Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below (a) 100 90 80 70 60 50 40 30 20 10 0 60 90 Stock Price 95 70 50 October November December January Feburary 80 March Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? (b) Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? (c) In January, which month should Person B rather use as reference point in order to maximize their value? (d) [ Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum price that the stock will need to have in April to fulfill C's expectations?

Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below (a) 100 90 80 70 60 50 40 30 20 10 0 60 90 Stock Price 95 70 50 October November December January Feburary 80 March Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? (b) Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? (c) In January, which month should Person B rather use as reference point in order to maximize their value? (d) [ Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum price that the stock will need to have in April to fulfill C's expectations?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter17: Financial Markets

Section: Chapter Questions

Problem 36P: The Darkroom Windowshade Company has 100,000 shares of stock outstanding. The investors in the firm...

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