Question 2. Suppose in an experiment, you randomly hand out a chocolate to half of the subjects in a large group. You then allow the subjects to trade the chocolate. That is, the ones who own the chocolate can sell theirs, and the ones who do not own the chocolate can buy from the others. The chocolates can be sold at any price the buyer and the seller agree upon, irrespective of the price in the shop.
Question 2. Suppose in an experiment, you randomly hand out a chocolate to half of the subjects in a large group. You then allow the subjects to trade the chocolate. That is, the ones who own the chocolate can sell theirs, and the ones who do not own the chocolate can buy from the others. The chocolates can be sold at any price the buyer and the seller agree upon, irrespective of the price in the shop.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:Question 2.
Suppose in an experiment, you randomly hand out a chocolate to half of the
subjects in a large group. You then allow the subjects to trade the chocolate.
That is, the ones who own the chocolate can sell theirs, and the ones who do
not own the chocolate can buy from the others. The chocolates can be sold at
any price the buyer and the seller agree upon, irrespective of the price in the
shop.
Transcribed Image Text:1.
2.
3.
4.
Explain why, in the absence of transaction costs, we would
expect about half of the chocolates to change hands according to the
standard theory.
Suppose that a subject, who received a chocolate in the exper-
iment, has the following value function for chocolate and for money:
- {√ √v=
v(x) =
x>0
1-2√√x x < 0
What is the minimum price she is willing to accept to sell her chocolate?
Suppose that a subject, who did not receive a chocolate in the
experiment, has the same value function for chocolate and for money:
v(x): =
S√x
-2√√x
x>0
x<0
What is the maximum price she is willing to pay to buy a chocolate?
When the experiment is conducted in the lab, you observed
that less than half of the chocolates changed hands. Use your answers to
Questions (2.2) and (2.3) to explain this observation.
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