2. Answer all parts (a) - (d) of this question Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below (a) (b) 100 90 80 70 60 50 40 30 20 10 0 60 90 Stock Price 95 70 October November December January 50 Feburary 80 March Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? | Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? (c) In January, which month should Person B rather use as reference point in order to maximize their value? (d) Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum price that the stock will need to have in April to fulfill C's expectations?
2. Answer all parts (a) - (d) of this question Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below (a) (b) 100 90 80 70 60 50 40 30 20 10 0 60 90 Stock Price 95 70 October November December January 50 Feburary 80 March Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? | Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? (c) In January, which month should Person B rather use as reference point in order to maximize their value? (d) Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum price that the stock will need to have in April to fulfill C's expectations?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:2. Answer all parts (a) - (d) of this question
Person A, Person B and Person C own stock in the same company. All of them are loss averse
and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's
price is shown in the graph below
(a)
(b)
100
90
80
70
60
50
40
30
20
10
0
60
90
Stock Price
95
70
October November December January
50
Feburary
80
March
Person A bought the stock in November and uses the purchase price as their
reference point. If you ask them, how much would they say that they lost in terms of
value when the price dropped from £95 to £70?
| Person B bought the stock in October and uses the peak price as their reference
point. If you ask them, how much would they say that they lost in terms of value in
January?
(c)
In January, which month should Person B rather use as reference point in order
to maximize their value?
(d)
Person C bought the stock in March. They expect to derive a value of at
least +5 in April as compared to their reference point of the purchase price. What is the
minimum price that the stock will need to have in April to fulfill C's expectations?
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