Consider the following utility function, where $\mathrm{x}$ is the consumer good and $\mathrm{p}$ is the price of $\mathrm{x}$. $U(x, p)=\sqrt{x}+(p-10)$ is an example of utility function for an individual who exhibits which type of transaction utility?
A) Sunk cost fallacy.
B) Flat-rate bias.
C) Reference-Dependent Preferences.

Question

Quizplus · Accepted Answer

The utility function $U(x, p)=\sqrt{x}+(p-10)$ shows that the individual's utility not only depends on the quantity of the good $x$ but also on the price $p$ relative to a reference price (in this case, 10). This is characteristic of reference-dependent preferences, where the satisfaction or utility derived from a transaction depends on how the terms of the transaction compare to a reference point or expectation.

Consider the Following Utility Function, Where x\mathrm{x}x Is the Consumer Good And

Consider the Following Utility Function, Where $\mathrm{x}$ Is the Consumer Good And