# Using R Studios to solve 3 questions

E3.2 A consumer is given the chance to buy a baseball card for \$1, but he declines
the trade. If the consumer is now given the baseball card, will he be willing to
sell it for \$1? Standard consumer theory suggests yes, but behavioral economists
have found that “ownership” tends to increase the value of goods to consumers.
That is, the consumer may hold out for some amount more than \$1 (for exam-
ple, \$1.20) when selling the card, even though he was willing to pay only some
amount less than \$1 (for example, \$0.88) when buying it. Behavioral economists
call this phenomenon the “endowment effect.” John List investigated the endow-
ment effect in a randomized experiment involving sports memorabilia traders
at a sports-card show. Traders were randomly given one of two sports collect-
ibles, say good A or good B, that had approximately equal market value. Those
receiving good A were then given the option of trading good A for good B with
the experimenter; those receiving good B were given the option of trading good
B for good A with the experimenter. Data from the experiment and a detailed
description can be found on the text website, http://www.pearsonhighered
.com/stock_watson/, in the files Sportscards and Sportscards_Description.
a. i. Suppose that, absent any endowment effect, all the subjects prefer good
A to good B. What fraction of the experiment’s subjects would you
expect to trade the good that they were given for the other good? (Hint:
Because of random assignment of the two treatments, approximately
50% of the subjects received good A, and 50% received good B.)
ii. Suppose that, absent any endowment effect, 50% of the subjects prefer
good A to good B, and the other 50% prefer good B to good A. What
fraction of the subjects would you expect to trade the good they were
given for the other good?
iii. Suppose that, absent any endowment effect, X% of the subjects prefer
good A to good B, and the other (100 – X)% prefer good B to good
A. Show that you would expect 50% of the subjects to trade the good
they were given for the other good.
b. Using the sports card data, what fraction of the subjects traded the good they
were given? Is the fraction significantly different from 50%? Is there evi-
dence of an endowment effect? (Hint: Review Exercises 3.2 and 3.3.)
c. Some have argued that the endowment effect may be present but that it
is likely to disappear as traders gain more trading experience. Half of the
experimental subjects were dealers, and the other half were nondealers.
Dealers have more experience than nondealers. Repeat (b) for dealers
and nondealers. Is there a significant difference in their behavior?
Is the evidence consistent with the hypothesis that the endowment effect
disappears as traders gain more experience? (Hint: Review Exercise 3.15.)
E3.2 A consumer is given the chance to buy a baseball card for \$1, but he declines
the trade. If the consumer is now given the baseball card, will he be willing to
sell it for \$1? Standard consumer theory suggests yes, but behavioral economists
have found that “ownership” tends to increase the value of goods to consumers.
That is, the consumer may hold out for some amount more than \$1 (for exam-
ple, \$1.20) when selling the card, even though he was willing to pay only some
amount less than \$1 (for example, \$0.88) when buying it. Behavioral economists
call this phenomenon the “endowment effect.” John List investigated the endow-
ment effect in a randomized experiment involving sports memorabilia traders
at a sports-card show. Traders were randomly given one of two sports collect-
ibles, say good A or good B, that had approximately equal market value. Those
receiving good A were then given the option of trading good A for good B with
the experimenter; those receiving good B were given the option of trading good
B for good A with the experimenter. Data from the experiment and a detailed
description can be found on the text website, http://www.pearsonhighered
.com/stock_watson/, in the files Sportscards and Sportscards_Description.
a. i. Suppose that, absent any endowment effect, all the subjects prefer good
A to good B. What fraction of the experiment’s subjects would you
expect to trade the good that they were given for the other good? (Hint:
Because of random assignment of the two treatments, approximately
50% of the subjects received good A, and 50% received good B.)
ii. Suppose that, absent any endowment effect, 50% of the subjects prefer
good A to good B, and the other 50% prefer good B to good A. What
fraction of the subjects would you expect to trade the good they were
given for the other good?
iii. Suppose that, absent any endowment effect, X% of the subjects prefer
good A to good B, and the other (100 – X)% prefer good B to good
A. Show that you would expect 50% of the subjects to trade the good
they were given for the other good.
b. Using the sports card data, what fraction of the subjects traded the good they
were given? Is the fraction significantly different from 50%? Is there evi-
dence of an endowment effect? (Hint: Review Exercises 3.2 and 3.3.)
c. Some have argued that the endowment effect may be present but that it
is likely to disappear as traders gain more trading experience. Half of the
experimental subjects were dealers, and the other half were nondealers.
Dealers have more experience than nondealers. Repeat (b) for dealers
and nondealers. Is there a significant difference in their behavior?
Is the evidence consistent with the hypothesis that the endowment effect
disappears as traders gain more experience? (Hint: Review Exercise 3.15.)
E4.2 On the text website, http://www.pearsonhighered.com/stock_watson/, you
will find the data file Earnings_and_Height, which contains data on earn-
ings, height, and other characteristics of a random sample of U.S. workers.?
A detailed description is given in Earnings_and_Height_Description, also
available on the website. In this exercise, you will investigate the relationship
between earnings and height.
a. What is the median value of height in the sample?
b. i. Estimate average earnings for workers whose height is at most
67 inches.
ii. Estimate average earnings for workers whose height is greater than
67 inches.
iii. On average, do taller workers earn more than shorter workers? How
much more? What is a 95% confidence interval for the difference in
average earnings?
c. Construct a scatterplot of annual earnings (Earnings) on height (Height).
Notice that the points on the plot fall along horizontal lines. (There are
only 23 distinct values of Earnings). Why? (Hint: Carefully read the
detailed data description.)
d. Run a regression of Earnings on Height.
i. What is the estimated slope?
ii. Use the estimated regression to predict earnings for a worker who
is 67 inches tall, for a worker who is 70 inches tall, and for a worker

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