Question 1

According to behavioral economists, rational consumers are able to make decisions when faced with many choices because preferences are complete.

Accepted Answer

A) True 
 B)False  False

Question 2

If a tennis player were truly randomizing over which half of the court to serve to, she would never serve to the same side of the court 5 times in a row.

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following are examples of the framing effect?

Accepted Answer

A) Campus "Public Interest Research Groups" receive more operating funds from student registration fees when the default choice is to contribute but a box must be checked to opt out versus a default of not contributing but checking a box to contribute. 
B) Shoppers often purchase extended service and warranty plans even though expected losses are much smaller than the cost of the plans. 
C) In a repeated classroom experiment, half the class was randomly picked to receive an iPod Shuffle of music from the 1970s.The average value placed on the Shuffle is consistently higher for students who received the Shuffle than for those who didn't. 
D) A busy executive who wants to exercise more joins a bicycling club where fellow members will exert pressure upon him if he doesn't go biking. 
E) All of the above. 
A) Campus "Public Interest Research Groups" receive more operating funds from student registration fees when the default choice is to contribute but a box must be checked to opt out versus a default of not contributing but checking a box to contribute. 
B) Shoppers often purchase extended service and warranty plans even though expected losses are much smaller than the cost of the plans. 
C) In a repeated classroom experiment, half the class was randomly picked to receive an iPod Shuffle of music from the 1970s.The average value placed on the Shuffle is consistently higher for students who received the Shuffle than for those who didn't. 
D) A busy executive who wants to exercise more joins a bicycling club where fellow members will exert pressure upon him if he doesn't go biking. 
E) All of the above. A

Question 4

Nash equilibria can be used to make predictions about human behavior in noncooperative games.Behavioral game theory studies actual human interaction, and has found inconsistencies between observed human behavior and Nash-predicted behavior.Which of the following is NOT an inconsistency pointed out by behavioral economists?

Accepted Answer

A) In ultimatum games, proposers should always offer to give responders the minimum possible split, regardless of whether it is perceived as "unfair" or not. 
B) In ultimatum games, offers perceived as "unfair" are frequently rejected. 
C) In ultimatum games, responders are less likely to turn down "unfair" offers if the dollar amount is large. 
D) Third party observers of ultimatum games will frequently punish what they perceive as "unfair" divisions, even at a cost to themselves. 
E) In ultimatum games, men tend to receive more favorable divisions, particularly when divisions are proposed by women. 
A) In ultimatum games, proposers should always offer to give responders the minimum possible split, regardless of whether it is perceived as "unfair" or not. 
B) In ultimatum games, offers perceived as "unfair" are frequently rejected. 
C) In ultimatum games, responders are less likely to turn down "unfair" offers if the dollar amount is large. 
D) Third party observers of ultimatum games will frequently punish what they perceive as "unfair" divisions, even at a cost to themselves. 
E) In ultimatum games, men tend to receive more favorable divisions, particularly when divisions are proposed by women.

Question 5

In the 1960s dark comedy classic Dr.Strangelove, the Soviet Union constructs a Doomsday Machine that will destroy all life on earth automatically if the Soviet Union is attacked.The Doomsday Machine can never be turned off or disabled.Which of the following would best explain why the Soviets would build the Doomsday Machine?

Accepted Answer

A) This is a completely irrational action. 
B) This is an example of the use of spurious information to influence outcomes. 
C) This is an example of the negative framing effect. 
D) By removing the choice of whether or not to retaliate, the Soviets increase the chance that the United States will not attack. 
E) The Soviets would gain utility from destroying all life on earth. 
A) This is a completely irrational action. 
B) This is an example of the use of spurious information to influence outcomes. 
C) This is an example of the negative framing effect. 
D) By removing the choice of whether or not to retaliate, the Soviets increase the chance that the United States will not attack. 
E) The Soviets would gain utility from destroying all life on earth.

Question 6

Consider 2 identical twins, Scott and Rich.Scott is a professional wrestler who will earn lots of income when he is young and will retire by age 40.Rich is a manager who expects to earn high income in his 50s and 60s.The life cycle theory of savings would predict that Scott should save while he is young to smooth consumption over his lifetime, and Rich should borrow against his future earnings when he is young.If Scott and Rich are typical savers, which of the following scenarios is most likely to be observed?

Accepted Answer

A) Scott will save a substantial portion of his wrestling income but Rich will not borrow against future earnings to boost consumption when he is young. 
B) Scott will save a substantial portion of his wrestling income and Rich will borrow against future earnings to boost consumption when he is young. 
C) Scott will spend his wrestling income when he is young and Rich will not borrow against future earnings to boost consumption when he is young. 
D) Scott will spend his wrestling income when he is young and Rich will borrow against future earnings to boost consumption when he is young. 
E) There are no typical patterns of saving. 
A) Scott will save a substantial portion of his wrestling income but Rich will not borrow against future earnings to boost consumption when he is young. 
B) Scott will save a substantial portion of his wrestling income and Rich will borrow against future earnings to boost consumption when he is young. 
C) Scott will spend his wrestling income when he is young and Rich will not borrow against future earnings to boost consumption when he is young. 
D) Scott will spend his wrestling income when he is young and Rich will borrow against future earnings to boost consumption when he is young. 
E) There are no typical patterns of saving.

Question 7

People who have recently become unemployed often believe the national unemployment rate is higher than it actually is.Behavioral economists would attribute this to

Accepted Answer

A) the anchoring effect. 
B) the law of small numbers. 
C) time inconsistency of preferences. 
D) fairness norms. 
E) hyperbolic discounting. 
A) the anchoring effect. 
B) the law of small numbers. 
C) time inconsistency of preferences. 
D) fairness norms. 
E) hyperbolic discounting.

Question 8

In an experiment on risk aversion, a group of people were given the following choice: A)Lose $100 with certainty, or B)50% chance to win $50, 50% chance to lose $200.An overwhelming majority chose option B.This can be best explained by which of the following?

Accepted Answer

A) People have a greater aversion to loss than to risk. 
B) Option B has a smaller expected loss than option A. 
C) This behavior is consistent with risk aversion with losses. 
D) Option B has an expected gain as opposed to certain loss with option A. 
E) This behavior violates the Weak Axiom of Revealed Preference. 
A) People have a greater aversion to loss than to risk. 
B) Option B has a smaller expected loss than option A. 
C) This behavior is consistent with risk aversion with losses. 
D) Option B has an expected gain as opposed to certain loss with option A. 
E) This behavior violates the Weak Axiom of Revealed Preference.

Question 9

People find it easier to commit to saving for retirement from next year's salary as opposed to current salary.This behavior is consistent with hyperbolic discounting of income.

Accepted Answer

A) True 
 B)False

Question 10

Professor Bob has an incredibly messy office, and really wants to change but just can't.Professor Bob just read his first book about behavioral economics.To help him keep his office more neat, Professor Bob could hire

Accepted Answer

A) an expensive office consultant to set up an organizational scheme.Because the consultant's visit was so expensive, Professor Bob will not want to lose his investment. 
B) a very expensive custodial service that will clean and bill Professor Bob only when his office needs cleaning. 
C) somebody to clean his office once a week for the entire year whether it needs it or not. 
D) a sarcastic graduate student to make fun of him when his office becomes messy. 
E) All of the above would be equally effective in changing Professor Bob's behavior. 
A) an expensive office consultant to set up an organizational scheme.Because the consultant's visit was so expensive, Professor Bob will not want to lose his investment. 
B) a very expensive custodial service that will clean and bill Professor Bob only when his office needs cleaning. 
C) somebody to clean his office once a week for the entire year whether it needs it or not. 
D) a sarcastic graduate student to make fun of him when his office becomes messy. 
E) All of the above would be equally effective in changing Professor Bob's behavior.

Question 11

Using lessons learned from behavioral economists, which of the following would be most likely to increase retirement savings?

Accepted Answer

A) Specifying that all retirement contributions are to be made by personal check only 
B) Allowing customers to make contributions of any amount whenever they desire 
C) Enabling automatic deductions from paychecks, but allow customers to make as many changes to the amount as they like without cost or obligation 
D) Allowing customers to commit to an increasing portion of their paycheck being automatically deposited in retirement savings in future years 
E) Charging service fees for contributions under $100 
A) Specifying that all retirement contributions are to be made by personal check only 
B) Allowing customers to make contributions of any amount whenever they desire 
C) Enabling automatic deductions from paychecks, but allow customers to make as many changes to the amount as they like without cost or obligation 
D) Allowing customers to commit to an increasing portion of their paycheck being automatically deposited in retirement savings in future years 
E) Charging service fees for contributions under $100

Question 12

In a study of individually held stock portfolios over time, gains were much more likely to be realized than losses.Fifteen percent of all gains were realized in the time period, while only 10% of losses were.Subsequently, the rising stocks that were sold outperformed the losing stocks that were held.Behavioral economists would explain this as

Accepted Answer

A) aversion to losses. 
B) overconfidence as exhibited in excessive trading. 
C) the framing effect (losses vs.gains). 
D) a departure from sound financial practices. 
E) All of the above. 
A) aversion to losses. 
B) overconfidence as exhibited in excessive trading. 
C) the framing effect (losses vs.gains). 
D) a departure from sound financial practices. 
E) All of the above.

Question 13

A couple planning to get married wants to do all that they can to make their marriage last.To help, they should consider having

Accepted Answer

A) a very lavish and expensive wedding. 
B) a prenuptial agreement specifying how assets will be divided among them in case of divorce. 
C) an agreement in which all jointly held assets are donated to charity in case of divorce. 
D) an inexpensive wedding in Las Vegas. 
E) an Elvis impersonator marry them in Las Vegas. 
A) a very lavish and expensive wedding. 
B) a prenuptial agreement specifying how assets will be divided among them in case of divorce. 
C) an agreement in which all jointly held assets are donated to charity in case of divorce. 
D) an inexpensive wedding in Las Vegas. 
E) an Elvis impersonator marry them in Las Vegas.

Question 14

In practice, people tend to accept too many large risks (such as forgoing life insurance)and avoid too many small risks (such as losing or breaking a cell phone).

Accepted Answer

A) True 
 B)False

Question 15

In the movie The Hunt for Red October, Captain Ramius (Sean Connery)leaves a letter for the Soviet Navy announcing that he intends to defect to the United States.As a result, the Soviet Navy launches a massive effort to find and sink Ramius's ship, the Red October.In announcing that he was intending to defect, Capt.Ramius's actions could be explained as

Accepted Answer

A) an act of irrationality. 
B) a step to remove the option of return to the Soviet Union, thereby increasing the likelihood of a successful defection to the West. 
C) a spurious piece of information that might affect behavior. 
D) part of the process of discovering his preferences. 
E) an attempt at randomizing behavior to make his adversaries less certain of his true intentions. 
A) an act of irrationality. 
B) a step to remove the option of return to the Soviet Union, thereby increasing the likelihood of a successful defection to the West. 
C) a spurious piece of information that might affect behavior. 
D) part of the process of discovering his preferences. 
E) an attempt at randomizing behavior to make his adversaries less certain of his true intentions.

Question 16

Under hyperbolic discounting, a person discounts the long term future more heavily than the near term future.

Accepted Answer

A) True 
 B)False

Question 17

In an experiment on risk aversion and inconsistency, a group of people were given the following choice: A)Lose $100 with certainty, or B)50% chance to win $50, 50% chance to lose $200.Which of the following scenarios is most accurate and would most likely occur?

Accepted Answer

A) A majority chose option A.Option A has a lower expected loss. 
B) A majority chose option B.Option A has a lower expected loss. 
C) A majority chose option A.Option B has a lower expected loss. 
D) A majority chose option B.Option B has a lower expected loss. 
E) Roughly equal numbers chose A and B, because they have equal expected losses. 
A) A majority chose option A.Option A has a lower expected loss. 
B) A majority chose option B.Option A has a lower expected loss. 
C) A majority chose option A.Option B has a lower expected loss. 
D) A majority chose option B.Option B has a lower expected loss. 
E) Roughly equal numbers chose A and B, because they have equal expected losses.

Question 18

Suppose you and a complete stranger must split $100 in even dollar increments.You propose a split, and the stranger with whom you are splitting the $100 either accepts or rejects.If she rejects, you both receive nothing.
a.What is the Nash equilibrium for this game?
b.The Nash equilibrium solution is not frequently observed in practice.Explain why.

Accepted Answer

a.You should propose $99 for yourself, $

Question 19

In a study by financial economists Brad Barber and Terrance Odeank of stock portfolio management techniques and returns, men trade more frequently on average than women, and as a result of more active management, men's portfolios grow at a higher rate of return than women's.

Accepted Answer

A) True 
 B)False

Question 20

A substantial majority of Americans have inadequate retirement savings.Behavioral economists attribute this to

Accepted Answer

A) time inconsistency of preferences. 
B) lack of self-control. 
C) preferences between current and future consumption that are still being discovered. 
D) framing effects. 
E) a.and b.are both correct. 
A) time inconsistency of preferences. 
B) lack of self-control. 
C) preferences between current and future consumption that are still being discovered. 
D) framing effects. 
E) a.and b.are both correct.

Exam 29: Behavioral Economics

According to behavioral economists, rational consumers are able to make decisions when faced with many choices because preferences are complete.

If a tennis player were truly randomizing over which half of the court to serve to, she would never serve to the same side of the court 5 times in a row.

Which of the following are examples of the framing effect?

People who have recently become unemployed often believe the national unemployment rate is higher than it actually is.Behavioral economists would attribute this to

In an experiment on risk aversion, a group of people were given the following choice: A)Lose $100 with certainty, or B)50% chance to win $50, 50% chance to lose $200.An overwhelming majority chose option B.This can be best explained by which of the following?

People find it easier to commit to saving for retirement from next year's salary as opposed to current salary.This behavior is consistent with hyperbolic discounting of income.

Professor Bob has an incredibly messy office, and really wants to change but just can't.Professor Bob just read his first book about behavioral economics.To help him keep his office more neat, Professor Bob could hire

Using lessons learned from behavioral economists, which of the following would be most likely to increase retirement savings?

A couple planning to get married wants to do all that they can to make their marriage last.To help, they should consider having

In practice, people tend to accept too many large risks (such as forgoing life insurance)and avoid too many small risks (such as losing or breaking a cell phone).

Under hyperbolic discounting, a person discounts the long term future more heavily than the near term future.

In an experiment on risk aversion and inconsistency, a group of people were given the following choice: A)Lose $100 with certainty, or B)50% chance to win $50, 50% chance to lose $200.Which of the following scenarios is most accurate and would most likely occur?

In a study by financial economists Brad Barber and Terrance Odeank of stock portfolio management techniques and returns, men trade more frequently on average than women, and as a result of more active management, men's portfolios grow at a higher rate of return than women's.

A substantial majority of Americans have inadequate retirement savings.Behavioral economists attribute this to

Budget Constraint-Part A

Budget Constraint-Part B

Preferences-Part A

Preferences-Part B

Utility-Part A

Utility-Part B

Choice-Part A

Choice-Part B

Demand-Part A

Demand-Part B

Revealed Preference-Part A

Revealed Preference-Part B

Slutsky Equation-Part A

Slutsky Equation-Part B

Buying and Selling-Part A

Buying and Selling-Part B

Intertemporal Choice-Part A

Intertemporal Choice-Part B

Asset Markets-Part A

Asset Markets-Part B

Uncertainty-Part A

Uncertainty-Part B

Risky Assets-Part A

Risky Assets-Part B

Consumers Surplus-Part A

Consumers Surplus-Part B

Market Demand-Part A

Market Demand-Part B

Equilibrium-Part A

Equilibrium-Part B

Auctions-Part A

Auctions-Part B

Technology-Part A

Technology-Part B

Profit Maximization-Part A

Profit Maximization-Part B

Cost Minimization-Part A

Cost Minimization-Part B

Cost Curves-Part A

Cost Curves-Part B

Firm Supply-Part A

Firm Supply-Part B

Industry Supply-Part A

Industry Supply-Part B

Monopoly-Part A

Monopoly-Part B

Monopoly Behavior-Part A

Monopoly Behavior-Part B

Factor Markets-Part A

Factor Markets-Part B

Oligopoly-Part A

Oligopoly-Part B

Game Theory-Part A

Game Theory-Part B

Game Applications-Part A

Game Applications-Part B

Exchange-Part A

Exchange-Part B

Production-Part A

Production-Part B

Welfare-Part A

Welfare-Part B

Externalities-Part A

Externalities-Part B

Information Technology-Part A