Economics professor Alan is at his wit’s end. Each year, before his first microeconomics exam, he tells his students that they’ll need to memorize the formula for the price elasticity of demand. Yet time after time, students fail to accurately regurgitate the formula on their exams. Alan is considering two options to motivate a better performance: Option A is to tell his students, “If you correctly write the formula, I’ll give you three extra credit points.” Option B is to tell students, “I’m giving you three extra credit points on this exam. But if you don’t correctly write the formula, I will take back those extra credit points.” 

a. If Alan’s students are completely rational, will they be more motivated by Option A or Option B to memorize the formula? Or, will both options motivate them equally?

b. If Alan’s students are swayed by the endowment effect, which scheme is likely to be most effective in motivating them to memorize the formula? Explain your answer.

c. Discuss the interplay of the endowment effect and framing bias inherent in this problem.