Suppose Min has the following reference-dependent utility function:

x.8 for x 0

U(m)=V(mrm), whereV(x)= 2(x)0.8 forx<0

In which m is the amount of money she has and rm denotes her reference point. We assume that her reference point is the status quo: rm = m0, where m0 is the amount of money m she starts with.

(a) Suppose she considers the gamble A: ($550, 0.5; $500, 0.5). Will she want to play this gamble? Please give the name of the effect driving her behaviour.

(b) Suppose she is at the casino and that she loses $500. She feels quite bad about it and perceives it as a loss. Her reference point is unchanged at rm = m0, but the amount of money she has is now m = m0 500. Would Min be willing to take gamble A now? Please explain why.

(c) Let's consider the situation where some time elapses after Min's initial loss of $500. She has now come to term with it. He reference point moves to rm = m0 500 as a consequence. Would she take gamble A now?

(d) Let's now assume that Min gets a scratch card and happens to win $10,000! She is very happy and feels good about her gains as her reference point is still rm = m0 500 while her wealth is now m = m0 + 9, 500. Would she take the gamble A now?