Alex preferences over cake, c, and money, m, can be represented by the utility function u (c, m) = c + m + (c ? rc) + (m ? rm) where rc is his cake reference point, rm is his money reference point, and

the function () is defined as (z) = z , z ? 0 and ?z, z 0.

1. If his reference point is the status quo (that is, his initial endowment), what is the maximum price Sam would be willing to pay to buy a cake? 2. If his reference point is the status quo, what is the minimum price Sam would be willing to accept to sell a cake he already owned?

Sam's preferences over cake, c, and money, m, can be represented by the utility function t"1(Cam)= C+M+#(crc) +#(m m) where Tc is his cake reference point, rm is his money reference point, and the function ,u, (-) is dened as z 220 #(Z)= , A2 z 0. 1. If his reference point is the status quo (that is, his initial endowment), what is the maximum price Sam would be willing to pay to buy a cake? 2. If his reference point is the status quo, what is the minimum price Sam would be willing to accept to sell a cake he already owned? 3. If his reference point is the status quo, what is the minimum amount of money Sam would be willing to accept instead of receiving a cake (that he did not already own)? In other words, if Sam were a \"chooser,\" how much money would he demand to compensate for not accepting a cake? 4. Find a condition on A such that we can say that Sam exhibits the endowment effect