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(econ324)[2006](f)midterm~masze^_10249.pdf
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Department of Economics, HKUST
ECON 324 ECONOMICS OF HUMAN BEHAVIOR
Semester: Fall 2006 Prof. S. F. Leung

Midterm Examination October 24, 2006 10:30am C 11:50 am
This is a closed book examination. You have 80 minutes to complete the test. Write coherently, lucidly, and legibly. Always explain your answer. The maximum score for this exam is 80 points. Points are marked next to the questions and may be served as a rough guide to how much time you should allocate on each question. Points will be deducted for irrelevant materials. Use mathematics and/or diagrams wherever appropriate to support your answer.
1. (10)
Indicate whether each of the following statements is TRUE, FALSE, or UNCERTAIN, and explain your answer. Use mathematics or diagrams wherever appropriate to support your answer. More credit will be given to better and more complete arguments.
(a)
The fact that people consume more cold drinks in the summer than in the winter and more hot drinks in the winter than in the summer suggests that preferences are not stable.

(b)
Throwing a toothpick on the street will result in a $1,500 fine for littering, even though the social cost of the litter is much smaller than $1,500. This disproportional fine does not make economic sense.



2. (5)
Economics assumes that human behaviors are rational. In reality, human beings make mistakes all the time. Mistakes are a clear rejection of the rationality assumption. Discuss.
1

3. (10)
John is afraid of flying after the 911 terrorist attacks. Peter is his friend and an economist.

(a)
Peter tells John that he can reduce the risk of terrorist attacks by traveling in smaller airplanes because economic theory suggests that terrorists, if they are rational, will hijack big airplanes. Do you agree? Explain.

(b)
Peter also argues that rational terrorists will not hijack an airplane near the end of a flight. A hijack will more likely occur at the beginning of a flight. Therefore, if nothing happens at the beginning, then there is no need to worry about the rest of the flight. Do you agree? Explain.



4. (10)
(a)
What is optimal foraging theory?

(b)
Consider taking an examination such as the midterm for ECON324. An important part (strategy or technique) of exam taking is the amount of time spent on each question. Discuss whether and how optimal foraging theory can be applied to determine the optimal time allocation on exam questions.



5. (15)
It is widely believed that suicide is an irrational behavior. Many people commit suicide because they have neurotic disorders (e.g., depression). Economics cannot be applied to study suicide because the economic approach is based on rationality.
(a)
Can you use the economic approach to explain why people commit suicide?

(b)
It has been found in a large number of countries that more males commit suicide than females. Can you use the economic approach to explain this empirical finding?

(c)