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2. In an experiment, researchers randomly gave half of the subjects a mug and the other half a pen, and told the subjects that they
2. In an experiment, researchers randomly gave half of the subjects a mug and the other half a pen, and told the subjects that they owned the item they were given and could take it home at the end of the experiment. Then, independently of whether they had a mug or a pen, researchers grouped the subjects into two groups: Group 1 was told that they would have a 90% probability of being able to exchange their object for the other one at the end of the experiment (with the researcher), and Group 2 was told that they would have a 10% chance of being able to do so. Then, all subjects filled out a time-consuming survey, the purpose of which was to give subjects time to form an attachment to the item they had. Finally, subjects were asked whether they want to exchange their item (with the researcher) if given the chance. (a) (b) [10 points| In a neoclassical model (with no reference dependence), what percentage of subjects should want to exchange in Group 1 and Group 27 [Hint: Of those subjects endowed with mugs, what percentage would want to trade it? And of those subjects endowed with pens, what percentage would want to trade it? Note that the answer should not assume that mugs are valued similarly to pens, i.e., mugs could be valued much higher on average than pens, or vice versa.| [5 points] In a prospect-theory model where the reference point is the status quo, in which group (Group 1 or Group 2) should a larger percentage of subjects want to exchange their item? [5 points| In the last step of the experiment, subjects were asked if they wanted to exchange if given the chance. In Group 1, 56.4% said they would want to exchange, while in Group 2, 22.7% said they would want to do so. Explain this difference between Group 1 and Group 2 using prospect theory. What does this tell us about the hypothesis that the reference point is the status quo
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