Behavioural economics | Economics homework help

Question 1. (25%)

Albert and Beth are looking at a new camera at a store that oers a no-questions-asked

return policy. They are not sure the new features are worth it. Albert decides to take one

home, thinking that he can always return it tomorrow. Beth decides against taking one home,

thinking that she can always come back and pick one up tomorrow. They are both loss averse

over cameras, with the same value function over cameras:

v(x) = x for gains

v(x) = 2x for losses

They both use their endowments as their reference points. Ignore any transaction costs.

1. After Albert has taken his camera home, he incorporates it into his endowment. How

much of a loss in utility would he incur by returning it tomorrow?

2. Beth, who does not take her camera home, does not incorporate it into her endowment.

How much of a foregone gain in utility does the camera she does not own represent to


3. Who is more likely to end up the owner of the camera, Albert or Beth?

4. Does this help to explain why stores are willing to oer the no-questions-asked return

policy despite the potential costs on repackaging and refurbishment?

Question 2. (25%)

Sam’s preferences over cake, c, and money, m, can be represented by the utility function

u (c;m) = c + 4m + (c ???? rc) + 4 (m ???? rm)


where rc is his cake reference point, rm is his money reference point, and the function () is

dened as

(z) =



z z 0

3z z < 0


1. If his reference point is the status quo (that is, his initial endowment), what is the

maximum price Sam would be willing to pay to buy a cake?

(Hint: use the indierence condition that Sam’s utility does not change after gaining a

cake and losing his willingness-to-pay.)

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?

3. If his reference point is the status quo, what is the minimum amount of money Sam

would be willing to accept instead of receiving a cake (that he did not already own)? In

other words, if Sam were a chooser,” how much money would he demand to compensate

for not accepting a cake?

4. Use the concepts we discussed in class to explain your answers to Questions 2.1, 2.2,

and 2.3.

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more