Suppose that you were to perform an experiment on subjects to determine whether they prefer to have coffee mugs or money. You plan to use a large representative sampling of individuals and endow half of the participants in your experiment with coffee mugs and then ask those to whom mugs were given what would be the lowest price at which they would sell. Those subjects who were not given mugs were asked how much they would pay for a mug.

a. If participants are rational and consistent in their preferences, how should purchase prices differ from selling prices?

b. Assume that the endowment effect described by Kahneman and Tversky is true for individuals. How should purchase prices differ from selling prices?

c. What would be the relevance of this type of experiment to stock markets?