Exercises for Chapter 1 Tutorial Session

1 Rational Choice 1

A student house offers students a room plus catering combo for 1000 euros per month that allows students
to eat as much as they want in that month. Another student house offers students a room at a price of 500
euros coupled with a meals booklet of coupons that allows them to have three normal, pre-defined meals
a day (breakfast, lunch and dinner) for a month at a cost of 500 euros. If students want to eat more or
something that is not on that day’s menu, they have to pay a top-up fee. If they eat less, they can use
their spare coupons in the month that follows or get a refund, whichever is more convenient for them. If
students are rational, which student house should you expect members of the university rowing team (who
need an average of 5000 kilocalories a day, whereas a normal student needs only 2000) to choose?

2 Rational Choice 2

Yesterday you were unexpectedly given a free ticket to a Muse concert scheduled for 1 December. The
market price of this ticket is 100 euros, but the most you could sell it for is only 75 euros. Today you
discover that Lady Gaga will be giving a concert that same evening. Tickets for the Lady Gaga concert are
still available at 100 euros. Had you known before receiving your Muse ticket yesterday that Lady Gaga
would be coming, you definitely would have bought a ticket to see her, not Muse. Is it true that, from
what we are told about your preferences, it follows that if you are rational, you should attend the Lady
Gaga concert. Explain.

3 Exchange Rate

Benedict lives in England and so keeps his savings in British pounds. He is deciding where to go on a skiing
holiday in February 2020. There are two options. A week in Cortina D’Ampezzo, Italy would cost 1,250
euros and he values the benefit of the holiday at 1,750 pounds. A week in Glenshee Ski Centre, Scotland
would cost 1,000 pounds and he values the benefit at 1,300 pounds. At the time of booking the exchange
rate is 1 pound per euro. Benedict books the holiday in Italy and pays a 250 euro deposit that cannot be
refunded in case he cancels the holiday.
Q1: Was Benedict’s decision to pre-book the Italian holiday rational?
By the time of the holiday, the exchange rate has dropped to 1.5 pounds to a euro (thus Benedict now
needs 1.5 pounds to get 1 euro). The Scotland holiday is still an option. Benedict could cancel the Italian
holiday and go to Scotland (still for 1,000 pounds). Q2: What should he do?

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4 It’s the Margin that Matters, Stupid!

Suppose that when your tennis opponent comes to the net, your best response is either to lob (hit the ball
over his head) or to pass (hit the ball out of reach on either side). Each type of shot is more effective if it
catches your opponent by surprise. Suppose someone who lobs all the time will win a given point only 10
per cent of the time with a lob, but that someone who virtually never lobs wins the point on 90 per cent
of the rare occasions when she does lob. Similarly, suppose someone who tries passing shots all the time
wins any given point only 30 per cent of the time with a passing shot, but someone who virtually never
tries to pass wins 40 per cent of the time when she does try. Suppose, finally, that the rate at which each
type of shot becomes less effective with use declines linearly with the proportion of times a player uses it.
The payoffs from the two types of shot are summarized graphically in the Figure below. Here, the
problem is to produce the greatest possible percentage of winning shots when your opponent comes to the
net. Let F (L) be the percentage of points you will win with a lob as a function of the proportion of times
you lob (L). F (L) is thus, in effect, the average product of L; LF (L) is the product of L. Let G(L) be
the percentage of points you will win with a passing shot, again as a function of the proportion of times
you lob. The negative slope of F (L)reflects the fact that lobs become less effective the more you use them.
Similarly, the positive slope of G(L) says that passing shots become more effective the more you lob.
Your problem is to compute L∗ , the best proportion of times to lob. Suggestion: make sure you write your
problem in terms of L.