Question

the endowment effect, loss aversion, range effects, reference dependence, reward prediction error, failure to consider opportunity costs, failure to consider sunk costs. Which of these phenomenon best explains each of the following?

1. Dani needs gas for her car. She lives in a remote area and the only gas station is charging $2.45/gallon. Dani thinks that price is too high, so she drives 20 miles to a gas station charging $2.30/gallon and then comes home.

2. Raul just bought a new car, after spending over a month researching different models and how much to spend on the car. The same day he bought a bottle of wine to celebrate for $80, not realizing the same bottle of wine was available for $35 from several other retailers in his area.

3. Frank holds a garage sale, but charges fairly high prices for his goods, and makes very few sales.

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Answer #1

1) Dani fails to consider the opportunity cost of driving her car to get petrol from far away.

2) This can be explained by reference dependent preferences as ,raul can consider that he is making a big investmnet,buying a car,he needs to celebrate it with a good bottle of wine that is relatively expensive.

3) Frank overvalues his good , because of the endowment effect i.e. a circumstance in which an individual places a higher value on an object that they already own than the value they would place on that same object if they did not own it.

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