Question

q) Give an example to illustrate the endowment effect

will be appreciated if answered in 5sentences by your own

Answer 1

An endowment effect occurs when an individual places a greater value on a good if he is accorded ownership of the good than if the good was given to him without ownership rights on it. This means that his willingness to pay for the good is much less than the willingness to sell the good once he owns it. The presence endowment effect challenges the standard economic theory of indifference curves since an individual facing endowment effect will have a very distorted indifference curve. The psychological explanation for this effect is that a person develops an attachment with the good due to which he is unwilling to part with. In order to compensate for this additional loss, the person expects a greater price for selling the good. For example, a person owning a house may not be willing to sell the house even at the market price or if he is given a house exactly same as his present house. He will have to be paid a premium depending on the value he places on owning the house. This is due to endowment effect.