Philosophy of economics: midterm

PHIL 147/247 Spring 2020

Midterm 2

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1. Jane is first given a choice between these two lotteries:
LA: getting a small steak with certainty (a 100% chance); vs.
LB: an 80% chance of getting a large steak and 20% chance of getting nothing. Jane chooses LA.
Jane is later given a choice between the following two lotteries:
LC: a 25% chance of getting a small steak and 75% chance of getting nothing; vs.
LD: a 20% chance of getting a large steak and an 80% chance of getting nothing. Jane chooses LD.

Answer the following 2 questions:
a) Show that Jane’s preferences over lotteries cannot be represented by a utility function that has the expected utility form (and hence violates the assumptions of the expected utility theorem).

b) Explain two strategies that a defender of expected utility could use to argue that Jane’s behavior is not a violation of the theory after all. Try that at least one of the strategies involve a psychologically realistic story about Jane’s behavior.

2. Watch the video linked on Gauchospace in which economics professor Edward Glaeser explains the derivation of a simple economic model (don’t worry: you don’t need to follow all the details of the math).
Answer the following 2 questions:

a) (A few lines would suffice as an answer to this question). Mention some real-world phenomena that the model could contribute to explain. What are some of the assumptions of the model? (distinguish here between fundamental assumptions about agents’ behavior and assumptions about particular conditions or circumstances). What are some of the model’s predictions?

b) Defend the model from the following potential criticism: “This model is no good: nowhere in the world is there a firm that produces output in the way represented here (“magically” delivering either a “high” or a “low” level of output with a fixed probability) or a worker who chooses between two, and only two, possible levels of effort. Besides, most real people are irrational.”
PHIL 147/247 Spring 2020
Your total word count for the whole exam should be between 1,100 and 1,300 words (upper limit is an
absolute maximum).
Please upload your answers to Gauchospace as a PDF file, double-spaced. There is no need for you to copy the questions before your answers (just number your answers as 1a), 1b), 2a), 2b)).

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