Problem
A. Imagine the following gamble offered at Casino de Gotham. Guests can decide whether or not to purchase a ticket to play the gamble for $5. The gamble itself works as follows: A fair coin is tossed. If the coin toss shows tails, the player wins $10. If it shows heads, a card is randomly drawn from a standard pack, containing an equal number of cards of each of the four suits (spades, clubs, hearts and diamonds). Depending on the suit of the card drawn in this way, the payoffs are as follows: If the card is a spade, the player wins $50. If it is a club, the player wins $35. If it is a heart, the player loses $70, and if it is a diamond, the player loses $15.
a. Represent this situation as a decision tree from the perspective of a guest.
b. How much would you be prepared to pay for playing this gamble if you were a guest, and why? What is your advice for other potential players?
B. Explain the concept of bounded rationality. Critically compare and contrast this concept with that of instrumental rationality. In your answer, explain the significance of these concepts for economic analysis
C. Why do behavioural economists seek to "operationalise" the concept of culture for predicting economic behaviour and recommending related policies? Comment on the potential for human values surveys to be used by economists in such efforts. In answer, include a discussion of at least three such survey instruments.
D. "There is a paradox at the heart of our civilization. Individuals want more income. Yet, as society has got richer, people have not become happier" (Layard, 2003).
Critically assess this statement from a behavioural economics viewpoint. In your answer, refer to the approach and findings of happiness economics, and discuss the implications for economic policy.