Consider a seller, buyer, and chooser of a mug. The seller owns a mug and is...

  

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Consider a seller, buyer, and chooser of a mug. The seller owns a mug and is willing to sell it for a price of s dollars or more. The buyer does not own the mug and is willing to pay up to b dollars for buying the mug. The chooser owns no mug, and values the mug at e dollars (she prefers getting a mug over getting a dollars if a < e, and prefers getting a dollars if r > c). The seller, buyer, and chooser are loss averse over money, with the same value function for money: r >0 v(x dollars) -2-r r<0 Further assume that all three are loss averse over mugs, with the same value function for mugs (the same v for everyone): v(gaining a mug) = v, v(losing a mug) = -2v Total utility is the sum of the gain/loss utility for mugs and the gain/loss utility for money. The reference point is the status quo, that is, a person's initial endowment. Note again that the buyer, seller, and chooser have the same underlying preferences, so that any difference SO between them is entirely due to their endowment. 1. What is the relationship between b, c, and s? Suppose b = 2. What would c and s be? 2. Suppose the buyer, seller, and chooser are only loss averse over mugs, but not over money. That is, their value function for money is instead: r > 0 v(r dollars) r< 0 What is the relationship between b, c, and s? Suppose b = 2. What would c and s be? 3. Consider now a seller, buyer, and chooser who are not loss averse: r >0 v(r dollars) %3D - r<0 and v(gaining a mug) = v, v(losing a mug) = -v What is the relationship between b, c, and s? Suppose b = 2. What would e and s be? 4. Consider now a seller, buyer, and chooser who are not loss averse (as in the previous question), but whose value for the mug varies with ownership. Specifically, the value of the mug is v for someone who does not currently own the mug, and 2u for someone who currently owns a mug. What is the relationship between b, c, and s? Suppose b = 2. What would e and s be? Consider a seller, buyer, and chooser of a mug. The seller owns a mug and is willing to sell it for a price of s dollars or more. The buyer does not own the mug and is willing to pay up to b dollars for buying the mug. The chooser owns no mug, and values the mug at e dollars (she prefers getting a mug over getting a dollars if a < e, and prefers getting a dollars if r > c). The seller, buyer, and chooser are loss averse over money, with the same value function for money: r >0 v(x dollars) -2-r r<0 Further assume that all three are loss averse over mugs, with the same value function for mugs (the same v for everyone): v(gaining a mug) = v, v(losing a mug) = -2v Total utility is the sum of the gain/loss utility for mugs and the gain/loss utility for money. The reference point is the status quo, that is, a person's initial endowment. Note again that the buyer, seller, and chooser have the same underlying preferences, so that any difference SO between them is entirely due to their endowment. 1. What is the relationship between b, c, and s? Suppose b = 2. What would c and s be? 2. Suppose the buyer, seller, and chooser are only loss averse over mugs, but not over money. That is, their value function for money is instead: r > 0 v(r dollars) r< 0 What is the relationship between b, c, and s? Suppose b = 2. What would c and s be? 3. Consider now a seller, buyer, and chooser who are not loss averse: r >0 v(r dollars) %3D - r<0 and v(gaining a mug) = v, v(losing a mug) = -v What is the relationship between b, c, and s? Suppose b = 2. What would e and s be? 4. Consider now a seller, buyer, and chooser who are not loss averse (as in the previous question), but whose value for the mug varies with ownership. Specifically, the value of the mug is v for someone who does not currently own the mug, and 2u for someone who currently owns a mug. What is the relationship between b, c, and s? Suppose b = 2. What would e and s be?