Suppose an individual faces a decision of whether or not to make an investment 2 years from now. The investment will cost $10,125, and it will yield a benefit b 2 years later.
a. Suppose the individual treats a dollar 1 year from now the same way as $0.90 now. How low can b be for this individual to plan to make the investment in two years?
b. Now suppose that the individual's tastes are better characterized by the beta-delta model. Suppose delta is 0.9. For what values of beta will the individual plan the same course of action 2 years from now as he would in the typical delta model (with the same delta)?
c. Suppose beta is 0.9 (with delta also equal to 0.9). How low can b be in order for the individual to be willing to undertake the investment when he faces the choice in 2 years?
d. For what range of values for b does the individual from (c) plan to undertake the investment but then decides not to when the time comes?
What will be an ideal response?
b. Regardless of what value beta takes, future plans are unaffected.
c.
d. For the range from 12,500 to 13,889.
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Which of the following is a false statement about absolute and comparative advantage?
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