Exercise 1. In this question, we study how the endowment effect model could accommodate the willing to sell and willingness to pay gap for a given object. Let M denote mug and C denote cash, so that bundles (M,C) represents different combination of mugs and cash. Given a reference point (rm, rc), suppose that preferences of John over different bundles of mugs and cash can be represented by the following utility function: U(rмrc) (M,C) = M + C + v(MTM) + v(C - rc) (1) where the function v(t) = { if t> 0 2t if t≤0 (2) captures loss aversion as shown in lecture. Please answer the following questions considering that John takes his endowment as a reference. 1. (15 points) Suppose John was given an endowment of (rm,rc) = (1,0). What is the minimum amount of cash that John is willing to accept to sell the mug? WTS 2. (15 points) Suppose John was given an endowment of (rm,rc) = (0,5). What is the maximum amount of cash that John is willing to pay for the mug? WTP 3. (5 points) Is there and if so what is a gap in the WTP and WTS? 4. (15 points) Suppose John was given an endowment of (rm,rc) = (0,0). Which of the following bundle would he prefer (1,0) or (0,1)