Intermediate microeconomics

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Question

Intermediate microeconomics

Suppose your preferences can be represented by the following value

function: v(x) = x^αfor gains (x ≥ 0) and v(x) = -λ(-x)^βfor losses (x < 0)

Where:

α = coefficient of diminishing marginal sensitivity for gains

β = coefficient of diminishing marginal sensitivity for losses

λ = coefficient of loss aversion

Assume in this example that α = 0.5, β = 0.5 and λ = 2.

Plot and sketch the value function for the following values of x

x = 25: x = 50: x = 75: x = 100

x = -25: x = -50: x = -75: x = -100

Briefly explain what the value function predicts about your preferences.

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Intermediate microeconomics

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