3. Suppose Min has the following reference-dependent utility function: U(m) = V(m-rm), where V(x): { 2.1-...

 

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3. Suppose Min has the following reference-dependent utility function: U(m) = V(m-rm), where V(x): { ²2.1- x.8 -2.(-x) 0.8 = for x ≥ 0 for x < 0 In which m is the amount of money she has and rm denotes her reference point. We assume that her reference point is the status quo: rm = mo, where mo is the amount of money m she starts with. (a) Suppose she considers the gamble A: ($550, 0.5; -$500, 0.5). Will she want to play this gamble? Please give the name of the effect driving her behaviour. (b) Suppose she is at the casino and that she loses $500. She feels quite bad about it and perceives it as a loss. Her reference point is unchanged at rm = mo, but the amount of money she has is now m = mo - 500. Would Min be willing to take gamble A now? Please explain why. (c) Let's consider the situation where some time elapses after Min's initial loss of $500. She has now come to term with it. He reference point moves to rm = mo 500 as a consequence. Would she take gamble A now? (d) Let's now assume that Min gets a scratch card and happens to win $10,000! She is very happy and feels good about her gains as her reference point is still rm = mo - 500 while her wealth is now m = mo +9,500. Would she take the gamble A now? 3. Suppose Min has the following reference-dependent utility function: U(m) = V(m-rm), where V(x): { ²2.1- x.8 -2.(-x) 0.8 = for x ≥ 0 for x < 0 In which m is the amount of money she has and rm denotes her reference point. We assume that her reference point is the status quo: rm = mo, where mo is the amount of money m she starts with. (a) Suppose she considers the gamble A: ($550, 0.5; -$500, 0.5). Will she want to play this gamble? Please give the name of the effect driving her behaviour. (b) Suppose she is at the casino and that she loses $500. She feels quite bad about it and perceives it as a loss. Her reference point is unchanged at rm = mo, but the amount of money she has is now m = mo - 500. Would Min be willing to take gamble A now? Please explain why. (c) Let's consider the situation where some time elapses after Min's initial loss of $500. She has now come to term with it. He reference point moves to rm = mo 500 as a consequence. Would she take gamble A now? (d) Let's now assume that Min gets a scratch card and happens to win $10,000! She is very happy and feels good about her gains as her reference point is still rm = mo - 500 while her wealth is now m = mo +9,500. Would she take the gamble A now?

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aMins utility function is Um Vm Tm where Vx 2 x08 for a 0 and Tm is her reference point If she considers the gamble A 550 05 500 05 the expected value ... View the full answer