Question :

Consider an individual with reference-dependent preferences, and a reference level of wealth of 5 100,000. She goes out for a walk and loses $100, which drops out of her wallet, and can't find it. D n her way homeshe passes someone on the street who offers her the opportunity to play the followinggame of chance: she can bet any amount up to $125, and they will ip a coin to detenn ine the outcome of the bet. If it comes up heads, she will double whatever she bets. If it comes up tails she loSes her bet. She will: a. Bet S 1 2 5 h.We need more information on her preferences to say whether she will place a bet, and how much {2. Bet less than 5 1m} {1. Not bet e. Bet at least $100 Suppose instead that she ) and 51 Ill} while out on her walk, so that she is 5 1m} richer [rather than $100 poorer] when offered the gamble. How much would she bet? a. i need more information to answer this question b.She wotdd bet less than the answer i gave in the precedingquestion c. The bet would be identical to the one she would make in the preceding question d.She wotdd bet more than the answer i gave in the precedingquestion Consider E rin, who satisfies the conditions of expected utility theory. She is offered the opportunity to make the following gamble: A=[[I}.5,-1000),[.5,12ll]]. She says she would accept the offer. instead of offering A, however, it turns out that Erin is offered B=[[I}.25,- l],[.2 5,1200],[I}.5,2I})]. She will: a. We require more on Erin's risk preferences to know whether she will accept or reject B b. Reject B _ {2. Accept B d.We need to know Erin's wealth to know whether she will accept or reject B Suppose that, in the preceding question, E rin rejects A when offered it. When she is instead offered B, she will: a. Reject B h.We need to know Erin's wealth to know whether she will accept or reject B c. We require more on Erin's risk preferences to know whether she will accept or reject B {1. Accept B