Mats, who has reference-dependent preferences over beer and money, goes to the local pub with a friend, but is not planning on drinking any beer or spending any of his 50 Euro in cash. Let his end-of-evening outcomes in pints of beer consumed and cash be c1 and c2, respectively, and let his reference point in pints of beer and cash be r1 and r2, respectively. Then, Mats’ utility is given by v(6c1 − 6r1) + v(c2 − r2), where v(x) = x for x ≥ 0, and v(x) = 1.5x for x < 0. 1) Now suppose that after Mats gets his promo pint but before he decides whether to sell it, he notices that he lost 10 Euro on the way to the pub. He does not yet incorporate this 10 Euro loss into his reference point for cash. Calculate his selling price for the pint of beer. 2) Suppose that the pub advertises that it will have a 1 Euro/pint promotion. Thinking that this is worth it, Mats plans in advance to buy a pint, and incorporates this plan into his reference point. What is Mats’ reference point (r1, r2) in this case? Once he arrives at the pub, Mats is told that the pub has run out of the promo- tional beer. What is the maximum price pB that Mats would pay for a beer now?
Mats, who has reference-dependent preferences over beer and money, goes to the local pub with a friend, but is not planning on drinking any beer or spending any of his 50 Euro in cash. Let his end-of-evening outcomes in pints of beer consumed and cash be c1 and c2, respectively, and let his reference point in pints of beer and cash be r1 and r2, respectively. Then, Mats’ utility is given by
v(6c1 − 6r1) + v(c2 − r2), where v(x) = x for x ≥ 0, and v(x) = 1.5x for x < 0.
1) Now suppose that after Mats gets his promo pint but before he decides whether to sell it, he notices that he lost 10 Euro on the way to the pub. He does not yet incorporate this 10 Euro loss into his reference point for cash. Calculate his selling
2) Suppose that the pub advertises that it will have a 1 Euro/pint promotion. Thinking that this is worth it, Mats plans in advance to buy a pint, and incorporates this plan into his reference point. What is Mats’ reference point (r1, r2) in this case? Once he arrives at the pub, Mats is told that the pub has run out of the promo- tional beer. What is the maximum price pB that Mats would pay for a beer now?
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