Question

When students in a large class were surveyed about how much they would be willing to pay for a coffee mug with their university's logo on it, their median willingness to pay was $5. At random, half of the students in this class were then given such a coffee mug and each of the remaining students were given $5 in cash. Students who got mugs were then offered an opportunity to sell them to students who had not gotten one. According to standard economic models, how many mugs would be expected to change hands? How, if at all, would a behavioral economist's prediction differ?

Answer 1

Answer and Explanation:

1> Let's solve the standard economic model first based on rational expectation.

Since the medium willingness to pay is $5, we can assume half the people have more willingness to pay than $5 and half the people have less. (Since it's a large class, we can assume this)

So, half of them who got the mug will sell, according to standard theory.

2> Now behavioral economist will disagree. People who got the mug, get an emotional and nostalgic attachment with it, thus they would not like to sell it because they get utility after having something, so by behavioral theory, less than half of pupils who got the mug will sell.