John wants to sell his car. His friend is willing to pay $5000 for the car. For any price q between $5000 & $6000 he can sell the car with probability 6 q/1000 . Suppose that his weighting function is linear (ie (p) = p) and his valuation function is given as follows:

(x) = x if x 0

x if x < 0

(a) If John is an optimist and his reference point is $6,000 for his car, what price should he set? Assume that if no offer is made, John will sell it to his friend for $5000. (b) In class we showed that if his reference point was $5,000, he would set a different price. Discuss why the two optimal prices are different.