There are three little pigs, Damien, Bruno, and Raja. Each of the three pigs lives for five periods, 1, 2, 3, 4, and 5, and is a hyperbolic discounter as introduced in class. In period 1, Damien and Bruno have to decide whether to build a house of bricks or of straw (the market is out of sticks). Building a house of straw has no instantaneous utility cost (it takes no effort), but building a house of bricks has an instantaneous utility cost of 3 (it requires some effort). Every day the three little pigs get utility from rolling around in the mud near the house they live in. This includes the first period, in which they roll around in the mud after houses have been built. But how much utility they get depends on whether they are safe from the big bad wolf, and this in turn depends on what their house is made of. If a pig lives in a brick house, he gets an instantaneous utility of 5 each period from rolling around in the mud. But if a pig lives in a straw house, he knows that the big bad wolf could come and huff and puff and blow his house down, and so he only gets instantaneous utility of 4 each period from rolling around in the mud.

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