SAMPLE FINAL EXAM 2024
2-HOUR ONLINE EXAMINATION
ECON0040: BEHAVIOURAL ECONOMICS
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Page limit: 10 pages
Your answers, excluding the cover sheet, should not exceed this page limit. Please note that a page is one side of an A4 sheet with a minimum margin of 2 cm from the top, bottom, left and right borders of the page. The submission can be handwritten or typed, but the font size should be no smaller than the equivalent to an 11pt font size. This page limit is generous to accommodate students with large handwriting. We expect most of the submissions to be significantly shorter than the set page limit. If you exceed the maximum number of pages, the mark will be reduced by 10 percentage points, but the penalised mark will not be reduced below the pass mark: marks already at or below the passmark will not be reduced.
Answer ALL questions from Part A and Answer ONE question from Part B.
All questions carry equal weight. Please keep your answers for both parts precise and concise.
In cases where a student answers more questions than requested by the examination rubric, the policy of the Economics Department is that the student’s first set of answers up to the required number will be the ones that count (not the best answers). All remaining answers will be ignored.
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PART A
Answer ALL questions from this section.
A1 Zoe needs to prepare her homework. There are four weekends t ∈ {1, 2, 3, 4}. If Zoe prepares the homework in the first three weekends (t ∈ {1, 2, 3}), then she pays a cost ct immediately and she feels the benefit bt = 25 of doing the homework in period 4 when she takes the final exam. If she fails to prepare the homework at all, then she pays no cost and receives no benefit. She is perfectly patient, i.e. δ = 1. Assume c = (8, 10, 12) where the cost schedule c denotes the cost of doing the homework at periods t ∈ {1, 2, 3}. Explain carefully what Zoe will do and why if she has present-biased preferences, i.e. she has (β, δ)-preferences. Assume that β = 5/3.
(a) She is time-consistent? [20% of A1]
(b) She is naive? [20% of A1]
(c) She is sophisticated? [20% of A1]
(d) Can we draw any general lessons from this example? Please explain the intuition behind your answers. [20% of A1]
(e) Now imagine that you are tasked with designing a commitment mechanism that will help a present-biased Zoe with completing the task at an optimal time. Explain your mechanism and define when and how your mechanism should be used. [20% of A1]
A2 Suppose Laura has Köszegi-Rabin preferences and is shopping for a laptop, and she has
a linear consumption utility in cars c1 and money c2. Her consumption utility is m1 (c1) = 800c1 and m2(c2) = c2. The universal gain-loss function of Laura is given by:
and the price of the laptop is £400.
(a) What does η and λ mean? What does the given values of η and λ imply? [25% of A2]
(b) Is it a personal equilibrium for Laura to expect to buy a laptop and then buy it? [25% of A2]
(c) Is it a personal equilibrium for Laura to expect not to buy a laptop and then not buy it? [25% of A2]
(d) What is Laura’s preferred personal equilibrium? Please discuss what does this refer to. [25% of A2]
PART B
Answer ONE question from this section.
B1 Mani, Mullainathan, Shafir and Zhao (2013) analyse the relationship between limited bandwidth and poverty.
(a) Why do these scholars think that studying this relationship is interesting? Why did they find the need to conduct two separate studies for their analysis? [25% of B1]
(b) Explain the experimental procedure the authors used in this paper, particularly outlining the differences in the two studies they have conducted. [25% of B1]
(c) What are their main findings? Does income affect cognitive function? Explain. [25% of B1]
(d) Suppose you have to design a policy addressing the issues analysed in this paper; what would your recommendations be? Who would be the ideal audience for your policy? [25% of B1]
B2 Prospect Theory:
(a) What are the main building blocks of prospect theory and how does it differ from expected utility theory? Draw graphs if necessary. [30% of B2]
(b) Describe two empirical or experimental phenomena that can be explained by prospect theory but not expected utility theory. (Note: Please make sure that at least one of the examples has not already been discussed in class and is your own) [35% of B2]
(c) Consider Adam who needs to choose between two lotteries shown below:
Lottery 1: (£120, £0; 2/1, 2/1) vs. Lottery 2: (£600, −£40; 4/1, 4/3)
Adam maximisesthe value of a gamble given by prospect theory. Assume that π(p) = p and that the value function is linear in gains and losses:
For what λ would Adam choose Lottery 1 over Lottery 2? [35% of B2]