Question 1

A significant downside to network externalities is that

Accepted Answer

A) there may be large switching costs to consumers for changing products so that consumers end up using products with inferior technologies. 
B) firms may network with unethical suppliers or distributors. 
C) the costs of hiring celebrity endorsements may be very high. 
D) there may be large switching costs to firms changing technologies. 
A) there may be large switching costs to consumers for changing products so that consumers end up using products with inferior technologies. 
B) firms may network with unethical suppliers or distributors. 
C) the costs of hiring celebrity endorsements may be very high. 
D) there may be large switching costs to firms changing technologies.

Question 2

Arnold Kim began blogging about Apple products during his fourth year of medical school.Kim's website,MacRumors.com,became so successful that he decided to give up his medical career and work full time on his website,despite the nearly $200 000 he had invested in his education.In making his decision,Kim decided to ignore the money and time he spent on his education.Economists would say that Kim made a

Accepted Answer

A) rational decision to ignore these sunk costs. 
B) poor decision since he had already invested his time and money on his medical career. 
C) poor decision since doctors are in greater demand than bloggers. 
D) hasty decision by not waiting to recoup his financial investment before giving up his medical career. 
A) rational decision to ignore these sunk costs. 
B) poor decision since he had already invested his time and money on his medical career. 
C) poor decision since doctors are in greater demand than bloggers. 
D) hasty decision by not waiting to recoup his financial investment before giving up his medical career.

Question 3

The amount of income a consumer has to spend on goods and services is known as

Accepted Answer

A) purchasing power. 
B) effective demand. 
C) a budget constraint. 
D) wealth. 
A) purchasing power. 
B) effective demand. 
C) a budget constraint. 
D) wealth.

Question 4

The economic model of consumer behaviour predicts that

Accepted Answer

A) consumers will try to earn as much income as they can over their lifetimes. 
B) consumers will choose to buy the combination of goods and services that make them as well off as possible from those combinations that their budgets allow them to buy. 
C) consumers will try to accumulate as many goods and services as they can before they die. 
D) consumers will divide their time between consumption and leisure activities in order to maximise social welfare. 
A) consumers will try to earn as much income as they can over their lifetimes. 
B) consumers will choose to buy the combination of goods and services that make them as well off as possible from those combinations that their budgets allow them to buy. 
C) consumers will try to accumulate as many goods and services as they can before they die. 
D) consumers will divide their time between consumption and leisure activities in order to maximise social welfare.

Question 5

Why do convex indifference curves have a negative slope?

Accepted Answer

A) because consumers take market prices as given 
B) because consumers face a budget constraint 
C) because to keep utility constant,a consumer must get more of one good if she is to give up some of the other 
D) because scarcity implies that it is not possible to consume more of one good without giving up some of the other 
A) because consumers take market prices as given 
B) because consumers face a budget constraint 
C) because to keep utility constant,a consumer must get more of one good if she is to give up some of the other 
D) because scarcity implies that it is not possible to consume more of one good without giving up some of the other

Question 6

The observation that people tend to value something more highly when they own it than when they don't is called the

Accepted Answer

A) wealth effect. 
B) endowment effect. 
C) path dependent effect. 
D) endorsement effect. 
A) wealth effect. 
B) endowment effect. 
C) path dependent effect. 
D) endorsement effect.

Question 7

Some online penny auctions charge a fee,such as $1,for every bid placed.Why should these costs of $1 per bid be considered sunk costs? Would it be smart for someone who has 'already invested $5 in bidding costs' to keep bidding to 'protect his or her sunk investments'? Why or why not?

Accepted Answer

The $1 charge per bid should be consider

Question 8

The income effect of a price change refers to

Accepted Answer

A) the change in demand that occurs when consumer income changes. 
B) the change in the quantity demanded that results from a change in price,making the good more or less expensive relative to other goods,holding everything else constant. 
C) the change in demand that occurs when both income and price change. 
D) the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power,holding everything else constant. 
A) the change in demand that occurs when consumer income changes. 
B) the change in the quantity demanded that results from a change in price,making the good more or less expensive relative to other goods,holding everything else constant. 
C) the change in demand that occurs when both income and price change. 
D) the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power,holding everything else constant.

Question 9

Psychologists Daniel Kahneman and Amos Tversky conducted the following experiments by asking a sample of people the following questions:
Scenario A: 'Imagine that you have decided to see a play and paid the admission price of $10 per ticket.As you enter the theatre you discover that you have lost the ticket.The seat was not marked and the ticket cannot be recovered.Would you pay $10 for another ticket?'
Scenario B: 'Imagine that you have decided to see a play where admission is $10 per ticket.As you enter the theatre you discover that you have lost a $10 bill.Would you still pay $10 for a ticket for the play?'
As long as additional tickets are available,there's no meaningful difference between losing $10 in cash before buying a ticket,and losing the $10 ticket after buying it.In both cases,you are out $10.Yet,far more subjects (88 per cent)in Scenario B say they would pay $10 for another ticket and see the play while in Scenario A,only 46 per cent of the subjects say they would be willing to spend another $10 to see the play.
Which of the following is the best explanation for the results of the experiment?

Accepted Answer

A) The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable but this is not so in Scenario B. 
B) In Scenario B,people had not anticipated spending an additional $10 so in effect the price of the ticket is $20 and not $10 whereas in Scenario A,the price of the ticket is still $10. 
C) In Scenario A,people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket whereas in Scenario B,they do not make the connection between the lost $10 bill and the play. 
D) The net benefit derived from watching the play is lower in Scenario A where the effective cost is $20 compared to the net benefit in Scenario B. 
A) The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable but this is not so in Scenario B. 
B) In Scenario B,people had not anticipated spending an additional $10 so in effect the price of the ticket is $20 and not $10 whereas in Scenario A,the price of the ticket is still $10. 
C) In Scenario A,people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket whereas in Scenario B,they do not make the connection between the lost $10 bill and the play. 
D) The net benefit derived from watching the play is lower in Scenario A where the effective cost is $20 compared to the net benefit in Scenario B.

Question 10

What is a Giffen good?

Accepted Answer

A Giffen good is something con

Question 11

If a consumer always buys goods rationally,then

Accepted Answer

A) the total utilities of the different goods consumed will be equal. 
B) the average utilities of the different goods consumed will be equal. 
C) the marginal utilities per dollar spent on all goods will be equal. 
D) the marginal utilities of the different goods consumed will be equal. 
A) the total utilities of the different goods consumed will be equal. 
B) the average utilities of the different goods consumed will be equal. 
C) the marginal utilities per dollar spent on all goods will be equal. 
D) the marginal utilities of the different goods consumed will be equal.

Question 12

Which of the following is not a common mistake made by consumers?

Accepted Answer

A) the failure to take into account the implicit costs of an activity 
B) the failure to ignore sunk costs 
C) being overly optimistic about their future behaviour 
D) being overly pessimistic about their future behaviour 
A) the failure to take into account the implicit costs of an activity 
B) the failure to ignore sunk costs 
C) being overly optimistic about their future behaviour 
D) being overly pessimistic about their future behaviour

Question 13

The only Giffen goods that have been identified so far in the real world are luxury goods.

Accepted Answer

A) True 
 B)False

Question 14

What is marginal utility and what is the law of diminishing marginal utility?

Accepted Answer

Marginal utility is the change in total

Question 15

Many people leave their servers tips in restaurants,even when they are not likely to visit the restaurant again.This is evidence that

Accepted Answer

A) people would rather pay for good service at an inexpensive restaurant than pay higher prices and receive poor service at an expensive restaurant. 
B) people enjoy eating at restaurants more than eating at home. 
C) people treat others fairly even if doing so makes them worse off financially. 
D) there has been an improvement in the service people receive in restaurants over time,partly because the restaurant industry has become more competitive. 
A) people would rather pay for good service at an inexpensive restaurant than pay higher prices and receive poor service at an expensive restaurant. 
B) people enjoy eating at restaurants more than eating at home. 
C) people treat others fairly even if doing so makes them worse off financially. 
D) there has been an improvement in the service people receive in restaurants over time,partly because the restaurant industry has become more competitive.

Question 16

After getting an A on your economics exam,you decide to go to your favourite Mexican restaurant to celebrate.You are having trouble deciding whether to order the chipotle chicken chimichanga or the cilantro seafood enchiladas.Use the rule of equal marginal utility per dollar to determine which one to purchase: (a)the chimichanga for $8 which gives you 120 units of utility,or (b)the enchiladas for $15 which gives you 195 units of utility?

Accepted Answer

You should buy the chimichanga

Question 17

Which of the following describes the substitution effect of a price change?

Accepted Answer

A) The change in demand that results from a change in price,making the good more or less expensive relative to other goods,holding constant the effect of the price change on consumer purchasing power. 
B) The change in quantity demanded of a good that results from the effect of a change in price on consumer purchasing power,holding everything else constant. 
C) The change in quantity demanded of a good that results from the change in the price of a substitute for the good. 
D) The change in quantity demanded of a good that results from a change in price,making the good more or less expensive relative to other goods,holding constant the effect of the price change on consumer purchasing power. 
A) The change in demand that results from a change in price,making the good more or less expensive relative to other goods,holding constant the effect of the price change on consumer purchasing power. 
B) The change in quantity demanded of a good that results from the effect of a change in price on consumer purchasing power,holding everything else constant. 
C) The change in quantity demanded of a good that results from the change in the price of a substitute for the good. 
D) The change in quantity demanded of a good that results from a change in price,making the good more or less expensive relative to other goods,holding constant the effect of the price change on consumer purchasing power.

Question 18

In the utility maximising model,consumer preferences are assumed to be transitive.What does this mean?

Accepted Answer

A) that consumers prefer more of a good to less 
B) that consumers have the freedom to change their preferences from time to time 
C) that consumers have preferences that are relatively consistent in the time period under consideration 
D) that consumers go through cycles in their consumption behaviour 
A) that consumers prefer more of a good to less 
B) that consumers have the freedom to change their preferences from time to time 
C) that consumers have preferences that are relatively consistent in the time period under consideration 
D) that consumers go through cycles in their consumption behaviour

Question 19

Consider a downward-sloping demand curve.When the price of an inferior good increases,the income and substitution effects

Accepted Answer

A) work in the same direction to increase quantity demanded. 
B) work in the same direction to decrease quantity demanded. 
C) work in opposite directions and quantity demanded increases. 
D) work in opposite directions and quantity demanded decreases. 
A) work in the same direction to increase quantity demanded. 
B) work in the same direction to decrease quantity demanded. 
C) work in opposite directions and quantity demanded increases. 
D) work in opposite directions and quantity demanded decreases.

Question 20

In their surveys of consumers,Daniel Kahneman,Jack Knetsch and Richard Thaler found that

Accepted Answer

A) most people considered it unfair for firms to raise their prices because of an increase in their costs,but fair to raise their prices after an increase in demand. 
B) most people considered any increase in price to be unfair,as it led to an increase in profits. 
C) most people believed that low income people were hurt most by increases in prices. 
D) most people considered an increase in price by firms following an increase in their costs to be fair but believed it was unfair for firms to raise their prices because of an increase in demand. 
A) most people considered it unfair for firms to raise their prices because of an increase in their costs,but fair to raise their prices after an increase in demand. 
B) most people considered any increase in price to be unfair,as it led to an increase in profits. 
C) most people believed that low income people were hurt most by increases in prices. 
D) most people considered an increase in price by firms following an increase in their costs to be fair but believed it was unfair for firms to raise their prices because of an increase in demand.

A significant downside to network externalities is that

The amount of income a consumer has to spend on goods and services is known as

The economic model of consumer behaviour predicts that

Why do convex indifference curves have a negative slope?

The observation that people tend to value something more highly when they own it than when they don't is called the

Some online penny auctions charge a fee,such as $1,for every bid placed.Why should these costs of $1 per bid be considered sunk costs? Would it be smart for someone who has 'already invested $5 in bidding costs' to keep bidding to 'protect his or her sunk investments'? Why or why not?

The income effect of a price change refers to

What is a Giffen good?

If a consumer always buys goods rationally,then

Which of the following is not a common mistake made by consumers?

The only Giffen goods that have been identified so far in the real world are luxury goods.

What is marginal utility and what is the law of diminishing marginal utility?

Many people leave their servers tips in restaurants,even when they are not likely to visit the restaurant again.This is evidence that

Which of the following describes the substitution effect of a price change?

In the utility maximising model,consumer preferences are assumed to be transitive.What does this mean?

Consider a downward-sloping demand curve.When the price of an inferior good increases,the income and substitution effects

In their surveys of consumers,Daniel Kahneman,Jack Knetsch and Richard Thaler found that

Economics: Foundations and Models

Choices and Trade-Offs in the Market

Where Prices Come From: the Interaction of Demand and Supply

Elasticity: the Responsiveness of Demand and Supply

Economic Efficiency, Government Price Setting and Taxes

Technology, Production and Costs

Firms in Perfectly Competitive Markets

Monopoly Markets

Monopolistic Competition

Oligopoly: Firms in Less Competitive Markets

The Markets for Labour and Other Factors of Production

International Trade

Government Intervention in the Market

Externalities, Environmental Policy and Public Goods

The Distribution of Income and Social Policy

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Exam 6: Consumer Choice and Behavioural Economics

A significant downside to network externalities is that

The amount of income a consumer has to spend on goods and services is known as

The economic model of consumer behaviour predicts that

Why do convex indifference curves have a negative slope?

The observation that people tend to value something more highly when they own it than when they don't is called the

Some online penny auctions charge a fee,such as $1,for every bid placed.Why should these costs of $1 per bid be considered sunk costs? Would it be smart for someone who has 'already invested $5 in bidding costs' to keep bidding to 'protect his or her sunk investments'? Why or why not?

The income effect of a price change refers to

What is a Giffen good?

If a consumer always buys goods rationally,then

Which of the following is not a common mistake made by consumers?

The only Giffen goods that have been identified so far in the real world are luxury goods.

What is marginal utility and what is the law of diminishing marginal utility?

Many people leave their servers tips in restaurants,even when they are not likely to visit the restaurant again.This is evidence that

Which of the following describes the substitution effect of a price change?

In the utility maximising model,consumer preferences are assumed to be transitive.What does this mean?

Consider a downward-sloping demand curve.When the price of an inferior good increases,the income and substitution effects

In their surveys of consumers,Daniel Kahneman,Jack Knetsch and Richard Thaler found that

Economics: Foundations and Models

Choices and Trade-Offs in the Market

Where Prices Come From: the Interaction of Demand and Supply

Elasticity: the Responsiveness of Demand and Supply

Economic Efficiency, Government Price Setting and Taxes

Technology, Production and Costs

Firms in Perfectly Competitive Markets

Monopoly Markets

Monopolistic Competition

Oligopoly: Firms in Less Competitive Markets

The Markets for Labour and Other Factors of Production

International Trade

Government Intervention in the Market

Externalities, Environmental Policy and Public Goods

The Distribution of Income and Social Policy

Filters