Question 1

(Consider This) According to the piece "Wannamaker's Lament," how have firms responded to the evidence that most advertising campaigns have little impact on sales?

Accepted Answer

A)  Firms have substantially cut their advertising budgets to focus more on product quality. 
B)  Firms have substantially increased their advertising budgets in order to hit the spending threshold necessary to affect sales. 
C)  Firms have substantially cut their advertising budgets to focus more on new product development. 
D)  Firms have conducted a lot of simple experiments to determine what might increase sales. 
A)  Firms have substantially cut their advertising budgets to focus more on product quality. 
B)  Firms have substantially increased their advertising budgets in order to hit the spending threshold necessary to affect sales. 
C)  Firms have substantially cut their advertising budgets to focus more on new product development. 
D)  Firms have conducted a lot of simple experiments to determine what might increase sales.

Question 2

Anchoring

Accepted Answer

A)  can influence decision making with irrelevant information. 
B)  explains why, for example, hamburger will be advertised as 80% lean rather than 20% fat. 
C)  causes losses to be felt more intensely than gains. 
D)  explains why, for example, firms prefer to reduce package sizes rather than raising prices. 
A)  can influence decision making with irrelevant information. 
B)  explains why, for example, hamburger will be advertised as 80% lean rather than 20% fat. 
C)  causes losses to be felt more intensely than gains. 
D)  explains why, for example, firms prefer to reduce package sizes rather than raising prices.

Question 3

Neoclassical economics and behavioral economics

Accepted Answer

A)  are generally viewed as complementary, together providing better understanding of economic behavior than each could on its own. 
B)  are diametrically opposed to each other. 
C)  generally address different issues in economics and therefore rarely intersect on the same topic. 
D)  both start from the premise that people are fundamentally rational in their decision making. 
A)  are generally viewed as complementary, together providing better understanding of economic behavior than each could on its own. 
B)  are diametrically opposed to each other. 
C)  generally address different issues in economics and therefore rarely intersect on the same topic. 
D)  both start from the premise that people are fundamentally rational in their decision making.

Question 4

Some behavioral economists explain the so-called endowment effect to be a consequence of people's tendency to

Accepted Answer

A)  feel gains more intensely than losses. 
B)  feel losses more intensely than gains. 
C)  focus mentally on a recently viewed number. 
D)  feel strongly about fairness and generosity. 
A)  feel gains more intensely than losses. 
B)  feel losses more intensely than gains. 
C)  focus mentally on a recently viewed number. 
D)  feel strongly about fairness and generosity.

Question 5

In anonymous surveys, on average people rate themselves as "above average" with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the

Accepted Answer

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

Question 6

The "hedonic treadmill" of prospect theory suggests that if people's incomes rise and stay at the new higher level, then their feelings of satisfaction also rise and stay at the new higher level.

Accepted Answer

A) True 
 B)False

Question 7

Behavioral economics recognizes that people frequently make errors, but these errors generally cancel out in such a way that neoclassical models are sufficient for predicting economic outcomes.

Accepted Answer

A) True 
 B)False

Question 8

According to prospect theory, firms are more likely to shrink packages than raise prices because

Accepted Answer

A)  consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money. 
B)  they don't understand that consumers recognize price increases easily, regardless of what form they take. 
C)  consumers associate smaller packages with higher quality luxury goods. 
D)  consumers are generally trying to downsize their purchases and lead simpler lives. 
A)  consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money. 
B)  they don't understand that consumers recognize price increases easily, regardless of what form they take. 
C)  consumers associate smaller packages with higher quality luxury goods. 
D)  consumers are generally trying to downsize their purchases and lead simpler lives.

Question 9

Behavioral economists avoid dealing with fairness concerns because the concept is too subjective.

Accepted Answer

A) True 
 B)False

Question 10

According to behavioral economists, precommitments

Accepted Answer

A)  help people overcome their self-control problems caused by time inconsistency. 
B)  do not fundamentally alter decisions because they do not change the benefits or costs of a particular action. 
C)  end up being more costly, as people regularly violate them and incur penalties. 
D)  overcome cognitive biases introduced by brain System 2. 
A)  help people overcome their self-control problems caused by time inconsistency. 
B)  do not fundamentally alter decisions because they do not change the benefits or costs of a particular action. 
C)  end up being more costly, as people regularly violate them and incur penalties. 
D)  overcome cognitive biases introduced by brain System 2.

Question 11

Which of the following statements about behavioral economics is not true?

Accepted Answer

A)  Its insights help policymakers determine how to nudge people to make certain choices. 
B)  It combines insights from economics, psychology, and neuroscience to better understand how people behave. 
C)  It assumes that people are always rational, deliberate, and objective in their choices. 
D)  It studies how people deal with choices involving "goods" as well as "bads." 
A)  Its insights help policymakers determine how to nudge people to make certain choices. 
B)  It combines insights from economics, psychology, and neuroscience to better understand how people behave. 
C)  It assumes that people are always rational, deliberate, and objective in their choices. 
D)  It studies how people deal with choices involving "goods" as well as "bads."

Question 12

Last month Laura saw the value of her stock portfolio rise by $20,000. This month she saw the value of her portfolio decline by $20,000. According to behavioral economics,

Accepted Answer

A)  the positive utility Laura received from seeing her portfolio value rise was equal to the disutility she felt when its value declined. 
B)  Laura should not invest in stocks unless the utility she receives from gains is at least as great as the disutility she feels from losses. 
C)  the positive utility Laura received from seeing her portfolio value rise was greater than the disutility she felt when its value declined. 
D)  the positive utility Laura received from seeing her portfolio value rise was less than the disutility she felt when its value declined. 
A)  the positive utility Laura received from seeing her portfolio value rise was equal to the disutility she felt when its value declined. 
B)  Laura should not invest in stocks unless the utility she receives from gains is at least as great as the disutility she feels from losses. 
C)  the positive utility Laura received from seeing her portfolio value rise was greater than the disutility she felt when its value declined. 
D)  the positive utility Laura received from seeing her portfolio value rise was less than the disutility she felt when its value declined.

Question 13

Credit card companies require low minimum payments that impose significant interest costs on consumers choosing to pay the minimum. Recent legislation has required credit card companies to show on customer billing statements how much interest would be paid and how long it would take to repay the current balance if only the minimum is paid. Behavioral economists would expect this legislation to

Accepted Answer

A)  substantially increase monthly payments, as consumers make better decisions when they have more information. 
B)  overcome the status quo bias that keeps people paying the minimum. 
C)  cause credit card companies to increase the minimum payments. 
D)  have little effect, as anchoring would keep many people paying the minimum. 
A)  substantially increase monthly payments, as consumers make better decisions when they have more information. 
B)  overcome the status quo bias that keeps people paying the minimum. 
C)  cause credit card companies to increase the minimum payments. 
D)  have little effect, as anchoring would keep many people paying the minimum.

Question 14

Time inconsistency refers to the persistent underestimation of how long a task will take to perform.

Accepted Answer

A) True 
 B)False

Question 15

"Heuristics" used by the human brain refer to the

Accepted Answer

A)  ability of the brain to make sophisticated and accurate mental processes. 
B)  shortcuts that the brain uses in order to process information. 
C)  elements in the brain that lead to consistent interpretation of all visual information. 
D)  mental processes that burn and often waste a lot of energy. 
A)  ability of the brain to make sophisticated and accurate mental processes. 
B)  shortcuts that the brain uses in order to process information. 
C)  elements in the brain that lead to consistent interpretation of all visual information. 
D)  mental processes that burn and often waste a lot of energy.

Question 16

Both neoclassical and behavioral economics believe that people are mostly rational in both their decision making and their actions.

Accepted Answer

A) True 
 B)False

Question 17

Between System 1 and System 2 in the brain, System 1 makes most of the decisions.

Accepted Answer

A) True 
 B)False

Question 18

Framing effects may cause the same person to view the same new situation differently depending on whether that new situation makes him or her better or worse off.

Accepted Answer

A) True 
 B)False

Question 19

Why do credit card companies typically require small minimum payment amounts on their customers' monthly credit card statements?

Accepted Answer

A)  Credit card companies are concerned that their customers will be put in financial distress if required to make higher payments. 
B)  Credit card companies want to promote faster repayment, and customers will be encouraged to pay more each month if they're able to pay well beyond the minimum. 
C)  Credit card companies want to increase profits by promoting slower repayment, and actual customer payments will be anchored by the smaller payment requirements. 
D)  Credit card companies actually charge the highest minimum payment they are allowed by law to charge. 
A)  Credit card companies are concerned that their customers will be put in financial distress if required to make higher payments. 
B)  Credit card companies want to promote faster repayment, and customers will be encouraged to pay more each month if they're able to pay well beyond the minimum. 
C)  Credit card companies want to increase profits by promoting slower repayment, and actual customer payments will be anchored by the smaller payment requirements. 
D)  Credit card companies actually charge the highest minimum payment they are allowed by law to charge.

Question 20

Myopia and time inconsistency are major stumbling blocks that behavioral economists have found in people's ability to make decisions that involve trade-offs between

Accepted Answer

A)  importing and exporting. 
B)  work and leisure. 
C)  the private sector and the government. 
D)  the present and the future. 
A)  importing and exporting. 
B)  work and leisure. 
C)  the private sector and the government. 
D)  the present and the future.

Exam 8: Behavioral Economics

(Consider This) According to the piece "Wannamaker's Lament," how have firms responded to the evidence that most advertising campaigns have little impact on sales?

Anchoring

Neoclassical economics and behavioral economics

Some behavioral economists explain the so-called endowment effect to be a consequence of people's tendency to

In anonymous surveys, on average people rate themselves as "above average" with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the

The "hedonic treadmill" of prospect theory suggests that if people's incomes rise and stay at the new higher level, then their feelings of satisfaction also rise and stay at the new higher level.

Behavioral economics recognizes that people frequently make errors, but these errors generally cancel out in such a way that neoclassical models are sufficient for predicting economic outcomes.

According to prospect theory, firms are more likely to shrink packages than raise prices because

Behavioral economists avoid dealing with fairness concerns because the concept is too subjective.

According to behavioral economists, precommitments

Which of the following statements about behavioral economics is not true?

Last month Laura saw the value of her stock portfolio rise by $20,000. This month she saw the value of her portfolio decline by $20,000. According to behavioral economics,

Time inconsistency refers to the persistent underestimation of how long a task will take to perform.

"Heuristics" used by the human brain refer to the

Both neoclassical and behavioral economics believe that people are mostly rational in both their decision making and their actions.

Between System 1 and System 2 in the brain, System 1 makes most of the decisions.

Framing effects may cause the same person to view the same new situation differently depending on whether that new situation makes him or her better or worse off.

Why do credit card companies typically require small minimum payment amounts on their customers' monthly credit card statements?

Myopia and time inconsistency are major stumbling blocks that behavioral economists have found in people's ability to make decisions that involve trade-offs between

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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