Deck 1: Rationality, Irrationality, and Rationalization

Question 1

Behavioral economics is the study of how _______________human behavior impacts the allocation of scarce resources.

A) Predicted.
B) Observed.
C) Irrational.
D) Rational.

Answer 1

Observed.

Question 2

Behavioral economics is the study of irrational behavior.

Answer 2

False

Question 3

All of the following are motivations for employing behavioral models

A) Strategic.
B) Therapeutic.
C) Unifying.
D) Academic.

Answer 3

Unifying.

Question 4

If $x_{1}$ and $x_{2}$ are both normal goods and $U\left(x_{1}, x_{2}\right)$ , then $U\left(x_{1}, x_{2}\right)$ necessarily increases if

A) $x_{1}$ increases.
B) $x_{2}$ increases.
C) $x_{1}$ increases, $x_{2}$ decreases.
D) $x_{1}, x_{2}$ increase.

Question 5

Figure 1 shows three utility curves. Which of the following statements is not true?

A) Utility increases as you move upwards along a utility curve.
B) On a single utility curve, the level of utility is constant.
C) Utility decreases as you move to utility curves towards the origin.
D) Utility is an ordinal measure.

Question 6

Utility maximization assumes the following except:

A) Individuals are only concerned with normal goods.
B) Individuals have a set of stable preferences.
C) Individuals know how their choice will result in a particular outcome.
D) Individuals have the ability to make the optimal choices.

Question 7

The set of tangency points between a utility function and a budget constraint at various income levels is called

A) Optimal demand.
B) Income expansion path.
C) Marginal Utility.
D) Normal goods.

Question 8

A consumer typically buys toothpaste A. He is watching TV one day and sees an advertisement about toothpaste B. He realized that toothpaste B has been available for purchase as long as toothpaste A, but he never knew it existed. What assumption is violated?

A) Transitive Preferences.
B) Increasing utility for normal goods.
C) Complete Preferences.
D) Stable Preferences.

Question 9

The concept that describes the firm's solution to profit maximization is

A) Marginal cost equals marginal revenue.
B) Maximize marginal revenue.
C) Minimize cost.
D) Marginal revenue equals fixed costs.

Question 10

The concept of bounded rationality refers to:

A) A utility function that cannot be fully described.
B) Individuals unable to use "rule-of-thumbs" to make decisions.
C) Only individuals who have been well-trained in economics can make the optimal decisions.
D) Limits on cognitive abilities, access to information and limits on other necessary resources keep individuals from achieving utility maximization.

Question 11

What types of tools does a rationally bounded individual use to make a decision?

A) Calculator.
B) Advertising.
C) "Rule of thumbs" or heuristics.
D) His friends.

Question 12

Suppose an individual has a utility function $U\left(x_{1}, x_{2}\right)$ and budget constraint $p_{1} x_{1}+p_{2} x_{2} \leq$ $y$ . He employs the rule-of-thumb that says buy $x_{2}$ if and only if $p_{2}<p_{1}$ . If $p_{1}<p_{2}$ , then the individual's rule-of-thumb results in optimal demand if he has the following utility function:

A) $U\left(x_{1}, x_{2}\right)=2 \mathrm{x}_{1}+2 x_{2}$
B) $U\left(x_{1}, x_{2}\right)=\ln \left(x_{1}\right)+\sqrt{ }\left(x_{2}\right)$
C) $U\left(x_{1}, x_{2}\right)=\mathrm{x}_{1}^{\frac{1}{3}} x_{2}^{\frac{2}{3}}$
D) $U\left(x_{1}, x_{2}\right)=\ln \left(x_{1}\right)+\ln \left(x_{2}\right)$

Question 13

What is the main difference between a behavioral model and a procedurally rational model.

A) Behavioral models are not based on any particular assumptions, whereas procedurally rational models are.
B) Procedurally rational models do not depart from the rational model, whereas behavioral models do.
C) Behavioral models tell us why individuals make certain choices, whereas procedurally rational models do not.
D) There are no differences.

Question 14

A relationship between $x$ and $y$ has been estimated in an experimental setting. If this relationship can be broadly applied outside of the laboratory, then the experiment is considered:

A) Internally Valid.
B) Externally Valid.
C) Properly Randomized.
D) Relevant.

Question 15

An individual's utility function is always expressed in terms of dollars or money.

Question 16

$U\left(x_{1}, x_{2}\right)$ increases if $x_{1}$ and $x_{2}$ increase.

Question 17

If preferences are complete and transitive then utility curves will never intersect.

Question 18

Optimal demand for a consumer is given by $x_{1}>0$ , and $x_{2}=0$ . This is a corner solution.

Question 19

If an individual has a strictly concave utility function and a solution to the utility maximization exists, then it must be a corner solution.

Question 20

Assume there is an internal solution to the utility maximization problem. Utility maximization occurs where the ratio of the marginal utility of $x_{1}$ to the marginal utility of $x_{2}$ equals the ratio of $p_{1}$ to $p_{2}$ .

Question 21

There are situations in which the assumption of the rational model is violated, but if it is still a close approximation of behavior, then the conclusions are still valid.

Question 22

Using the "as-if" approach can help us to understand the decision-maker's motivations for their choices.

Question 23

The solution to the utility maximization and the profit maximization problems are similar in the nature in that optimization occurs at a point of tangency between the objective function (utility or production functions) and relative prices.

Question 24

A behavioral model can rationalize any type of behavior.

Question 25

An individual is procedurally rational if their decision is the result of logical deliberation.

Question 26

If an individual is procedurally rational then they arrive at the same decision as would an individual using the rational model.

Question 27

One reason why experiments are useful is that they allow a highly controlled setting in which behaviors and theoretical models can be appropriately tested.

Question 28

Suppose an experiment wants to test the effect of $x$ on $y$ on the general public. There are two sessions. In the first session $x=2$ and in the second session $x=4$ . The subject pool in the first session consisted of 50 males and the subject pool in the second session consisted of 50 females. The design is internally valid.

Question 29

Let $U\left(x_{1}, x_{2}\right)=\ln \left(x_{1}\right)+\ln \left(x_{2}\right)$ and $p_{1} x_{1}+p_{2} x_{2} \leq y$ . Find the optimal demand for $x_{1}$ in terms of $y, p_{1}$ .

Question 30

Let $U\left(x_{1}, x_{2}\right)=\mathrm{x}_{1}+x_{2}$ and $p_{1} x_{1}+p_{2} x_{2} \leq y$ , where $p_{1}<p_{2}$ . Find the optimal demand for $x_{1}$ and $x_{2}$ in terms of $y, p_{1}, p_{2}$ .

Question 31

There are three bundles of the same two goods: $\left(x_{1}, x_{2}\right),\left(\widetilde{x_{1}}, \widetilde{x_{2}}\right),\left(\widehat{x_{1}}, \widehat{x_{2}}\right)$ . If $y>z$ then $\mathrm{y}$ is preferred to $\mathrm{z}$ . If $y \sim z$ then the individual is indifferent between $\mathrm{y}$ and $\mathrm{z}$ . Using $\geqslant$ and $\sim$ describe what it means to have complete preferences.