Deck 18: Behavioral and Experimental Economics

Question 1

Consider 200 people with a disease. Which of the following possibilities are identical?

A) II and III
B) I and II
C) I and IV
D) III and IV

Answer 1

C

Question 2

Which of the following is (are) forms of framing bias?

A) I, III, and IV
B) II
C) III and IV
D) I and II

Answer 2

A

Question 3

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:

A) vertical thought.
B) metering.
C) fleeting.
D) anchoring.

Answer 3

D

Question 4

Professional golfers who display loss aversion may be more tentative putting for birdie than putting for par and thus make a greater proportion of par putts from equal distances?

A) The psychological loss of missing a par putt (worsening your score by one stroke) is greater than the psychological gain of making a birdie putt (improving your score by one stroke).
B) The psychological loss of missing a par putt (worsening your score by one stroke) is less than the psychological gain of making a birdie putt (improving your score by one stroke).
C) The psychological loss of missing a par putt (worsening your score by one stroke) is equivalent to the psychological gain of making a birdie putt (improving your score by one stroke).
D) There is no psychological gain for making birdie putts when golfers are nominally loss averse.

Question 5

On Monday, you want to start your exercise program on Saturday. When Saturday arrives, you spend your time watching college football and don't exercise. This behavior is an example of:

A) negative discounting.
B) egocentrism.
C) time inconsistency.
D) neo-foresight.

Question 6

The field that examines how human psychology affects economic decision making is:

A) behavioral economics.
B) Freudianomics.
C) psychonomics.
D) forensic economics.

Question 7

In an experiment, subjects predicted they scored 100% on a spelling test. The actual average score was 80%. These findings reflect the behavioral bias of:

A) hallowed by thy name.
B) ancillary bias.
C) hyperbolic discounting.
D) overconfidence.

Question 8

Suppose that the average level of prices in the economy fell 4% and workers' wages were cut by 2%. Which of the following statement(s) is TRUE?

A) I
B) II and III
C) I, II, and III
D) II

Question 9

Which of the following behaviors is (are) consistent with hyperbolic discounting?

A) III
B) I and III
C) I, II, and IV
D) I, II, III, and IV

Question 10

What is the endowment effect?

A) Children who receive a large inheritance are less likely to work.
B) The more you have of something, the more you want to get rid of it.
C) The fact of owning a good makes it more valuable.
D) Colleges with large endowments give student aid more generously.

Question 11

What is hyperbolic discounting?

A) the tendency to place much greater importance on the immediate present than even the near future when making economic decisions
B) the use of a positive discount rate that exceeds the real interest rate
C) the valuing of future benefits at an exponentially higher rate than current benefits
D) the ability of people to psychologically discount losses more than gains

Question 12

Suppose that most people who plan to work out at a gym are overly optimistic about how many times they will use the gym in the upcoming year. A rational gym owner might respond by selling:

A) weekly memberships at inflated prices.
B) annual or multiyear memberships.
C) daily memberships at discounted prices.
D) a monthly plan at $100 and a yearly plan at $1,500.

Question 13

Loss aversion is a:

A) phenomenon whereby simply possessing an item increases its value.
B) situation in which a consumer prefers avoiding economic losses to acquiring economic gains.
C) bias whereby a person places too much emphasis on the immediate future, ignoring the recent past.
D) bias whereby a person places too much emphasis on the immediate future, ignoring the distant future.

Question 14

Behavioral economists find that people are _____; for example, _____ than 50% of survey respondents report they are above-average drivers.

A) overconfident; fewer
B) underconfident; fewer
C) overconfident; more
D) underconfident; more

Question 15

What is an example of an endowment effect?

A) Mark paid $3,100 for a used car that he values at $4,000. Recently, Mark was offered $4,400 for the car but refuses to sell it.
B) Sammy receives increasing marginal utility as his 401K plan increases.
C) Toby prefers a guaranteed $200 to a gamble with an expected value of $200.
D) Deana refuses to transfer money from her checking account into her savings account, even though she has paid all her monthly bills.

Question 16

People who fail to take inflation into account when calculating losses may be:

A) unbiased loss-averse.
B) using real variables to make decisions.
C) loss-averse.
D) acutely loss-averse.

Question 17

Standard economic models assume that people make decisions based on _____, not _____.

A) altruistic motives; self-interest
B) real variables (i.e., variables adjusted for inflation); nominal variables
C) endowment effects; framing
D) framing; anchoring

Question 18

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?

A) Indifference curves are quasi-concave.
B) The more you have of something, the more you want to get rid of it.
C) The act of owning a good makes it more valuable.
D) Preferences are not always logically consistent, violating the assumption of transitivity.

Question 19

Which scenario represents time inconsistency?

A) A person prefers $80 today to $100 one year from now but prefers $100 in six years to $80 in five years.
B) You prefer receiving $2 on January 1 of this year to receiving $1 on January 2 of this year, and you prefer $2 on January 1 of next year to $1 on January 2 of next year.
C) A person prefers $100 in one year to $80 today but prefers $100 in six years to $80 in five years.
D) You value $1 today more than $1 tomorrow.

Question 20

A consumer who is time-consistent:

A) is on time or a little early for most appointments.
B) uses nominal and real variables when making economic decisions.
C) will make the same decision in economic transactions, whether the transaction happens immediately or in the distant future.
D) will always make different decisions, depending on whether an economic transaction occurs immediately or in the distant future.

Question 21

Eli purchased stock in XYC Inc. at $31 a share, but the stock is now worth only $19 a share. Eli believes that XYC's stock will underperform the average stock market return. However, Eli won't sell his stock until it reaches at least $31. Eli's decision making is:

A) biased by sunk costs.
B) economically rational.
C) biased by self-control problems.
D) the result of hyperbolic discounting.

Question 22

Every dollar that Paula earns working overtime she saves for her retirement. This week she has added $80 to her retirement account by working overtime. On her way home from work on Friday, Paula wins $80 in a radio contest and drives to Janice Jewelers to buy a pair of $80 earrings. Paula is displaying:

A) marketing vacillation.
B) brain oscillation.
C) mental accounting.
D) passerby fixation.

Question 23

During a down market in Boston, homeowners tried to sell at prices based on what they originally paid. As a result, the Boston real estate market:

A) had a housing shortage.
B) had an excess supply of housing.
C) was characterized by prices below equilibrium.
D) set a record for the number of housing sales in a month.

Question 24

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:

A) sunk cost fallacy.
B) marginal comparison fallacy.
C) ceteris paribus fallacy.
D) harmonization conundrum.

Question 25

The rational addiction model of Gary Becker and Kevin Murphy contends that:

A) addicts are irrational and do not consider the full costs of using addictive substances.
B) consumers weigh the benefits of using addictive substances along with their full costs.
C) standard economic models are not equipped to address socially destructive behavior.
D) prices play no role in the decisions to use addictive substances.

Question 26

Which of the following are examples of altruism?

A) I and III
B) I, II, and III
C) III
D) II

Question 27

Outlet stores frequently advertise huge discounts off base prices. Although nobody actually pays the base price, the large discount may convince consumers that they are getting a good deal. The outlet stores are using the high base prices as a form of:

A) shoveling.
B) anchoring.
C) yanking.
D) fanning.

Question 28

Which economists accounted for "rational addicton" in utility functions?

A) Gary Becker and Kevin Murphy
B) William Jevons and Albertus Magnus
C) Richard Cantillon and Jeremy Bentham
D) Edwin Chadwick and David Ricardo

Question 29

The idea that people are altruistic:

A) reinforces the basic economic notion of self-interested rational behavior.
B) challenges the basic economic notion of self-interested rational behavior.
C) cannot be modeled into utility functions.
D) assumes that marginal benefits of certain activities will not be subject to diminishing returns.

Question 30

Use the following to answer question:
Figure 18.1
(Figure 18.1) Suppose that people selling their homes fall prey to the sunk cost fallacy, refusing to sell at the going market price to avoid a nominal loss during an economic downturn. What price might these homeowners try to sell their homes for?

A) $120,000
B) $150,000
C) $100,000
D) any price less than $120,000

Question 31

In an experiment, each subject observed a random spin of a wheel that showed values from 0 to 100. The subjects were then asked to guess the number of African countries in the United Nations. If the subjects were affected by anchoring, the researchers likely found _____ correlation between the number on the wheel and the subject's guess.

A) a negative
B) a positive
C) zero
D) a random

Question 32

Peter said, "It's time to bring our troops home from Afghanistan." Ava responded, "We need to keep our troops in Afghanistan or the deaths of all the soldiers who lost their lives fighting will be wasted." What behavior economics bias was Ava committing?

A) mental accounting
B) nominal loss aversion
C) rational ignorance
D) sunk cost fallacy

Question 33

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

A) not acting as if money is fungible.
B) using mental accounting.
C) not using mental accounting.
D) risk-inconsistent.

Question 34

Altruism is:

A) making decisions using heuristic reasoning.
B) self-interested acts that minimize a person's objective function.
C) self-interested acts that maximize a person's objective function.
D) unselfish concern for the welfare of others.

Question 35

Which of the following statements is (are) consistent with rational addiction?

A) I
B) II
C) I and II
D) III

Question 36

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

A) self-interested; altruism
B) self-interested; greed
C) altruistic; self-interest
D) altruistic; the sunk cost fallacy

Question 37

The sunk cost fallacy is the:

A) principle that sunk costs matter more and more with the passage of time.
B) mistaken belief that one should consider sunk costs when making decisions.
C) idea that people ignore experience when making future decisions.
D) correct belief that past investments can be recovered from future actions.

Question 38

The theory that accounts for "rational addiction" reveals that:

A) consumers who use drugs are exhibiting irrational decision making.
B) addiction is most common among those earning six figure incomes.
C) consumers consider both the lifetime costs and benefits (utility) of addiction.
D) addiction cannot be classified as rational.

Question 39

Use the following to answer question:
Figure 18.2
(Figure 18.2) The graph shows the demand and supply curves for Bryce Harper's rookie baseball card. If baseball card collectors, who are loss-averse, originally paid $6 for Harper's card, the current market for Harper's card will be characterized by:

A) 3 million cards being traded.
B) an excess supply of 3 million cards.
C) an excess demand of 3 million cards.
D) 5 million cards being traded.

Question 40

Behavioral economics:

A) invalidates most of the standard economic models because it is difficult to account for irrational behavior.
B) suggests that people are even more rational and calculating than suggested by standard economic models.
C) concludes that, at least for durable goods, demand curves and supply curves both slope upward.
D) provides insights that can, in many cases, easily be accounted for by standard economic models.

Question 41

In competitive markets, people who have systemic biases are likely to:

A) increase over time.
B) exit the market over time or adjust their behaviors.
C) have a comparative advantage over their rational counterparts.
D) never enter markets and participate in them.

Question 42

How might health clubs price their membership plans to take into account that people are overly optimistic about how committed they are to their exercise goals?

Question 43

A furniture store offers customers no payments for one year on all new purchases. Spendthrift Sam takes advantage of the promotion and buys a new bedroom set, despite only being able to make minimal monthly payments on his credit card balances. What behavioral bias is Sam displaying?

Question 44

While on a once-in-a-lifetime road trip, Mr. Jingles had numerous restaurant meals at roadside diners, each time tipping his waitress 20% of the bill. Which basic economic assumption is Mr. Jingles violating?

Question 45

What is econometrics?

A) a bias in which people overemphasize small risks while ignoring large risks
B) the use of statistical and analytical techniques to test economic theory
C) the use of mathematical theory to speculate on cause and effect
D) the branch of economics that studies psychological biases

Question 46

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:

A) lab experiment.
B) field experiment.
C) natural experiment.
D) free-rider experiment.

Question 47

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

Question 48

Which of the following is (are) shortcomings of lab experiments?

A) II
B) I and II
C) III
D) I, II, and III

Question 49

In a study to examine altruistic behavior, an economics professor recruits college students to participate in a game. The game consists of teams of two, where one person is the proposer and the other the responder. The proposer receives a sum of money and must decide how to split the money with the responder. If the responder likes how the money was split, each person receives the determined amount. If the responder rejects the split, neither player receives any money. This study is an example of a:

A) Pigouvian conjecture.
B) lab experiment.
C) natural experiment.
D) path-dependent experiment.

Question 50

Define or describe the following terms.

Question 51

Suppose that a firm's potential customers succumb to the endowment effect. Explain how a firm could take advantage of this bias.

Question 52

An infomercial is selling a thigh toner for either $99 or three monthly payments of $39 (in which the first payment occurs immediately and remaining payments occur at the end of the next two months).

Question 53

Which of the following statements is (are) TRUE?

A) I
B) II
C) III
D) II and III

Question 54

Researchers examined the effect of hurricanes on Florida counties to see how storms affect local labor markets. Because the path and intensity of hurricanes are random, the researchers are conducting a:

A) compensating differential study.
B) hedonic study.
C) natural experiment.
D) Euclidian experiment.

Question 55

Yesterday Melinda bought a ticket for today's show. She has a splitting 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?

Question 56

Give an example of each of the following systematic biases.

Question 57

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?

Question 58

Amazon.com changed its prices based on customers' geographic location to determine how price changes affect sales. This is an example of a:

A) field experiment.
B) permit study.
C) natural experiment.
D) Coase experiment.

Question 59

An economist sent out numerous résumés to businesses; all were identical except that some of the résumés had "African American-sounding" names and others "white-sounding" names. The economist was interested to see whether a person's name affected the callback rate. This study is an example of a:

A) field experiment.
B) contrived experiment.
C) natural experiment.
D) clinical trial.

Question 60

Every Monday, two college students, Justin and Danielle, make plans to study on the weekend. If Justin is time-consistent and Danielle is time-inconsistent, what happens over the weekend?

Question 61

Mary recently bought a kayak for $700 that she values at $1,000. Mary's friend, Kathy, offered to buy the kayak from her for $1,000, but Mary turned her down. Why did Mary turn the offer down?

Question 62

Jonah 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 Jonah sell the car. Jonah 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 Jonah exhibiting?

Question 63

A recent willingness-to-pay survey asked respondents to value the waters of Salem Sound. The respondents were asked what they would be willing to pay to help protect the water. They were given the following choices: $10, $40, $100, $300, $650, $1,000, $3,000, $10,000 or fill in a value for some other amount. What type of behavioral bias will be captured by this question the way it is written?

Question 64

In 1992, New Jersey raised its minimum wage, but Pennsylvania, a neighboring state, did not. What type of experiment did this change set up?

Question 65

Chris purchased a 21-speed road bike for $1,000 but found after a couple of weeks that he didn't ride it that often, so he decided to sell it. He listed the bike on a local bike selling Web site and received several offers less than $1,000, but he refuses to sell for less than what he paid for it. Explain the mistake that Chris is making.

Question 66

How might firms conduct field experiments?

Question 67

What are the shortcomings of lab experiments?

Question 68

Many people purchase toys with the notion that they will appreciate in value over time. Assume the following graph represents the market for collectible toys with initial equilibrium at point A. What price will the sellers agree to if the market for collectible toys declines suddenly to D₂ and they are subject to sunk cost fallacy? Explain.

Question 69

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.

Question 70

Consider a game in which each of three men is given $20. All three must secretly decide whether they will contribute any part of their $20 to a trust fund. At the end of the game, each player will receive 40% of the total money contributed to the trust fund, in addition to any of the remaining $20 that he is holding.

Question 71

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

Question 72

Sean doesn't like to wait to purchase items that he wants, but Calvin prefers to pay for things he 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 Sean is a hyperbolic discounter and if his per month discount rates are 50% for the first two months and 2% thereafter, which will he prefer?

Question 73

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.

Question 74

Explain the behavior bias being made in the following scenarios.

Question 75

On President Obama's reelection Web site, there was a place to donate money. A person could choose to donate $35, $50, $100, $250, $500, $1,000, $5,000 or fill in a value for some other amount. What behavioral bias was the President's Web site trying to take advantage of by providing information on suggested donations?

Question 76

Explain whether the following statement does or does not exhibit time inconsistency: "A person prefers $100 today to $150 one year from now but prefers $150 in seven years to $100 in six years."

Question 77

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

Question 78

Abigail keeps her money in specific accounts for specific purposes. For example, when she saves for a car, she has a car savings account. What type of framing bias is Abigail exhibiting?

Question 79

What advantages do natural experiments and field experiments have over lab experiments?