Question 1

According to prospect theory, what strategy will firms typically employ with regard to pricing and packaging of their goods, when faced with rising production costs?

Accepted Answer

A)  Firms will increase both package sizes and prices but will increase prices more to communicate to consumers that the product has greater value. 
B)  Firms will reduce package sizes but keep prices the same, thus increasing the per unit price of the good. 
C)  Firms will keep package sizes the same but lower prices and attempt to cover the higher costs with greater revenue. 
D)  According to prospect theory, the choice of strategy doesn't matter, as consumers are generally able to recognize price increases regardless of what form they take. 
A)  Firms will increase both package sizes and prices but will increase prices more to communicate to consumers that the product has greater value. 
B)  Firms will reduce package sizes but keep prices the same, thus increasing the per unit price of the good. 
C)  Firms will keep package sizes the same but lower prices and attempt to cover the higher costs with greater revenue. 
D)  According to prospect theory, the choice of strategy doesn't matter, as consumers are generally able to recognize price increases regardless of what form they take.

Question 2

The ultimatum game reveals that the threat of rejection

Accepted Answer

A)  weakens the functioning of the invisible hand. 
B)  reduces cooperation. 
C)  increases selfish behavior. 
D)  helps align private interests with social interests. 
A)  weakens the functioning of the invisible hand. 
B)  reduces cooperation. 
C)  increases selfish behavior. 
D)  helps align private interests with social interests.

Question 3

Adam and Brittany both recently started new jobs. Both have determined that they should save 10 percent of their monthly income toward retirement. Adam's employer has no program established for payroll deduction, but he could easily set up automatic withdrawals to go into a retirement fund. Brittany's employer automatically directs 8 percent of the paycheck into a retirement fund, but the employee can change the percentage deducted. Behavioral economists would expect

Accepted Answer

A)  Adam to save more, as he would set up a 10 percent automatic withdrawal, while Brittany would stay at the default of 8 percent. 
B)  Brittany to save more, as both would tend to stay at the defaults provided by their employers. 
C)  them both to save 10 percent eventually, as both had predetermined that that was the optimal amount to save. 
D)  Brittany to feel a greater sense of loss by seeing funds automatically withheld each month. 
A)  Adam to save more, as he would set up a 10 percent automatic withdrawal, while Brittany would stay at the default of 8 percent. 
B)  Brittany to save more, as both would tend to stay at the defaults provided by their employers. 
C)  them both to save 10 percent eventually, as both had predetermined that that was the optimal amount to save. 
D)  Brittany to feel a greater sense of loss by seeing funds automatically withheld each month.

Question 4

Augi carefully plans out an early morning exercise routine to lose weight and get fit. When it's time to work out, however, Augi just "doesn't feel up to it" and decides to sleep in. Behavioral economics would say that Augi

Accepted Answer

A)  weighed the costs and benefits and made a rational economic decision to sleep in. 
B)  used System 1 of her brain to formulate her workout plan, but then gave in to System 2 when she chose to sleep in. 
C)  used System 2 of her brain to formulate her workout plan, but then gave in to System 1 when she chose to sleep in. 
D)  is fundamentally lazy and incapable of sticking to a workout plan. 
A)  weighed the costs and benefits and made a rational economic decision to sleep in. 
B)  used System 1 of her brain to formulate her workout plan, but then gave in to System 2 when she chose to sleep in. 
C)  used System 2 of her brain to formulate her workout plan, but then gave in to System 1 when she chose to sleep in. 
D)  is fundamentally lazy and incapable of sticking to a workout plan.

Question 5

Which of the following best explains the difference between neoclassical economics and behavioral economics?

Accepted Answer

A)  Neoclassical economics believes that government should play a minimal role in the economy, while behavioral economics calls for a more active role for government. 
B)  Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors. 
C)  There is no real difference; behavioral economics just studies more intently how the rational decision-making process works. 
D)  Neoclassical economics no longer offers valid explanations for economic outcomes, while behavioral economics does. 
A)  Neoclassical economics believes that government should play a minimal role in the economy, while behavioral economics calls for a more active role for government. 
B)  Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors. 
C)  There is no real difference; behavioral economics just studies more intently how the rational decision-making process works. 
D)  Neoclassical economics no longer offers valid explanations for economic outcomes, while behavioral economics does.

Question 6

Whenever Josh goes to his favorite restaurant, he wants to buy tiramisu, his favorite dessert. Despite the fact that he would enjoy the flavor of the tiramisu the same amount every time, Josh only buys it when others are having dessert and never buys it if he would be the only one having dessert. Behavioral economists would say that Josh's decision is affected by

Accepted Answer

A)  the availability heuristic. 
B)  confirmation biases. 
C)  framing effects. 
D)  the self-serving bias. 
A)  the availability heuristic. 
B)  confirmation biases. 
C)  framing effects. 
D)  the self-serving bias.

Question 7

Heuristics generally help people make faster decisions.

Accepted Answer

A) True 
 B)False

Question 8

Fairness, according to behavioral economics,

Accepted Answer

A)  is too subjective to be considered in the analysis of economic behavior. 
B)  can be objectively standardized across individuals. 
C)  varies from one individual to another but still affects economic behavior in important ways. 
D)  matters to people, but because of self-interest, fairness has little effect on their economic decisions. 
A)  is too subjective to be considered in the analysis of economic behavior. 
B)  can be objectively standardized across individuals. 
C)  varies from one individual to another but still affects economic behavior in important ways. 
D)  matters to people, but because of self-interest, fairness has little effect on their economic decisions.

Question 9

One implication of the phenomenon described by economist Richard Easterlin as the "hedonic treadmill" is that

Accepted Answer

A)  people who consume more goods and services are happier than those who consume less. 
B)  people can only become happier if they are consuming more and more. 
C)  there is a threshold of consumption that one must cross before one can be happy. 
D)  we can combine the happiness of different individuals to get "total happiness." 
A)  people who consume more goods and services are happier than those who consume less. 
B)  people can only become happier if they are consuming more and more. 
C)  there is a threshold of consumption that one must cross before one can be happy. 
D)  we can combine the happiness of different individuals to get "total happiness."

Question 10

Neoclassical economics focuses on predicting the behavior of economic agents, whereas behavioral economics focuses on the mental processes involved in decision making.

Accepted Answer

A) True 
 B)False

Question 11

Examples of precommitments to deal with people's time inconsistency problems include the following, except

Accepted Answer

A)  automatic payroll deductions. 
B)  debit card accounts. 
C)  early withdrawal penalties. 
D)  salary smoothing. 
A)  automatic payroll deductions. 
B)  debit card accounts. 
C)  early withdrawal penalties. 
D)  salary smoothing.

Question 12

When people retroactively believe that they had accurately foreseen past events, they are illustrating the

Accepted Answer

A)  confirmation bias. 
B)  framing effect. 
C)  hindsight bias. 
D)  self-serving bias. 
A)  confirmation bias. 
B)  framing effect. 
C)  hindsight bias. 
D)  self-serving bias.

Question 13

Time inconsistency refers to the phenomenon where your present self misjudges what your future self will do.

Accepted Answer

A) True 
 B)False

Question 14

The tendency of people to underestimate the time required to complete a task is called the

Accepted Answer

A)  planning fallacy. 
B)  framing effect. 
C)  hindsight bias. 
D)  availability heuristic. 
A)  planning fallacy. 
B)  framing effect. 
C)  hindsight bias. 
D)  availability heuristic.

Question 15

Alex was willing to pay $50 for the new World Cup soccer ball. When he received it as a gift, he was willing to sell it, but for no less than $80. According to behavioral economists,

Accepted Answer

A)  Alex's behavior is consistent with the endowment effect. 
B)  Alex's behavior is irrational because of inconsistent anchoring. 
C)  Alex should sell the ball if he's offered any amount over $50. 
D)  Alex's behavior is irrational because his frame has changed. 
A)  Alex's behavior is consistent with the endowment effect. 
B)  Alex's behavior is irrational because of inconsistent anchoring. 
C)  Alex should sell the ball if he's offered any amount over $50. 
D)  Alex's behavior is irrational because his frame has changed.

Question 16

John's friend Rosika won a major lottery jackpot. Seeing this, John goes out and buys a bunch of lottery tickets despite struggling financially and even though he knows that millions don't win and that the odds of winning are infinitesimal. John's decision to buy the lottery tickets under these circumstances would best be explained by the

Accepted Answer

A)  hindsight bias. 
B)  self-serving bias. 
C)  confirmation bias. 
D)  availability heuristic. 
A)  hindsight bias. 
B)  self-serving bias. 
C)  confirmation bias. 
D)  availability heuristic.

Question 17

The results of running the dictator game experiments thousands of times have revealed to behavioral economists that

Accepted Answer

A)  people's sense of fairness is fairly uniform across the population. 
B)  most people have little concern for others when it comes to financial matters. 
C)  individual feelings about fairness and generosity vary widely across the population. 
D)  most people are willing to give more than they will keep for themselves. 
A)  people's sense of fairness is fairly uniform across the population. 
B)  most people have little concern for others when it comes to financial matters. 
C)  individual feelings about fairness and generosity vary widely across the population. 
D)  most people are willing to give more than they will keep for themselves.

Question 18

One major tenet of behavioral economics is that the human brain is prone to commit errors in perception.

Accepted Answer

A) True 
 B)False

Question 19

Eric tries to eat more healthfully by eliminating cookies, donuts, and similar snacks from his diet. Every day at work, however, coworkers bring in these treats and Eric succumbs to temptation. Which of the following concepts would behavioral economists use to explain Eric's self-control problem?

Accepted Answer

A)  time inconsistency 
B)  availability heuristic 
C)  self-serving bias 
D)  system 2 processes dominating decision making 
A)  time inconsistency 
B)  availability heuristic 
C)  self-serving bias 
D)  system 2 processes dominating decision making

Question 20

Neoclassical economics and behavioral economics both recognize that people make errors in their decision making.

Accepted Answer

A) True 
 B)False

Exam 8: Behavioral Economics

According to prospect theory, what strategy will firms typically employ with regard to pricing and packaging of their goods, when faced with rising production costs?

The ultimatum game reveals that the threat of rejection

Augi carefully plans out an early morning exercise routine to lose weight and get fit. When it's time to work out, however, Augi just "doesn't feel up to it" and decides to sleep in. Behavioral economics would say that Augi

Which of the following best explains the difference between neoclassical economics and behavioral economics?

Heuristics generally help people make faster decisions.

Fairness, according to behavioral economics,

One implication of the phenomenon described by economist Richard Easterlin as the "hedonic treadmill" is that

Neoclassical economics focuses on predicting the behavior of economic agents, whereas behavioral economics focuses on the mental processes involved in decision making.

Examples of precommitments to deal with people's time inconsistency problems include the following, except

When people retroactively believe that they had accurately foreseen past events, they are illustrating the

Time inconsistency refers to the phenomenon where your present self misjudges what your future self will do.

The tendency of people to underestimate the time required to complete a task is called the

Alex was willing to pay $50 for the new World Cup soccer ball. When he received it as a gift, he was willing to sell it, but for no less than $80. According to behavioral economists,

The results of running the dictator game experiments thousands of times have revealed to behavioral economists that

One major tenet of behavioral economics is that the human brain is prone to commit errors in perception.

Eric tries to eat more healthfully by eliminating cookies, donuts, and similar snacks from his diet. Every day at work, however, coworkers bring in these treats and Eric succumbs to temptation. Which of the following concepts would behavioral economists use to explain Eric's self-control problem?

Neoclassical economics and behavioral economics both recognize that people make errors in their decision making.

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role and Government Failure

Elasticity

Utility Maximization

Businesses and the Costs of Production

Pure Competition in the Short Run

Pure Competition in the Long Run

Pure Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Technology, Rd, and Efficiency

The Demand for Resources

Wage Determination

Rent, Interest, and Profit

Natural Resource and Energy Economics

Public Finance: Expenditures and Taxes

Antitrust Policy and Regulation

Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

Health Care

Immigration

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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