmetrically. The veil of ignorance requires decision-makers to make choices without knowing where they will stand in society, which ensures that everyone is treated fairly and equally. Therefore, social preferences chosen from behind the veil of ignorance are likely to prioritize efficiency and symmetry.

Question 18

Prospect theory implies that individuals are risk loving over losses and risk averse over gains.

Accepted Answer

According to prospect theory, individuals tend to be more sensitive to losses than gains, and are generally risk-averse when it comes to potential gains but are risk-seeking when it comes to potential losses. This means they are likely to take more risks when faced with the possibility of losses in order to avoid suffering losses.

Question 19

Of all the constant elasticity of substitution social welfare function, only the one with elasticity of infinity will always choose the efficient outcome from a second-best consumption possibility frontier.

Accepted Answer

A CES social welfare function with an elasticity of infinity is equivalent to a utilitarian social welfare function, which always chooses the efficient outcome from a second-best consumption possibility frontier.

Question 20

Suppose an individual has to make a decision at time t without having all the information relevant for making the decision.At time (t+1), the relevant information is revealed.We will say that the individual made a mistake if his decision in time t would have been different had he known what he knows at time (t+1).True or False: Without behavioral economics, we would not be able to explain mistakes.

Accepted Answer

Behavioral economics is not the only way to explain mistakes. Other fields such as psychology, decision theory, and cognitive science also offer explanations for why individuals may make mistakes in decision-making.

Quiz 29: What Is Good Challenges From Psychology and Philosophy