1. Harvey has reference-dependent preferences over mugs and wealth. His consumption of mugs is denoted m and his wealth is denoted w. Let the reference points (endowments) be denoted m* and ω*. Harvey's utility function is:

(a) Calculate Harvey's choosing, selling, and buying prices (p^t_c, p^t_s, and p^t_b respectively).

(b) Who is more loss averse: the person whose preferences we studied in class or Harvey's? How can you tell this based on their utility functions? How can you tell this based on their trading prices?

(c) Suppose you ran an experiment and the median prices were p_c = 3.5, p_s = 7, and p_b = 1.75. Find a specification of the utility function (similar to the ones above) that matches this data.

(d) Suppose you ran an experiment and the median prices were p_c = 3.5, p_s = 7, and p_b = 3.5. Find a specification of the utility function that matches this data.

2. Henrique and Nageeb are considering their Thanksgiving options. Nageeb has already decided to go to Santa Barbara (but he hasn't made his reservations yet). Henrique has not made any plans yet. They both just learned that Daniel Kahneman is going to be in town during Thanksgiving and they are both invited to dinner with him. They both have reference-dependent utility functions

Here by s we mean whether the person goes on vacation during Thanksgiving, s* is the reference point, k means whether the person gets dinner with Kahneman and k* is the reference point. Note that λ > 0.

(a) What are Nageeb's reference points (s*, k*)? For what values of λ will he choose the dinner?

(b) What are Henrique's reference points (s*, k*)? For what values of λ will he choose the dinner?

(c) Explain the difference between the two cases.=