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2. Fehr-Schmidt preferences. Players A and B have utility functions given by UA = XA - aA max(XB - XA, 0) - BA max(XA -
2. Fehr-Schmidt preferences. Players A and B have utility functions given by UA = XA - aA max(XB - XA, 0) - BA max(XA - XB, 0), and UB = XB - QB max(XA - XB, 0) - BB max(XB - XA, 0), where XA and xB are the monetary payoffs of A and B respectively. (a) What is the interpretation of the a and B parameters? (b) What restrictions do Fehr and Schmidt impose on the values of these parameters? Comment briefly. (c) Now suppose that (aA, BA) = (0.5, 0.2) and that xA is fixed at 5. Show how Player A's utility varies as a function of XB in a graph that has xB be on the x-axis and UA(XB|XA) on the y-axis . Clearly label where the line intersects the axes
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