Problem 2. Tim owns a house in the Boston area. He has accepted a job in Europe and has decided to sell the house. He has located one buyer who is willing to pay $1 million for the house but only has time to show the house to one more buyer. Tim is a Prospect Theory maximizer who values any two-outcome distribution of changes to his reference point s with probability p and t with probability (1p) and his utility is given by V = v(t)+[v(s)v(t)]p whenevers>t0ors

a. If Tim is a pessimist and bases his reference point on a presumption that he sells the house for $1 million, to which buyer will he show the house? [10 points]

b. If Tim is an optimist and bases his reference point on a presumption that he sells the house for $2 million, to which buyer will he show the house? [5 points]