1.Draw (and carefully label) a graph that demonstrates why the WTA/WTP gap is greater with loss aversion than in the case of the standard rational model with diminishing marginal utility. Explain the graph in a short answer.

2.Consider a high school student who is given $3 every school day by her parents as “lunch money.” The student works a part time job after school, earning a small amount of “spending cash.” In addition to her lunch money, the student spends $5 from her own earnings each week on lunch. Suppose her parents reduced her lunch money by $2 per day but that she simultaneously receives a $10-per-week raise at her job, requiring no extra effort on her part. What would the rational choice model suggest should happen to her spending on lunch? Alternatively, what does the mental accounting framework predict?

Answer rating: 100% (QA)

1 There are numerous experimental studies that provide evidence to the effect that the minimum compensation demanded by an agent for a good that she owns may be more than the maximum price she is will... View the full answer