function u (c, m) = c + m + µ (c − rc) + µ (m − rm) where rc is his cake reference point, rm is his money reference point, and the function µ (·) is defined as µ (z) = z , z ≥ 0 and λz, z < 0 where λ > 0. 1. If his reference point is the status quo (that is, his initial endowment
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Alex preferences over cake, c, and money, m, can be represented by the utility function
u (c, m) = c + m + µ (c − rc) + µ (m − rm)
where rc is his cake reference point, rm is his money reference point, and
the function µ (·) is
defined as µ (z) = z , z ≥ 0 and λz, z < 0 where λ > 0.
1. If his reference point is the status quo (that is, his initial endowment), what is the
maximum
2. If his reference point is the status quo, what is the minimum price Sam would be willing
to accept to sell a cake he already owned?
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Solved in 2 steps with 2 images
- An experimental subject has reference-dependent preferences over mugs and money. Letconsumption in mugs and money be c1 and c2, respectively, and let the reference point inmugs and money be r1 and r2, respectively. Then, the person’s utility is given by v(3c1 − 3r1) + v(c2 − r2) (1)where v(x) = x for x ≥ 0 and v(x) = 3x for x < 0. Normalize the person’s initial amountof money to zero, and suppose she starts off with zero mugs.a) What feature(s) of the prospect-theory value function does v capture? Whatfeature(s) does it not capture?b) According to the above utility function, who is better off: a person whosereference point is to get nothing and gets nothing, or one whose reference point is toget $1,000 and gets $1,000? Is there something weird about this? If so, how couldyou modify the utility function to make it more realistic (while still capturing thesame features of prospect theory)? Use the original utility function for the rest of…An experimental subject has reference-dependent preferences over mugs and money. Letconsumption in mugs and money be c1 and c2, respectively, and let the reference point inmugs and money be r1 and r2, respectively. Then, the person’s utility is given byv(3c1 − 3r1) + v(c2 − r2) (1)where v(x) = x for x ≥ 0 and v(x) = 3x for x < 0. Normalize the person’s initial amountof money to zero, and suppose she starts off with zero mugs.a) What feature(s) of the prospect-theory value function does v capture? Whatfeature(s) does it not capture?b) According to the above utility function, who is better off: a person whosereference point is to get nothing and gets nothing, or one whose reference point is toget $1,000 and gets $1,000? Is there something weird about this? If so, how couldyou modify the utility function to make it more realistic (while still capturing thesame features of prospect theory)? Use the original utility function for the rest of theproblem.c) Calculate the person’s buying…According to Chapter 3- History of Economic Thought by Hunt What do subscribers to the utility theory of value mean by the " water-diamond paradox" when discussing Smith's distinction between " value in use" and " value in exchange." ? How does Hunt explain Smith's position?
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- Suppose that there are only 10 individuals in the economy each with the following utility function over present and future consumption: U (c1, c2) = c1 +C2, where ci is consumption today, and c2 is consumption tomorrow. Consumption tomorrow is less valued because people are impatient and prefer consuming now rather than later. Buying 1 unit of consumption today costs $1 today and buying 1 unit of consumption tomorrow costs $1 tomorrow. All individuals have income of $10 dollars today and no income tomorrow (because they will be retired) but they can save at the market interest rater> 0. How much of his or her income will an individual consume today given that the interest rate is 0.3? O. Less than half of it O. Exactly half of it O. The individual is indifferent between consuming today and saving O. More than half of it O. All of it O. None of it How much of his or her income will an individual consume today given that the interest rate is 0.5? O. Less than half of it…Consider an overlapping generations model with the following characteristics: each generation is composed of 1,000 individuals. The fiat money supply changes according to Mt=2Mt-1. The initial old own a total of 10,000 units of fiat money. (M0=£10,000). Each period, the newly printed money is given to the old of that period as a lump-sum transfer (subsidy). Each person is endowed with 20 units of the consumption good when born and nothing when old. Preferences are such that individuals wish to save 10 units in fiat money when young at the equilibrium rate of return. a. What is the gross real rate of return on fiat money in this economy? b. How many goods does an individual receive as a subsidy? c. What is the price of the consumption good in period 1, in GBP?Answer this question in no more than 5 sentences. Why is it necessary for money to possess the necessary attributes that qualify it as “good money”?
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