Exam 18: Behavioral and Experimental Economics

Luigi drives two hours to a store to buy a Mikata circular saw. Unfortunately, the store sold its last Mikata saw just before Luigi arrived. Luigi decides to buy a lesser-quality saw so that his two-hour trip was not a waste of time. Luigi is committing the:

In 2004, people paid $400,000 for their homes around Crystal City, Virginia. During the housing crisis, they could sell those houses for only $300,000. If homeowners are loss-averse, what price do they try to sell their homes for? Graphically, illustrate this situation with supply and demand curves. Is there an excess demand for housing?

Loss aversion is a:

Alumni donations to universities and colleges may at first appear _____, but further examination reveals that they are motivated by _____.

Yesterday, Melinda bought a ticket for today's show. She has a migraine headache and normally would not go. However, she has already paid for the ticket, so she decides to go to the theater and get her money's worth. What behavioral bias is Melinda showing?

An economics professor is running an experiment in class, simulating auctions. Each student is told that the amount of money she has to spend is equal to 100 minus the last two digits of her social security number. The professor is auctioning off fictitious products. After the experiment is run, the professor is perplexed by the results, since they do not match that predicted by theory. Help the professor understand the results obtained from the experiment.

In an experiment, students were asked to consider the last two digits of their social security number. Next, students were asked to submit bids for a product. There was a positive correlation between the size of the bid and the last two digits of a student's social security number. This experiment highlights the behavioral economic issue of:

In the ultimatum game, two strangers are given $50 and must decide how to split the money between them. One player, called the proposer, makes the initial decision on how to split the money. The second player, called the responder, either accepts or rejects the proposer's offer. If the responder accepts the offer, both players are paid according to the proposer's offer. If the responder rejects the offer, neither player receives any money. Suppose the proposer and responder act in a rationally self-interested manner. The proposer would offer $____ to the responder and the responder would ____ the offer.

Why might overconfidence lead some people to try highly addictive drugs such as methamphetamine?

Suppose firms altered prices to different consumers to examine price sensitivity. This would be an example of a ____ experiment.

Suppose a college student was given a university mug that sells for $4 in the university bookstore, and now he is unwilling to sell it even for $10. Which of the following statements best reflects the student's behavior?

Adele doesn't like to wait to purchase items that she wants, but Agnes prefers to pay for things she wants in full. They are both planning on buying a video game system. The store is running an offer that consumers can buy the system for $400 or pay $120 per month for four months. Either choice allows the consumer to leave the store with the video game system. Using the discount rate of 2% per month, which payment scheme leaves the consumer better off? If Adele is a hyperbolic discounter and if her per month discount rates are 50% for the first two months and 2% thereafter, which will she prefer?

Eban believes that stock in RPS, Inc., currently selling at $15 per share, is undervalued. Eban has little experience buying stock but he strongly believes that he can outperform the overall market. The form of systematic bias exhibited by Eban is ____.

Does behavioral economics mean everything we've learned is useless?

Every Monday, two college students, Kaito and Himari, make plans to study on the weekend. If Kaito is time-consistent and Himari is time-inconsistent, then:

Suppose a person prefers $100 today to $150 one year from now but prefers $150 in seven years to $100 in six years. This is an example of ____.

Carl's spending decisions are not affected by the source of his money. In this case, Carl is:

Which of the following is an example of the systematic bias of paying attention to sunk costs?

Jabari has had his car for 10 years and put a lot of money into repairs. His mechanic has broken the news to him that he needs a new engine, a very expensive repair, and suggests that Jabari sell the car. Jabari argues that he has put too much money into the car to sell it now and that the mechanic should replace the engine. What systematic bias is Jabari exhibiting?

Between 1974 and 1982, the famous RAND health insurance study randomly assigned almost 8,000 people to various health insurance plans. To examine how insurance affects the demand for medical care, some of the insurance plans had little out-of-pocket expenses, while others had significant copays and deductibles. This insurance study is an example of a: