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Bill's value function
c) Suppose Bill were to experience a large negative shock to his wealth that does not
immediately change his reference point. Could this shock cause him to change his decision
concerning the $100 and gamble A? Draw a diagram showing the possible payoffs, Bill's value
function and the value of each option. Explain how this diagram illustrates Bill's decision after
the shock.
V(x)={x1/22(x)1/2wherex0wherex<0

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Bills value functionc) Suppose Bill were to experience a large .pdf

  • 1. Bill's value function c) Suppose Bill were to experience a large negative shock to his wealth that does not immediately change his reference point. Could this shock cause him to change his decision concerning the $100 and gamble A? Draw a diagram showing the possible payoffs, Bill's value function and the value of each option. Explain how this diagram illustrates Bill's decision after the shock. V(x)={x1/22(x)1/2wherex0wherex<0