Deck 10: Consumer Choice and Behavioral Economics

Question 1

Table 10-2 above shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods.

-Refer to Table 10-2. Holding prices constant, when Keira's income changed from $18 to $23, what happens to her total utility and to the marginal utilities of the last cup of soup and the last sandwich purchased?

A) Her total utility increases but the marginal utilities of the last cup of soup and the last sandwich consumed decrease.
B) Her total utility, the marginal utility of the last cup of soup consumed, and the marginal utility of the last sandwich consumed all increase.
C) Her total utility decreases but the marginal utilities of the last cup of soup and the last sandwich consumed increase.
D) Her total utility and the marginal utility of the last cup of soup consumed increase but marginal utility of the last sandwich consumed decreases.

Answer 1

Her total utility increases but the marginal utilities of the last cup of soup and the last sandwich consumed decrease.

Question 2

Which of the following statements is correct?

A) The income effect analyzes the effect of a change in a consumer's purchasing power as a result of a price change, holding constant the consumer's money income.
B) The income effect refers to the fact that when a consumer's income increases, the consumer will buy more normal goods and less inferior goods.
C) The income effect analyzes the effect of a change in a consumer's money income, holding constant the consumer's purchasing power.
D) The income effect explains why a price change causes the entire demand curve to shift to the right or to the left.

Answer 2

The income effect analyzes the effect of a change in a consumer's purchasing power as a result of a price change, holding constant the consumer's money income.

Question 3

Which of the following statements is correct?

A) The income effect explains why a price change causes both the demand curve and the supply curve to shift to the right or to the left.
B) The income effect explains why a price change causes a movement along a given demand curve.
C) The income effect explains why a price change causes a movement along a given supply curve.
D) The income effect explains why a price change causes the entire demand curve to shift to the right or to the left.

Answer 3

The income effect explains why a price change causes a movement along a given demand curve.

Question 4

-Refer to Table 10-3. The table above shows Lee's marginal utility per dollar from consuming ice cream cones and cans of Lime Fizz Soda. The price of an ice cream cone is $2 and the price of Lime Fizz Soda is $1. Use this information to select the correct statement.

A) We cannot determine how many ice cream cones and cans of Lime Fizz Soda Lee will consume without knowing what his budget is.
B) To maximize his utility Lee should consume 1 ice cream cone and 5 cans of Lime Fizz Soda.
C) We cannot determine how many ice cream cones and cans of Lime Fizz Soda will maximize Lee's utility because we are given only the marginal utility per dollar values. We also need to know the marginal utility for each quantity.
D) If Lee has an unlimited budget he will maximize his utility by buying only Lime Fizz Soda.

Question 5

-Refer to Table 10-4. For steak and cheese sandwiches and grilled chicken sandwiches, the table contains the values of the marginal utility (MU) and marginal utility per dollar (MU/P) for Mabel Jarvis. Mabel has $14 to spend on steak and cheese sandwiches and grilled chicken sandwiches. Which of the following statements is false?

A) The price of steak and cheese sandwiches is $4. The price of grilled chicken sandwiches is $2.
B) If Mabel maximizes her utility she will buy three grilled chicken sandwiches.
C) If Mabel maximizes her utility she will buy two steak and cheese sandwiches.
D) We do not have enough information to determine how many sandwiches Mabel will buy to maximize her utility.

Question 6

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

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 7

Arnie Ziffel has $20 per week to spend on any combination of pineapples and green tea. The price of a pineapple is $4 and the price of a bottle of green tea is $2. The table below shows Arnie's utility values. Use the table to answer the questions that follow the table.

a. Complete the table by filling in the blank spaces.
b. Suppose Arnold purchases 4 pineapples and 2 bottles of green tea. Is he consuming the optimal consumption bundle? If so, explain why. If not, what combination should he buy and why?

Question 8

Lilly Davis has $5 per week to spend on any combination of ice cream and candy. The price of an ice cream cone is $2 and the price of a candy bar is $1. The table below shows Lilly's utility values. Use the table to answer the questions that follow the table.


a. Complete the table by filling in the blank spaces.
b. Suppose Lilly purchases 2 ice cream cones and 1 candy bar. Is she consuming the optimal consumption bundle? If so, explain why. If not, what combination should she buy and why?

Question 9

By reserving half of the tickets available for her 2018 Reputation concert tour for sale to people registered as "verified fans", Taylor Swift hoped to

A) charge those fans a much higher price than the face value of the tickets.
B) completely eliminate scalpers from purchasing and reselling tickets.
C) recoup the profits made if and when those tickets were resold.
D) reduce the number of tickets bought by scalpers.

Question 10

Taylor Swift's approach to selling tickets to her 2018 Reputation concert tour resulted in

A) every seat filled at each concert because no tickets ended up being resold by scalpers.
B) the tour setting a record for the highest-grossing concert tour in U.S. history, but due to high resale prices, there were empty seats at some of her concerts.
C) very low revenue, with Swift losing a total of $50 million from the tour.
D) scalpers purchasing a majority of the concert tickets when they went on sale and earning a bigger profit from the tour than did Taylor Swift.

Question 11

The use of celebrity endorsements can increase brand recognition and sales, but partnering with the wrong celebrity can have a negative impact on a company. Two recently successful partnerships are Under Armour's teaming with Dwayne Johnson for their Project Rock 1 sneaker that sold out in only 30 minutes following its release, and Coca-Cola partnering with Selena Gomez for its "Share a Coke and a Song" campaign. On the flip side, Nike, who signed an endorsement deal with Tiger Woods in 2000, saw sales fall by $1.7 million and lost over 100,000 customers when the company announced it was standing by the golfer following his infidelity scandal. The article discusses four tips on choosing the correct celebrity endorser:
1. Make sure the product actually fits the endorser. There needs to be consistency between the product and celebrity.
2. Make sure the product performs as advertised, or risk negative customer perception of both the product and the endorser.
3. Choose drama-free endorsers that fit the values of the company and are not involved in any type of scandal.
4. Avoid endorsers that promote anything and everything, as customers recognize authentic and unauthentic promotion.
Source: Soline Demenois, "Why Celebrity Endorsement Works," therestlesscmo.com, October 17, 2019

-Refer to the Article Summary. Economists refer to an increase in sales due to celebrity endorsements, such as Under Armour's sales increase from its partnership with Dwayne Johnson, as being the result of

A) network externalities.
B) the endowment effect.
C) social influence.
D) the ultimatum game.

Question 12

The use of celebrity endorsements can increase brand recognition and sales, but partnering with the wrong celebrity can have a negative impact on a company. Two recently successful partnerships are Under Armour's teaming with Dwayne Johnson for their Project Rock 1 sneaker that sold out in only 30 minutes following its release, and Coca-Cola partnering with Selena Gomez for its "Share a Coke and a Song" campaign. On the flip side, Nike, who signed an endorsement deal with Tiger Woods in 2000, saw sales fall by $1.7 million and lost over 100,000 customers when the company announced it was standing by the golfer following his infidelity scandal. The article discusses four tips on choosing the correct celebrity endorser:
1. Make sure the product actually fits the endorser. There needs to be consistency between the product and celebrity.
2. Make sure the product performs as advertised, or risk negative customer perception of both the product and the endorser.
3. Choose drama-free endorsers that fit the values of the company and are not involved in any type of scandal.
4. Avoid endorsers that promote anything and everything, as customers recognize authentic and unauthentic promotion.
Source: Soline Demenois, "Why Celebrity Endorsement Works," therestlesscmo.com, October 17, 2019

-Refer to the Article Summary. One explanation for the increase in product sales because of celebrity endorsements, such as Selena Gomez's endorsement of Coca-Cola, is that people seem to receive ________ from goods they believe are popular.

A) more utility
B) diminishing utility
C) greater network externalities
D) increased path dependency

Question 13

Consider the following hypothetical scenarios:
Scenario A: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45. The sales attendant at the store tells you that the pair of jeans you wish to buy is on sale for $160 at another store, located about a 20-minute drive away.

Scenario B: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45. The sales attendant at the store tells you that the t-shirt you wish to buy is on sale for $30 at another store, located about a 20-minute drive away.
Based on standard economic theory, under which scenario would you make the 20-minute trip to the other store?

A) only scenario A because the pair of jeans is a very expensive item and $15 saving is quite substantial
B) only scenario B because a $15 saving amounts to a substantial discount (about 33 percent)
C) in either scenario if I think a $15 savings is worth the 20-minute trip
D) in neither scenario because a $15 savings is never worth a 20-minute trip

Question 14

Following the 2016 season, the San Francisco Giants signed pitcher Mark Melancon to a 4-year, $62 million contract. Melancon, who pitched poorly during 2017 and 2018, was still owed $28 million over the next two years, which the Giants would have to pay him even if they decided to release him to pursue potentially better pitchers. The Giants decided to keep Melancon on their roster. If the Giants decision to keep him was based on the $28 million still owed, economists would say that the Giants

A) committed the error of failing to ignore sunk costs.
B) were experiencing what is known as the endowment effect.
C) were ignoring nonmonetary opportunity costs.
D) were being realistic about their future behavior.

Question 15

A study discussed in the Apply the Concept feature in the text found that there is ________ that some consumers are not well aware of prices, even for goods they buy regularly.

A) no evidence
B) substantial evidence
C) little evidence
D) no reason to believe

Question 16

All of the following are key trends that have hurt department stores except

A) consumers have turned to buying on websites which offer lower prices, greater selection, and convenience.
B) building rent in shopping malls has become so expensive that department stores are having trouble earning profits despite experiencing record sales volume.
C) department stores grew dependent on attracting customers to shopping malls, which have been declining in popularity since the 1990s.
D) consumer tastes in clothing have shifted from traditional mass-produced clothing to fast-fashion clothing that is usually sold in smaller stores or online.

Question 17

Following the 2016 season, the San Francisco Giants signed pitcher Mark Melancon to a 4-year, $62 million contract. Melancon, who pitched poorly during 2017 and 2018, was still owed $28 million over the next two years, which the Giants would have to pay him even if they decided to release him to pursue potentially better pitchers. In making the decision whether to keep or release Melancon, the $28 million still owed to him

A) should be ignored since it represents a sunk cost.
B) should be considered since it is money the team has spent and needs to recoup.
C) should be ignored only if the Giants can increase their profit by more than $28 million over the next two years.
D) should be considered since it is money the Giants could have used to invest in other players.

Question 18

Wilbur Rickhiser, a financial advisor, recently told one of his clients: "The biggest mistake you can make is to hold onto a stock for too long in order to avoid a loss. Let's say you bought a stock for $50 per share but that six months later the price fell to $40 after a poor earnings report. Many of my clients in this situation will hold the stock, hoping the price will later rise above $50. In most cases like this the price does not rise and may even fall. You must know when to cut your losses." Which of the following is the best explanation for Rickhiser's advice?

A) People sometimes buy stocks because other people are buying them or they want to appear to be fashionable.
B) People sometimes make mistakes when they buy stocks because of the endowment effect.
C) People sometimes make mistakes when they buy stocks or when they buy goods and services: they ignore the monetary opportunity costs of their choices.
D) People often fail to ignore the sunk costs of their decisions. The cost of the stock bought at $50 per share is a sunk cost.

Question 19

Once a sports team signs a player to a guaranteed contract, the value of that contract becomes a nonmonetary opportunity cost.

Question 20

-Refer to Figure 10-5. What is the marginal rate of substitution for one bar of chocolate between g and h?

A) $\frac{1}{3}$ of a cookie.

B) $\frac{1}{2}$ of a cookie.

C) 2 cookies.

D) 3 cookies.

Question 21

-Refer to Figure 10-5. What is the marginal rate of substitution for one bar of chocolate between h and j?

A) $\frac{1}{8}$ of a cookie.

B) $\frac{1}{4}$ of a cookie.

C) 2 cookies.

D) 4 cookies.