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Each part is worth five points for a total of 25 extra credit points added to Problem Set #1. Julia decides to go to the
Each part is worth five points for a total of 25 extra credit points added to Problem Set #1. Julia decides to go to the store to purchase a new pair of headphones, but she is not sure what the price of the headphones will be. Julia experiences consumption utility over two dimensions money (Ci) and headphones (C2), such that mi(Ci) = 0.5Ci and mz(C2) = 25C2 (In other words, each dollar provides her 0.5 utils and a pair of new headphones provides her 25 utils). 1. What is Julia's willingness to pay if she behaves according to standard economic theory? For the rest of the problem consider the case where Julia has reference-dependent preferences, with n = 1 and ) = 2, and she can choose her reference point. 2. If Julia enters the store expecting to purchase the headphones, what is her willingness to pay? 3. If Julia enters the store not expecting to purchase the headphones, what is her willingness to pay? 4. What are her personal equilibria? 5. What are her preferred personal equilibria
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