Economics ASignment
1-2 pages
Assignment 3
Q.1. In order to encourage students to make the switch from PCs to Macs, they might give away free headphones to people who buy new computers. Use principles from behavioral economics to understand why this strategy might be successful.
(a) Suppose that a student would rather pay $1100 for a computer and get headphones for free, than pay $1000 for the computer and an additional $100 for the headphones. Using the concept of integration, explain how the value function allows us to give an account of this kind of behavior. What does Apple hope the student will integrate, and why would integration make him or her more likely to make the purchase? (10 points)
(b) Suppose that a student would rather pay $1100 for a computer, and get headphones for free, than to pay $1000 for the computer and an additional $100 for the headphones. Using the concept of segregation, explain how the value function allows us to give an account of this kind of behavior: What does Apple hope the student will segregate, and why would segregation make him or her more likely to make the purchase? (10 points).
Q.2. Suppose you won 1st prize of $100 cash in the chess competition same day you found $25 dollars in your old school bag. Suppose your value function v(.) is represented as follows:
V(x) = ? x for gains (x ? 0) and v(x) = -2? |x| for losses (x <0)
What is the total value if you integrate the two gains? (5 points)
What is the total value if you segregate the two gains? (5 points)
From the point of view of value, is it better to integrate or to segregate? Explain why. (5 points)
Q.3. You had to pay $36 fine for losing three books from the city library after paying $16 for the delivery of the school supplies which you ordered from vendor and mistakenly thought that shipping was free. Suppose your value function remains that of given in Q.2 above
What is the total value if you integrate the two losses? (5 points)
What is the total value if you segregate the two losses? (5 points)
From the point of view of value, is it better to integrate or to segregate? Explain why. (5 points)
Q.4. Explain in plain language how probability weighting in accordance with the ? function can lead a person to simultaneously gamble and purchase insurance. (10 points)
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