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ECO227: Experimental Economics and Finance

Tutorial 6

2022/2023 Semester 1

Question A

Economists say that cash is the best gift. In reality, however, the best gift is something that people wouldn’t buy for themselves.

a.   Why in economics cash is the best gift?

b.   Why the theoretical prediction deviates from the observed phenomenon? Please explain your answer based on mental accounting.

Question B

How to stimulate saving? Please explain your answer based on mental accounting.

Question C

Given that, in US, dividends are taxed at a higher rate than capital gains, why do firms still pay dividends?

Question D

Adam has two stocks. One has increased in value; the other has decreased in value.

a.   Now suppose Adam needs some cash. Which stock is he more likely to sell?

b.   Is his decision rational? Why?

c.   Please explain the behaviour based on mental accounting.