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Exam 4: Status Quo Bias and Default Options

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Question 21

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The endowment effect can be explained by loss aversion.

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Question 22

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A consumer faces three bundles of goods: $x, y, z$ . He has complete preferences. Using the preference relation notation " $>$ " describe his preferences. (Hint: There are several correct answers.)

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. Since the consumer has compl...

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Question 23

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Consider two goods: $\mathrm{a}$ and $\mathrm{b}$ . Each consumption bundle contains some $a \geq 0$ and some $b \geq 0$ . Suppose there are two reference points: $r_{1}$ and $r_{2}$ , which contain $(3,5)$ and $(5,5)$ of $(a, b)$ , respectively. Consider two consumption bundles $x_{1}$ and $x_{2}$ which contain $(6,2)$ and $(3,8)$ , respectively. Further, suppose $x_{1} \sim_{r_{1}} x_{2}$ and the reference structure displays loss aversion, what MUST be true?

A difference in willingness to pay and willingness to accept mean there is an endowment effect.

Anne and Jim participated in an experiment about the willingness to pay for a set of head phones. Jim is suggested a price of $\$ 13$ and Anne is suggested a price of $\$ 22$ . The experimenters conclude that both Anne and Jim use the anchoring and adjustment heuristic to arrive at a final willingness to pay. What are possible values of their willingness to pay:

Consider two bundles $x$ and $y$ and a reference point $r$ . If $x \sim_{r} y$ then it must also be true that $x \sim r$ and $r \sim y$ .

The status quo bias is necessarily inconsistent with the rational model.

Consider the constant loss aversion utility function in 4.1. This function creates a kink in the value function whenever $\lambda_{i}>0$ .

An individual whose preferences are given by the indifference curve in Figure 4.1 has preferences that violate which of the following assumptions found in the rational model:

A preference reversal is a violation of transitivity.

The policy implication of the default option bias is that policy-makers can set a desired choice as the default option. If the default option bias is present then this increases the likelihood that the government's choice is implemented.