Question: 2 Reference Point Tyler has loss averse preferences. In particular, Tyler values a gain of amount x as u(x) = x and values a loss

2 Reference Point

Tyler has loss averse preferences. In particular, Tyler values a gain of amount x as u(x) = x and values a loss of x as u(x) = 2x (a) What is the maximum amount of money that Tyler would pay for a lottery that pays $1000 with probability 1/2 and $0 with probability 1//2 ? You must show the reasoning behind your answer to get credit. (b) What is the maximum amount of money that Tyler would pay to avoid playing a lottery that loses $1000 with probability 1/2 and loses $0 with probability 1/2 ? You must show the reasoning behind your answer to get credit. (c) Propose a utility function exhibiting diminishing sensitivity and calculate the answers to part (a) and part (b) using this utility function. You must show the reasoning behind your answer to get credit.

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