behavioural economics

Question 1. (25%) Albert and Beth are attractive at a new camera at a abundance that o ers a no-questions-asked return policy. They are not abiding the new appearance are account it. Albert decides to booty one home, cerebration that he can consistently acknowledgment it tomorrow. Beth decides adjoin demography one home, thinking that she can consistently appear aback and aces one up tomorrow. They are both accident averse over cameras, with the aforementioned bulk action over cameras: v(x) = x for gains v(x) = 2x for losses They both use their endowments as their advertence points. Ignore any transaction costs. 1. Afterwards Albert has taken his camera home, he incorporates it into his endowment. How much of a accident in account would he acquire by abiding it tomorrow? 2. Beth, who does not booty her camera home, does not absorb it into her endowment. How abundant of a foregone accretion in account does the camera she does not own represent to her? 3. Who is added acceptable to end up the buyer of the camera, Albert or Beth? 4. Does this advice to explain why food are accommodating to o er the no-questions-asked return policy admitting the abeyant costs on repackaging and refurbishment? Question 2. (25%) Sam's preferences over cake, c, and money, m, can be represented by the account function u (c;m) = c + 4m +  (c ???? rc) + 4 (m ???? rm) 1 where rc is his block advertence point, rm is his money advertence point, and the action  () is de ned as  (z) = 8< : z z  0 3z z < 0 : 1. If his advertence point is the cachet quo (that is, his antecedent endowment), what is the maximum bulk Sam would be accommodating to pay to buy a cake? (Hint: use the indi erence action that Sam's account does not change afterwards accepting a cake and accident his willingness-to-pay.) 2. If his advertence point is the cachet quo, what is the minimum bulk Sam would be willing to acquire to advertise a block he already owned? 3. If his advertence point is the cachet quo, what is the minimum bulk of money Sam would be accommodating to acquire instead of accepting a block (that he did not already own)? In other words, if Sam were a \chooser," how abundant money would he appeal to compensate for not accepting a cake? 4. Use the concepts we discussed in chic to explain your answers to Questions 2.1, 2.2, and 2.3.

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