Precious drops

Exercise

A wine-lover purchases two dozen bottles of “Pingus” wine. A few years later the price of the wine has increased substantially. The bottle she had bought for $100 has now a price of $1000 at auction. This economist drinks from this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price. Analyze the behavior of the economist in the standard consumer-choice framework. Try to explain her conduct using an alternative theoretical model.

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Based on D. Kahnemann, D., Knetsch,J., and R. Thaler. (1991), “Anomalies: Endowment Effect, Loss Aversion, andStatus Quo Bias,” Journal of Economic Perspectives, 5,1, pp. 193-206.