Problem Set 3 Solutions

Problem Set 3 Solutions - PsychologyandEconomics Spring2010...

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Psychology and Economics Spring 2010 Prof. Sydnor Problem Set 3 solutions 1. Consider a person (person i ) who has preferences about some money that he and another person (person j ) are going to receive. Just like in class, person i has the following preferences that depend on the amount of money that they each have: ݑ ൫ݔ ൯ൌቊ ߩ ݕ ൅ ሺ1െߩ ሻݔ ݂݅ ݔ ൒ݕ ߪ ݕ ൅ ሺ1െߪ ሻݔ ݂݅ ݔ ൑ݕ a) Suppose that 1 > ρ > 0 > σ . Give a brief intuitive interpretation of these preferences. This person is envious when she have less than the other, but looks favorably on gains in income for the other person when she is ahead of the other in money. The negative σ tells us that she has negative marginal utility over the other persons money when behind in money. This means that when she is behind she would prefer to hurt the other person by (for example) burning that other person’s money. When ahead, however, she has a
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Problem Set 3 Solutions - PsychologyandEconomics Spring2010...

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