Exam 31:Behavioral Economics-Part A

The following statement is a defense of conventional models of consumer behavior against the objections of behavioral economists: Even if many participants in a market do not behave rationally,those who consistently maximize utility will have the greatest effect on market prices and outcomes.

In an experiment on risk aversion and inconsistency,a group of people were given the option to accept or reject the following gamble: 50% chance to win $150,50% chance to lose $100.Which of the following scenarios is most accurate and would most likely occur?

A stingy health maintenance organization (HMO)gives its customers diagnosed with cancer a choice between surgery and radiation therapy,but not both.The brochure they send to their customers describes surgery as 80% successful,but says that 2 out of 10 patients who choose radiation will die.If customers were given a choice between surgery and radiation therapy,which of the following scenarios would most likely occur?

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?

Psychologists and behavioral economists argue that preferences are "discovered," as opposed to a preexisting guide to choice.

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.

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.

John is doing very well in Intermediate Micro economics,but hires a graduate student to spend 1 hour a week with him to do workbook problems together.John always gets every problem correct without help from the graduate student,but he insists on continuing the relationship.Is there a behavioral economic explanation of why this is rational? Explain.

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

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 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).