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Exercise 9A.2 - Sandwich Surprises (Karle, Kirchsteiger, and Peitz 2015). Jayden likes turkey sandwiches (t) more than meatball sandwiches (m). In particular, his intrinsic
Exercise 9A.2 - Sandwich Surprises (Karle, Kirchsteiger, and Peitz 2015). Jayden likes turkey sandwiches (t) more than meatball sandwiches (m). In particular, his intrinsic utility functions over these sandwiches and wealth (w) are u(t) = 13t, u,,,(m) 10m, and u(w) = w. He currently has no sandwiches and no wealth. He knows that when he gets to the store one of the sandwiches will be priced at $8 and one will be priced at $7. But before arriving at the store, he doesn't know whether the price of the turkey sandwich (P) will be higher or lower than the price of the meat- ball sandwich (P). He expects that it is equally likely that he will buy the cheaper or the more expensive sandwich. Jayden's reference-dependent preferences with this random reference point for buying each type of sandwich are therefore represented by the fol- lowing utilities: P, Buy Turkey Sandwich: U = 13 - P +0.5v(-P, |-7)+0.5v(-P, |-8) Buy Meatball Sandwich: U = 10-P +0.5v(P | 7) +0.5v (-P | -8) where v(x|r) = x-r (x-r) if xr if x
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To solve Exercise 9A2 we need to assess Jaydens decisionmaking based on his referencedependent preferences when purchasing a turkey sandwich t or a me...Get Instant Access to Expert-Tailored Solutions
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