4. Consider a consumption profile that's measured in thousands of dollars per year over aperiod of four years: (20,22,23,25). These consecutive amounts of consumption yield different amounts of utility. What is the current utility of the consumption if the discount rate is 10%? (Round to the nearest 2 decimal places)

5. The winner of a lottery jackpot is offered to take the winning as a lump sum cash payment or in a yearly payment over 29 years(sometimes with a 5% yearly increase each year). Contrary to the advice of most financial advisers to take the annuity option(e.g.when interest rate is high), over 90% of winners take the immediate lump sum option. From a behavioral perspective, explain why most winners prefer to take the cash right away.

6. Each time I ask my students, during lecture, if they (option 1) want a break now or (option 2) they prefer that I keep going with the lecture and we will be finishing the class earlier they choose the 2nd option. Based on the neo classical model (e.g.DUM). Which option should be preferred? Using the behavioral way of thinking, why do you think students always choose option 2?

The most common pattern for marginal utility is:

a. diminishing marginal utility

b. budget constraint model

c. long term perspective theoretical model

d. substitute consumption

Consider the two-period intertemporal model that we studied in class.

(a) (5 marks) Discuss the similarities and differences between the drivers of consumption predicted by this model compared to those suggested by the traditional KeynesianconsumptionfunctionC=C(Y −T).

(b) (10 marks) Explain why this model predicts that consumption in the present and future will increase in response to either a rise in current income, or, a rise in future income. What happens to savings in each case?

(c) (15 marks) On a C1 vs. C2 diagram, sketch an indifference curve and budget constraint showing the optimal choice for a borrower. Now show the impact of an increase in the real interest rate r on the borrower, sketching two different cases: (i) where the increase in r results in a rise in period 2 consumption, and (ii) where the increase in r results in a fall in period two consumption. How can the model account for these two different cases? Discuss, what assumption must hold in each case.

We have assumed that consumption depends only on disposable income. Now suppose that consumptions depend on both disposable income and the interest rate. As the interest rate increases, consumption decreases.

a. If consumption suddenly begins to depend on the interest rate, what is the effect on the slope of the IS curve?

b. Will this change make monetary policy more or less effective? Explain.