Final answer:
Matthew will still buy the notebook if the price is $2 or lower. If Matthew does not expect to buy the notebook, we cannot determine the highest price under which he will buy it. Matthew is better off not expecting to buy the notebook when the price is $3.
Step-by-step explanation:
a. The highest price under which Matthew will still buy the notebook can be determined by finding the indifference point between his reference point and the price. In this case, the indifference point occurs when the utility from the reference point is equal to the utility from the price. Using the formula for utility, we can set up the equation: r1 + r2 = 1 - p. Solving for p, we get p = 2. Therefore, the highest price under which Matthew will still buy the notebook is $2.
b. Since Matthew does not expect to buy the notebook, his reference point is (0, 0). In this case, the highest price under which Matthew will buy the notebook is determined by his willingness to pay. If the price is lower than his willingness to pay, he will buy it. If the price is higher, he will not buy it. Since we do not have information about Matthew's willingness to pay, we cannot determine the highest price.
c. To determine whether Matthew is better off expecting to buy the notebook or not, we compare the utility he would get from each choice. If the utility from expecting to buy the notebook is higher than the utility from not expecting to buy it, then he is better off expecting to buy it. We can calculate the utilities using the formula: utility = r1 + r2. For the reference point (1, -3), the utility is -2. For the reference point (0, 0), the utility is 0. Since -2 < 0, Matthew is better off not expecting to buy the notebook.