Assignment 1

PPE 313 / PSYC 265

Total: 50 points

Due: 3:30pm ET 09/23/2021

Assignment should be uploaded onto Canvas in pdf format.

Full Name: Eli Cohen

Penn ID number: 25042299

Problem 1 [10 points]

An Italian restaurant offers different menus on different days of the week. They serve gnocchi
and tortellini on weekdays; lasagna, meatballs, and gnocchi on Saturdays; and gnocchi, tortellini,
meatballs, and lasagna on Sundays.

1.1.We know that Deniz orders gnocchi on weekdays and meatballs on Saturdays. If Deniz
has transitive, complete, and stable preferences, can we predict what he would order on
a Sunday? Why or why not? [2 pts]

Yes, we can predict that Deniz will order Meatballs, as his preferences are transitive. Meatballs >
Gnocchi and Gnocchi > Tortellini implies that Meatballs > Tortellini. Based on Deniz’s choice
on Saturdays we also know that Meatballs > Lasagna. Therefore, his most preferred option on
Sunday is meatballs.

1.2. Assign utilities to the following menu items, such that they would account for Deniz’s
choices listed in Q1.1. [4 points]

U(gnocchi) = 75
U(lasagna) = 50
U(meatballs) = 100
U(tortellini) = 25

As long as U(meatballs) is the greatest, and U(gnocchi) > U(tortellini), multiple possible
utility values are acceptable. Deniz’s preference relation between tortellini and lasagna is
ambiguous, as is Deniz’s preference between lasagna and gnocchi.

1.3. Neha displays the following choice pattern:

C({gnocchi, tortellini}) = gnocchi
C({lasagna, gnocchi}) = lasagna
C({tortellini, meatballs}) = tortellini
C({meatballs, gnocchi}) = meatballs

Given this information, can you predict what Neha would choose if given C({lasagna,
meatballs})? Please explain. [2 pts]

We cannot predict what Neha will choose as her preferences do not show transitivity. She
prefers meatballs to gnocchi (4th choice pattern), gnocchi to tortellini (1st choice pattern), and
tortellini to meatballs (3rd choice pattern). The loop of meatballs > gnocchi > tortellini >
 meatballs means we cannot predict what Neha will choose.

1.3.1. Can we assign utilities to the four dishes listed in Q1.2 to explain Neha’s choices?
Please explain. [2 pts]

We cannot assign utilities to explain Neha’s choices, as you need both transitivity and
completeness to be satisfied in order to do so. As shown in question 1.3, Neha’s
preferences are not transitive.

Problem 2 [10 points]

An internet company offers two different plans:

Plan 1: 400 mbps download speed for $50
Plan 2: 200 mbps download speed for $30

2.1. Plan 1 is more profitable for the company. However, most of the customers choose Plan 2 –
the one that is less profitable for the company. The marketing specialist working at the
company suggests introducing a third plan:
Plan 3: 600 mbps download speed for $80

2.1.1. Draw these three plans on the plot below where affordability is the inverse of the
price: [2 pts]

2.1.2. Would Plan 3 be likely to change the proportion of customers choosing Plan 1?
If so, in which direction? [1 pt]
 Yes, the introduction of Plan 3 would increase the proportion of customers choosing
Plan 1.

2.1.3. Would Plan 3 change the proportion of customers choosing Plan 2? If so, in
which direction? [1 pt]

Yes, the introduction of Plan 3 would decrease the proportion of customers choosing
Plan 2.

2.1.4. Please explain why you would/wouldn’t expect a change in the proportion of
customers choosing Plan 1 and 2 after the addition of the third plan. [2 pts]

These effects would likely be the result of the Compromise Effect. The addition of
Plan 3, an extreme in the download speed attribute, would result in Plan 1 appearing
as a compromise between Plans 2 & 3, resulting in a greater share of customers
choosing Plan 1, and a lesser share of customers choosing Plan 2 than before.

2.2. Now imagine that Plan 3 offers 350 mbps for $50 instead.
2.2.1. Would Plan 3 change the proportion of customers choosing Plan 1? If so, in
which direction? [1 pt]

Yes, the introduction of Plan 3 would increase the proportion of customers choosing
Plan 1.

2.2.2. Would Plan 3 change the proportion of customers choosing Plan 2? If so, in
which direction? [1 pt]

Yes, the introduction of Plan 3 would decrease the proportion of customers choosing
Plan 2.

2.2.3. Please explain why you would/wouldn’t expect a change in the proportion of
customers choosing Plan 1 and 2 after the addition of the third plan. [2 pts]

These effects would likely be the result of the Decoy Effect. When Plan 3 offers 350
mbps for $50, it is dominated by Plan 1 which offers a faster download speed for the
same price. An easy comparison can be drawn between Plan 1 & 3. However, it is
more difficult to compare Plans 2 & 3. Therefore, an increased proportion of
customers will select Plan 1, and a decreased proportion of customers will select Plan
2.
Problem 3 [20 points]

Consider the following decision makers (with w indicating the wealth state and U indicating the
utility function over money):
𝑦2
Sofia : w = $15; U(y) = 4
Ayumi : w = $15; U(y) = 5 · 𝑦
Luis : w = $15; U(y) = 2 · log⁡(𝑦)

(Note: You may need to download this file to see these functions)

3.1. Imagine that Sofia, Ayumi, and Luis are presented with a choice between the following
gambles represented in the format xi = (xi1, pi1; xi2, pi2):
x1 = (10, .3; 0, .7) x2 = (y, 1)
Given the information above, calculate the expected utility of the gamble x1 for each
decision maker. [6 pts]

(15+10)2 (15+0)2
Sofia: EU = 0.3 + 0.7 = 86.25 utils
4 4

Ayumi: EU = 0.3(5(15+10)) + 0.7(5(15)) = 90 utils

Luis: EU = 0.3(2 log(15+10)) + 0.7(2 log(15)) = 2.485 utils

3.2. Next, each decision maker is asked to report the lowest dollar amount for them to pick
the sure option over the gamble stated in Q3.1. Calculate this value (i.e., y) for each
decision maker and show your math. [6 pts]
would choose getting y$ for certain over 10$ with p=.30 if y is greater than…

Sofia: Convert 86.25 utils to $ → 86.25 = (y^2)/4 → $18.57

- Subtract their initial wealth $15, y = $3.57

Ayumi: Convert 90 utils to $ → 90 = 5y → $18

- Subtract their initial wealth $15, y = $3

Luis: Convert 2.485 utils to $ → 2.485 = 2 log(y) → $17.49

- Subtract their initial wealth $15, y = $2.49
3.3. Based on your calculations in 3.2, who would need the lowest certain amount (i.e., y) in
order to choose this option over playing the gamble in x1? How does this relate to the
decision makers’ risk preferences (i.e., risk seeking, risk neutral, or risk averse)? [4 pts]

Luis would need the lowest certain amount in order to choose the certain option, as he is risk
averse. This can be inferred from his logarithmic utility function. As such, Luis is eager to
not take the risky gamble and ‘does not need as much convincing’ (i.e. does not need a large
certain amount) to take the certain option, x2.

3.4. Based on your calculations in 3.2, who would need the highest certain amount (i.e., y)
in order to choose this option over playing the gamble in x1? How does this relate to the
decision makers’ risk preferences (i.e., risk seeking, risk neutral, or risk averse)? [4 pts]

Sofia would need the greatest certain amount in order to choose the certain option, as she is
risk seeking. This can be inferred from her exponential utility function. As such, Sofia is
eager to take the risky gamble and ‘needs greater convincing’ (i.e. needs a larger certain
amount) in order to take the certain option, x2.
Problem 4 [10 points]
Consider the following gambles:

x1 = $600 with p = .15 x2 = $450 with certainty

$450 with p = .84
$0 with p = .01

4.1. If you were given the gambles above, would you choose x1 or x2? [1pt just for stating
your preference, no correct answers]

I would choose gamble x1

4.2. Now imagine that you are given the following gambles:
x3 = $600 with p = .15 x4 = $450 with p = .16
$0 with p = .85 $0 with p = .84

Would you choose x3 or x4? Answer without doing any calculations. [1pt just for stating
your preference, no correct answers]

I would choose gamble x3

4.3. Imagine that Dan chooses x1 over x2 and we know that Dan maximizes EU. Based on
this information, which gamble would Dan choose when given the choice in Q4.2? Show
your math. [5pts]

Gamble x2 implies winning $450 with p = 0.84 and winning $450 with p = 0.16, therefore
Dan should ignore the part of x1 that is winning $450 with p = 0.16, as it is a common
denominator in both gambles. This elimination makes x3 the same gamble as x1, and x2 the
same gamble as x4, meaning that Dan should choose x3 if he abides by EUT.

4.4. Did your own responses diverge from those that you predicted for Dan? Briefly explain
how you made your choices and discuss how these choices relate to those made by EU
maximizers. [3 pts]

My choices did not diverge from those I predicted for Dan. I chose x1 because there is a large chance
I win $450, a small chance I win $600, and a relatively negligible chance that I win nothing. I viewed
this as more favorable than simply accepting $450 for certain. In the second decision I chose x3
because the 1% difference between winning $600 and winning $450 did not make up for the $150
dollar difference in potential earnings. This is consistent with the decision making of a EU
maximizer, as I choose both x1 and x3, just like Dan.