Assignment #4.pdf - Assignment 4 Behavioral Economics Economics 4374 due on Blackboard(before class 1 Solve Suppose Fox has reference-dependent

# Assignment #4.pdf - Assignment 4 Behavioral Economics...

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Assignment 4 Behavioral Economics: Economics 4374 due September 17, 2019 on Blackboard (before class) 1 Solve Suppose Fox has reference-dependent preferences over money, stickers, and airplanes. Let his consumption in money, stickers, and airplanes be c 1 , c 2 , and c 3 , respectively, and let his reference points in money, stickers, and airplanes be r 1 , r 2 , and r 3 , respectively. Then, Fox’s utility is given by v ( c 1 - r 1 ) + v (4 c 2 - 4 r 2 ) + v (4 c 3 - 4 r 3 ) , where v ( x ) = x for x 0, and v ( x ) = 2 x for x < 0. Normalize Fox’s initial amount of money to zero, and suppose he starts off with zero stickers and zero airplanes. 1. What will be Fox’s utility from losing two stickers, gaining one airplane, and gaining \$6? 2. Fox arrives at the experiment, and it turns out that he receives an \$8 show-up bonus, which he does not incorporate into his reference point for money. Suppose Fox is given a sticker (and he does incorporate this into his reference point). Calculate his selling

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