3. Mason has reference-dependent preferences over money and flights. Let his utility be: U = v(500cflight - 50Or flight) + V(Cmoney - money) where
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3. Mason has reference-dependent preferences over money and flights. Let his utility be:
U = v(500cflight - 50Or flight) + V(Cmoney - money) where v(2) =
if x 2 0,
2.x if x <0.
(a) Suppose Mason has a reference point of zero money and zero flights. What is the
most he is willing to pay for a flight? If flights cost $300, will he purchase a ticket
to go home?
(b) Mason's brother gives him $200 as a birthday gift, which he does not incorporate
into his reference point. What is the most he is willing to pay for a flight now?
(c) Explain the intuition as to why Mason's willingness to pay in part (b) differs from
that in part(a).
(d) Assume that Mason uses his birthday gift and buys a ticket home. He now has a
plane ticket and -$100 of money, which are also his new reference points. On the
day of the flight, there is a snow storm and his flight is cancelled. He is offered
a refund of $300 with no flight, or he can pay another $300 to book a different
flight that will beat the snow storm. What does he do?
(e) Explain the intuition as to why Mason's willingness to pay in part (d) differs from
that in part(b).

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