Week 2 Social Preferences

Question 1

Explain Altruism and Pure and Impure and examples for each

Answer 1

Altruism is the action of sacrificing ones benefit for others without expecting a personal reward (Rushton, 1984)

Pure is not expecting a reward, impure is expected a reward
An example of pure would be donating to charity because you feel like it is good.
Impure would be volunteering because it would look good on the media for your personal brand.

Question 2

Network effects: Explain direct network effects and indirect network effects and finally recite Metcalfe Law

Answer 2

Direct network effect is for example when your value grows with more tiktok followers
Indirect would be when your value increases with commentary goods so a console becomes more valuable when there are lots o games being produced for it
Metcalfe Law states the value of a network is proportional to the square of the number of users

Question 3

Fehr-Schmidt Inequality Aversion Model, explain the model, explain inequality, give an example, explain loss aversion, give example

Answer 3

The model states an individual may refuse an outcome, even if advantageous, if the resources to obtain that were obtained unfairly.
Inequality is the perceived unfairness towards an individual or allocation of resources and aversion to this means how much you don’t like it happening, high aversion means you really do not like it (inequality in this case). Loss aversion is the same concept but with money that you did not actually have. For example, expecting to get 100 but only getting 60, or having a budget of 100 and something went from 50 to 70 you feel like missed out

Question 4

Rabin Reciprocity Model explain and example

Answer 4

Individuals are more likely to cooperate if they believe their actions will be reciprocated, good behaviour with good rewards and punish bad behaviour
Example if a person helps you with a task you may feel like helping them too, or if employee gets a bonus they may feel like working harder

Question 5

Nash equilibrium Game, define, give example of prisoner

Answer 5

A concept in a game where individuals make the best possible decision based on their situation such that there is no incentive to change decision.
Example prisoners dilemma where two prisoners have the option to confess or stay silent. If both stay silent payoff is 3, if one silent and other confess then payoff is 2 for confess and -1 for silent, if both confess payoff is 1, - since prisoner don’t know what to other person will do the best is to always confess, this is the nash equilibrium

Question 6

Write the utility function when under Fehr-Schmidt

Answer 6

U= U( wi - (w-i) ) - £I( wi - (w-i) ) with £ being beta representing the weight of my aversion

Question 7

Write the utility function when under Pure Altruism

Answer 7

U = U(A) + £U(others) with £ being beta and the weight of how altruistic this is

Question 8

Write the utility function under Impure Altruism

Answer 8

U = U(A) + £U(others) + $U(selfmotivation) with £ being beta and weight for altruistic and $ being alpha the weight for my own self interest

Question 9

A firm is what maximising and a person is what maximising

Answer 9

Firm is profit, Person is utility