There are four students named A, B, C, and D. All four of them are loss averse over money, with the same value function for money: v(x dollars) = √x and x ≥ 0, −2√−x and x < 0 All three of them are also loss averse over mugs, with the same value function for mugs: v(y mugs) = 3y and y ≥ 0, 4y and y < 0 Total utility is the sum of the gain/loss utility for mugs and the gain/loss utility for money. The reference point is the status quo, that is, a person’s initial endowment. Student A owns a mug and is willing to sell it for a price of a dollars or more. Student B does not own a mug and is willing to pay up to b dollars for buying it. Student C does not own a mug and is indifferent between getting a mug and getting c dollars. Student D is indifferent between losing a mug and losing d dollars. 1. Solve for a, b, c, and d.
There are four students named A, B, C, and D. All four of them are loss averse over money,
with the same value function for money:
v(x dollars) = √x and x ≥ 0, −2√−x and x < 0
All three of them are also loss averse over mugs, with the same value function for mugs:
v(y mugs) = 3y and y ≥ 0, 4y and y < 0
Total utility is the sum of the gain/loss utility for mugs and the gain/loss utility for money.
The reference point is the status quo, that is, a person’s initial endowment. Student A owns
a mug and is willing to sell it for a price of a dollars or more. Student B does not own a
mug and is willing to pay up to b dollars for buying it. Student C does not own a mug and
is indifferent between getting a mug and getting c dollars. Student D is indifferent between
losing a mug and losing d dollars.
1. Solve for a, b, c, and d.
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