Deck 7: Behavioral Economics and Game Theory

Question 1

When comparing the standard models in the respective fields of economics and psychology,it is clear that:

A) both economists and psychologists always assume that people behave in a fully rational way.
B) both economists and psychologists always assume that people do not act in a fully rational way.
C) neither economists nor psychologists always assume that people behave in a fully rational way.
D) economists generally assume that people behave in a rational way, whereas psychologists generally do not assume this.
E) psychologists generally assume that people behave in a rational way, whereas economists generally do not assume this.

Answer 1

economists generally assume that people behave in a rational way, whereas psychologists generally do not assume this.

Question 2

Behavioral economics studies how ________ influences the decision-making process.

A) the weather pattern
B) rational economic action
C) human psychology
D) the financial sector
E) macroeconomics

Answer 2

human psychology

Question 3

A ________ effect occurs when an answer depends on how a question is asked or when a decision is influenced by the way alternatives are presented.

A) framing
B) hot-hand
C) Hayekian
D) priming
E) behaviorist

Answer 3

framing

Question 4

In 2002,Daniel Kahneman was awarded the Nobel Prize in Economics for "having integrated insights from psychological research into economic science,especially concerning human judgment and decision-making under uncertainty."
Source: "The Price in Economics 2002: Press Release." Nobelprize.org.12 Oct 2012.www.nobelprize.org/nobel_prizes/economics/laureates/2002/press.html
Based on this information,with which academic field would Daniel Kahneman most likely identify?

A) economics
B) industrial-organizational sociology
C) evolutionary biology
D) English
E) behavioral economics

Question 5

A consumer who adheres to bounded rationality is:

A) a fully rational consumer who behaves like an all-knowing supercomputer when making cost-benefit calculations.
B) a completely irrational consumer who is unable to use logic to compare costs and benefits.
C) neither capable of performing the problem-solving that traditional economic theory assumes nor is inclined to do so.
D) rational only in situations that involve market prices.
E) never rational in situations that involve market prices.

Question 6

In 2011,Edward Cartwright,a behavioral economist,gave credit to the Nobel Prize-winning economist Herbert Simon for launching what Cartwright calls the "you cannot be serious attack" on the standard economic model.Cartwright cites a paper published by Simon in 1955 where the author uses the standard economic model to solve elegantly how a rational person should behave.After solving an equation for this rational person's optimal behavior,Simon states:
My first empirical proposition is that there is a complete lack of evidence that,in actual human choice situations of any complexity,these computations can be,or are in fact,performed.
Source: "A Behavior Model of Rational Choice." Quarterly Journal of Economics (1955): 104.
This statement by Simon can be best described as a call to:

A) governments for increased education spending so that more decision-makers can and will perform the computations to which Simon is referring.
B) citizens to do their part to reduce the complexity of all human choice situations.
C) economists to replace Homo economicus in economic thinking with something more humanlike.
D) economists to continue to use Homo economicus to guide their understanding of the complex nature of human decision-making.
E) the United States Department of Economic Rationality to impose a new bylaw prohibiting the use of the standard economic model in academic research papers.

Question 7

Behavioral economics studies:

A) economy-wide phenomena such as real output, inflation, unemployment, and business cycles.
B) the decision-making processes of rational, self-interested economic actors.
C) all aspects of the markets and institutions that make up the financial system.
D) the implications of trade among individuals, firms, and countries.
E) how human psychology influences the decision-making process.

Question 8

________ is the field of economics that studies how human psychology influences the decision-making process.

A) Public finance
B) Psychology
C) Behavioral economics
D) Sociology
E) Macroeconomics

Question 9

The standard economic model assumes people can be approximated by ________,who is assumed to be fully rational,calculating,and selfish; has unlimited computational ability; and never makes systematic mistakes.

A) Homo consumus
B) Homo microcus
C) Homo demandcurvius
D) Homo economicus
E) Homo elasticious

Question 10

Most economic theory proceeds as though economic actors are all rational,self-interested decision-makers.Economists refer to this hypothetical rational,self-interested decision-maker as:

A) Homo consumus.
B) Homo microcus.
C) Homo demandcurvius.
D) Homo economicus.
E) Homo elasticious.

Question 11

________ occur when the ordering of the questions that are asked influences the answers.

A) Rational expectations
B) Hot-hand effects
C) Fairness effects
D) Priming effects
E) Quasi-rational effects

Question 12

Behavioral economics seeks to dethrone ________ and replace him with something "more human."

A) Homo rationalimus
B) Homo economicus
C) Homo macrus
D) Homo sapiens
E) Homo stevejobsimus

Question 13

Whenever consumers make decisions with limited information,the decision reflects:

A) perfect rationality.
B) perfect irrationality.
C) bounded rationality.
D) unbounded rationality.
E) confounded rationality.

Question 14

Priming effects:

A) occur when the ordering of the questions that are asked influences the answers.
B) occur when the ordering of the questions that are asked does not influence the answers.
C) occur when a decision-maker makes a rational decision based on a complete assessment of the costs and benefits.
D) are observed only in the context of political affairs.
E) are observed only when the decision-maker has an advanced graduate degree in particle physics.

Question 15

For mathematical convenience,assuming that people are fully rational and self-interested:

A) clearly does not mean that people really are fully rational and self-interested all the time.
B) clearly means that people really are fully rational and self-interested all the time.
C) is a practice never followed by economists but is often followed by psychologists.
D) is a practice always followed by behavioral economists.
E) is a practice that is banned in most states by professional ethics laws.

Question 16

In 1990,Richard Thaler,a behavioral economist,said the following with respect to the standard economic model:
The problem seems to be that while economists have gotten increasingly sophisticated and clever,consumers have remained decidedly human.
Which statement below best describes what Thaler implies in this sentence?

A) The standard economic model should be dumbed down so that more citizens can understand it.
B) The standard economic model fails to account for the fact that human beings generally do not act like Homo economicus.
C) Economists should educate citizens to become more sophisticated and clever so that their actions better fit the standard economic model.
D) The behavioral economic model needs to be abandoned.
E) Human nature is neither clever nor sophisticated.

Question 17

The traditional economic model conceptualizes the economy as made up of infinitely calculating,unemotional maximizers that have been called:

A) Homo consumus.
B) Homo economicus.
C) Homo microcus.
D) Homo demandcurvius.
E) Homo elasticious.

Question 18

Behavioral economists draw on insights from ________ to explore how people behave in economic settings.

A) experimental psychology
B) experimental biology
C) evolutionary biology
D) astrology
E) theoretical physics

Question 19

The hypothetical species Homo economicus is acutely aware of opportunities in the environment and:

A) strives to maximize the benefits received from each course of action while minimizing the costs.
B) strives to minimize the benefits received from each course of action while maximizing the costs.
C) strives to equalize the benefits received and costs incurred from each course of action.
D) takes an action only if the benefits to society of this action outweigh the costs to society of this action.
E) never takes action because of the understanding that all individual actions are to the detriment of society.

Question 20

A relatively new area in the field of economics called ________ economics studies people who appear to make choices that do not seem rational in an economic sense.

A) business-cycle
B) financial
C) behavioral
D) labor
E) entrepreneurial

Question 21

Amanda and Brenda are considering playing a game called Matching Twenties.In this game,Amanda and Brenda will each place a $20 bill on the table.Both players will then toss a fair coin.If both Amanda and Brenda toss heads or both Amanda and Brenda toss tails,Amanda wins the $40 on the table.If one woman tosses heads and the other tosses tails,Brenda wins the $40 on the table.
Amanda decides that she is not willing to play this game because a loss of $20 to Brenda would cause her to lose more utility than she would gain if she won $20 from Brenda.Which concept best explains Amanda's choice not to play the game?

A) hedonic editing
B) gain aversion
C) loss aversion
D) signaling
E) gain-loss asymmetry

Question 22

The ________ bias leads decision-makers to try to protect what they have,even when an objective evaluation of their circumstances suggests that a change would be beneficial.

A) egocentric
B) choice-supportive
C) time-saving
D) status quo
E) outcome

Question 23

Suppose 5,000 students were split into two groups of 2,500.Both groups were first presented with an image of a new high-end pair of shoes produced by UGG,a footwear company.
The first group was given the following statement and then asked the following question: "The normal retail price of these shoes is $200.Would you be willing to pay $125 for them?"
The second group was given the following statement and then asked the following question: "The normal retail price of these shoes is $450.Would you be willing to pay $125 for them?"
Suppose that 13% of the students in the first group answered yes and that 63% of the students in the second group answered yes.It is likely that more students in the second group were willing to pay $125 for the pair of shoes because they were told the normal price was much higher.This is an example of a ________ effect in decision-making.

A) bootstrapping
B) market-making
C) utilitarian
D) framing
E) psychosomatic

Question 24

Consider the following scenario to answer the questions that follow.
Suppose a large electronics retailer has 1,000 salespeople who sell new computers and new computer service plans. The retailer is interested in increasing the percentage of customers who purchase a computer service plan (or warranty) with their new computers. The retailer decides to test two sales pitches by splitting its salespeople into two groups of 500 and giving each group a slightly different sales pitch to recite to customers prior to the consummation of a computer sale.
The first group of salespeople recites the following sales pitch: "Before you pay, I wanted to let you know that all of our new computers come automatically with a warranty that adds $150 to the purchase price. If you wish to opt out and decline the warranty, all you need to do is fill out and sign a form attesting to your refusal."
The second group of salespeople recites the following sales pitch: "Before you pay, I wanted to let you know that, although none of our new computers come automatically with a warranty, you can purchase one by adding $150 to the purchase price. If you wish to opt in and accept the warranty, all you need to do is fill out and sign a form attesting to your acceptance."
Suppose that 34% of customers hearing the sales pitch from the first group purchased the warranty and that 34% of the customers hearing the sales pitch from the second group purchased the warranty.The managers concluded that ________ were not present,so it did not matter how the question about purchasing the warranty was asked.

A) rational effects
B) electronic aptitude effects
C) concerns about fairness
D) framing effects
E) fairness effects

Question 25

Suppose 1,000 college students are separated into two groups.The first group is asked the following questions in this order: "How happy are you with your college experience?" followed by "How many friends have you made in college?"
The second group is asked the following questions in this order: "How many friends have you made in college?" followed by "How happy are you with your college experience?"
Further suppose that students in the second group who reported that they had met more friends in college reported being much happier than did similar students in the first group.This is an example of ________ effects.

A) rationality
B) priming
C) dorm-room
D) financial aid
E) felinarian

Question 26

Consider the following scenario to answer the questions that follow.
In 2000, researchers Brigitte Madrian and Dennis Shea analyzed the 401(k) savings behavior of employees in a large U.S. corporation before and after an interesting change in the company 401(k) plan.
Before the plan change, employees were not automatically enrolled as participants in the company 401(k) plan upon being hired and were required to complete paperwork if they wanted to opt in. After the plan change, new employees were automatically enrolled in the 401(k) plan and were required to complete paperwork if they wanted to opt out. The amount of time and effort required to either opt in or opt out was approximately equal. None of the economic features of the plan changed.
The researchers found that 401(k)participation is significantly higher under automatic enrollment.One possible explanation for this finding is that:

A) there was a large shift in the employees' preferences for savings the day plan changes were implemented.
B) framing effects have no influence in employee 401(k) participation decisions.
C) framing effects have a significant influence in employee 401(k) participation decisions.
D) employees will always choose whether to participate based entirely on the economic features of the plan, not the way the decision to participate is framed.
E) employees are acting rationally in the context of standard economic models.

Question 27

Suppose 500 residents of a dormitory are separated into two groups.The first group is asked the following questions in this order: "How happy are you with your experience living in the dormitory?" followed by "To how many social gatherings held in the dormitory have you been invited?"
The second group is asked the following questions in this order: "To how many social gatherings held in the dormitory have you been invited?" followed by "How happy are you with your experience living in the dormitory?
Further suppose that residents in the second group who reported that they had been invited to fewer social gatherings held in the dormitory reported being less happy with their experience living in the dormitory than did similar residents in the first group.This is an example of ________ effects.

A) priming
B) Kahnemanian
C) internal rate of return
D) market capitalization
E) Rothbardian

Question 28

In behavioral economics,the status quo bias is often accompanied by ________,which exists when a person places more value on avoiding losses than attempting to realize gains.

A) loss aversion
B) gain aversion
C) the ambiguity effect
D) the availability heuristic
E) the bandwagon effect

Question 29

Suppose 600 cancer patients have identical diagnoses.The patients are separated into two groups of 300 and asked the following questions regarding a potentially beneficial radiation therapy treatment.
The first group was given the following statement and then asked the following question: "Statistically,950 out of every 1,000 cancer patients survive more than two years following the radiation treatment.Would you be willing to undergo the radiation treatment?"
The second group was given the following statement and then asked the following question: "Statistically,50 out of every 1,000 cancer patients die within the two years following the radiation treatment.Would you be willing to undergo the radiation treatment?"
Suppose that 78% of the patients in the first group answered yes and that 31% of the patients in the second group answered yes.Because the first statement that was given to both groups essentially states the same statistical fact in a different way,the significant difference in the answers recorded for each group is likely an example of a ________ effect in decision-making.

A) placebo
B) Taylorian
C) utilitarian
D) wording
E) framing

Question 30

Suppose 1,000 students were split into two groups of 500.Both groups were first presented with an image of a new high-end pair of jeans produced by Tommy Hilfiger,a clothing company.
The first group was given the following statement and then asked the following question: "The normal retail price of these jeans is $100.Would you be willing to pay $75 for them?"
The second group was given the following statement and then asked the following question: "The normal retail price of these jeans is $250.Would you be willing to pay $75 for them?"
Suppose that 24% of the students in the first group answered yes and that 73% of the students in the second group answered yes.It is likely that more students in the second group were willing to pay $75 for the pair of jeans because they were told the normal price was much higher.This is an example of a ________ effect in decision-making.

A) clothing
B) marketing
C) utilitarian
D) framing
E) psychosomatic

Question 31

Suppose 8,000 residents at an apartment complex are separated into two groups.The first group is asked the following questions in this order: "How happy are you with your experience at the apartment complex?" followed by "To how many social gatherings held at the apartment complex have you been invited?"
The second group is asked the following questions in this order: "To how many social gatherings held at the apartment complex have you been invited?" followed by "How happy are you with your experience at the apartment complex?"
Further suppose that residents in the second group who reported that they had been invited to more social gatherings held at the apartment complex reported being much happier with their experience at the apartment complex than did similar residents in the first group.This is an example of ________ effects.

A) Kahnemanian
B) Rothbardian
C) internal rate of return
D) market capitalization
E) priming

Question 32

Mario knows that,over the long run,it is in his best interest to save at least 10% of his paycheck for retirement.However,each time he receives his weekly paycheck of $1,000,he ends up spending it all and not depositing any into a retirement account.Mario has resolved to contact his employer's human resources department to set up a 401(k)work-sponsored retirement account where the 10% would be deducted automatically from his paycheck before it is issued to him each week.It is apparent from this information that Mario realized that:

A) his intertemporal decisions are inconsistent and he had to take action to make them consistent.
B) his intertemporal decisions are consistent and he had to take action to make them inconsistent.
C) it is better for him to handle sending money to a retirement account than to rely on his employer to send the money to a retirement account on his behalf.
D) he should not be saving for retirement after all because his short-run preferences to spend his entire paycheck are perfectly indicative of his long-run preferences.
E) he should not worry about the future anymore because it will take care of itself.

Question 33

Consider the following scenario to answer the questions that follow.
In 2000, researchers Brigitte Madrian and Dennis Shea analyzed the 401(k) savings behavior of employees in a large U.S. corporation before and after an interesting change in the company 401(k) plan.
Before the plan change, employees were not automatically enrolled as participants in the company 401(k) plan upon being hired and were required to complete paperwork if they wanted to opt in. After the plan change, new employees were automatically enrolled in the 401(k) plan and were required to complete paperwork if they wanted to opt out. The amount of time and effort required to either opt in or opt out was approximately equal. None of the economic features of the plan changed.
A finding of no significant difference in 401(k)plan participation after the plan change provides evidence that employee 401(k)participation decisions are made ________ and ________ effects do not exist in the context of 401(k)plan participation.

A) rationally; rational
B) irrationally; priming
C) rationally; framing
D) irrationally; framing
E) rationally; fairness

Question 34

The ________ is a cognitive bias that leads people to prefer things to change as little as possible.

A) status quo bias
B) gambler's bias
C) hot-hand fallacy
D) gambler's fallacy
E) hot-hand bias

Question 35

________ exists when a person places more value on avoiding losses than attempting to realize gains.

A) The availability heuristic
B) Loss aversion
C) The trait ascription bias
D) The halo effect
E) The availability cascade

Question 36

In 1980,the Schlitz Brewing Company conducted several beer taste tests on live television during NFL football games.One hundred confirmed Budweiser drinkers (who had each signed an affidavit stating that he drank at least 12 bottles of Budweiser each week)were each served a glass of both Schlitz and Budweiser in unmarked containers.After tasting both beers,the members of the group were asked which beer they preferred.Between 45% and 55% of the participants responded that they preferred Schlitz even though they were confirmed Budweiser drinkers.
Which bias can likely explain why the participants in the group displayed such strong brand allegiance to Budweiser prior to the taste test?

A) the availability heuristic
B) the trait ascription bias
C) the availability cascade
D) the status quo bias
E) the Rupertorian effect

Question 37

For the past five years,John S.has been purchasing Citizens of Humanity brand jeans each time he needs a new pair of jeans,even though a different brand,such as RocaWear or Ecko,would in all likelihood bring him more utility per dollar spent.A behavioral economist would suspect John S.is suffering from the ________ bias.

A) egocentric
B) choice-supportive
C) time-saving
D) status quo
E) outcome

Question 38

Consider the following scenario to answer the questions that follow.
Suppose a large electronics retailer has 1,000 salespeople who sell new computers and new computer service plans. The retailer is interested in increasing the percentage of customers who purchase a computer service plan (or warranty) with their new computers. The retailer decides to test two sales pitches by splitting its salespeople into two groups of 500 and giving each group a slightly different sales pitch to recite to customers prior to the consummation of a computer sale.
The first group of salespeople recites the following sales pitch: "Before you pay, I wanted to let you know that all of our new computers come automatically with a warranty that adds $150 to the purchase price. If you wish to opt out and decline the warranty, all you need to do is fill out and sign a form attesting to your refusal."
The second group of salespeople recites the following sales pitch: "Before you pay, I wanted to let you know that, although none of our new computers come automatically with a warranty, you can purchase one by adding $150 to the purchase price. If you wish to opt in and accept the warranty, all you need to do is fill out and sign a form attesting to your acceptance."
Suppose that 84% of customers hearing the sales pitch from the first group purchased the warranty and that 19% of the customers hearing the sales pitch from the second group purchased the warranty.The managers concluded that ________ were likely present and changed company policy such that all salespeople are required to recite the sales pitch given by the first group.

A) fairness effects
B) rational effects
C) electronic aptitude effects
D) concerns about fairness
E) framing effects

Question 39

Stephen C.has been purchasing Fruity Pebbles brand cereal each week for the past two years,even though a different brand,such as Captain Crunch or Rice Krispies,would in all likelihood bring him more utility per dollar spent.A behavioral economist would suspect Stephen C.is suffering from the ________ bias.

A) choice-supportive
B) status quo
C) egocentric
D) time-saving
E) outcome

Question 40

When people want to maintain their current lifestyles and are reluctant to change,they may exhibit what is known as the:

A) hot-hand fallacy.
B) gambler's fallacy.
C) status quo bias.
D) hot-hand bias.
E) gambler's bias.

Question 41

Consider the accompanying decision tree and information to answer the questions that follow.
The decision tree depicts two players (Jane and Aaron) playing an ultimatum game where Aaron is given $1,000 and asked to propose a way of splitting it with Jane. When Jane learns Aaron's proposal, Jane chooses whether to accept or reject the split. If Jane accepts the split, both players receive the money according to Aaron's split proposal. If Jane rejects the split, both players receive nothing. This game will be played only once, so Aaron does not have to worry about reciprocity when making his choice.
There are four sets of payoffs at the terminal nodes of the decision tree. In each node, the dollar amount to the left of the comma represents Aaron's payoff, and the dollar amount to the right of the comma represents Jane's payoff.

Assume that Aaron and Jane are two experimental subjects who follow bounded rationality.What is the likely outcome of the game if Aaron chooses to make an unfair proposal?

A) Jane will accept and Aaron will receive a payoff of $999.
B) Jane will accept and Aaron will receive a payoff of $1.
C) Jane will accept and Aaron will receive a payoff of $0.
D) Jane will reject and Aaron will receive a payoff of $500.
E) Jane will reject and Aaron will receive a payoff of $0.

Question 42

Consider the following scenario to answer the questions that follow.
Sarah and Laura are playing an ultimatum game where Laura is given an eight-slice pizza and asked to propose a way of splitting it with Sarah. When Sarah learns Laura's proposal, Sarah chooses whether to accept or reject the split. If Sarah accepts the split, both players receive the slices of pizza according to Laura's split proposal. If Sarah rejects the split, both players receive nothing. This game will be played only once, so Laura does not have to worry about reciprocity when making her choice. Assume that both players enjoy pizza and each would strictly prefer to eat more pizza than less.
Which of the following is the fairest split proposal Laura can offer?

A) Laura receives three slices and Sarah receives five slices.
B) Laura receives one slice and Sarah receives seven slices.
C) Laura receives two slices and Sarah receives five slices.
D) Laura receives seven slices and Sarah receives one slice.
E) Laura receives four slices and Sarah receives four slices.

Question 43

The ________ game is a common game that behavioral economists use in an experimental setting to study how fairness enters into the rational decision-making process.

A) ultimatum
B) prisoner's dilemma
C) behavioral economics
D) gambler's dilemma
E) hawk-dove

Question 44

Peggy and Marcy are playing an ultimatum game where Peggy is given $500.00 and asked to propose a way of splitting it with Marcy.When Marcy learns Peggy's proposal,Marcy chooses whether to accept or reject the split.If Marcy accepts the split,both players receive the money according to Peggy's split proposal.If Marcy rejects the split,both players receive nothing.This game will be played only once,so Peggy does not have to worry about reciprocity when making her choice.
Which of the following split proposals would Marcy be most likely to accept if she and Peggy were playing the game in an experimental session and both players adhered to bounded rationalism?

A) Peggy receives $449.99 and Marcy receives $50.01.
B) Peggy receives $499.99 and Marcy receives $0.01.
C) Peggy receives $400.00 and Marcy receives $100.00.
D) Peggy receives $350.00 and Marcy receives $150.00.
E) Peggy receives $250.00 and Marcy receives $250.00.

Question 45

The standard economic model of consumer choice assumes that people are ________.

A) risk averse.
B) risk loving.
C) risk neutral.
D) fairness averse.
E) fairness loving.

Question 46

People who are risk averse:

A) prefer a sure thing over a gamble with a higher expected value.
B) choose the outcome with the highest expected value.
C) choose the outcome with the lowest expected value.
D) prefer gambles with lower expected values, but potentially higher winnings, over a sure thing.
E) do not partake in any risky activities.

Question 47

Consider the accompanying decision tree and information to answer the questions that follow.
The decision tree depicts two players (Jane and Aaron) playing an ultimatum game where Aaron is given $1,000 and asked to propose a way of splitting it with Jane. When Jane learns Aaron's proposal, Jane chooses whether to accept or reject the split. If Jane accepts the split, both players receive the money according to Aaron's split proposal. If Jane rejects the split, both players receive nothing. This game will be played only once, so Aaron does not have to worry about reciprocity when making his choice.
There are four sets of payoffs at the terminal nodes of the decision tree. In each node, the dollar amount to the left of the comma represents Aaron's payoff, and the dollar amount to the right of the comma represents Jane's payoff.

What is the likely outcome of the game if Aaron chooses to make a fair proposal?

A) Jane will reject and Aaron will receive a payoff of $999.
B) Jane will reject and Aaron will receive a payoff of $500.
C) Jane will accept and Aaron will receive a payoff of $500.
D) Jane will reject and Aaron will receive a payoff of $1.
E) Jane will reject and Aaron will receive a payoff of $0.

Question 48

Jackie and Rhonda are playing an ultimatum game where Jackie is given $100 and asked to propose a way of splitting it with Rhonda.When Rhonda learns Jackie's proposal,Rhonda chooses whether to accept or reject the split.If Rhonda accepts the split,both players receive the money according to Jackie's split proposal.If Rhonda rejects the split,both players receive nothing.This game will be played only once,so Rhonda does not have to worry about reciprocity when making her choice.Traditional economic theory presumes that:

A) both players are irrational and wish to minimize the payoff to the other player.
B) both players are irrational and wish to maximize their own payoffs.
C) both players are rational and wish to minimize their own payoffs.
D) both players are rational and wish to maximize their own payoffs.
E) the player that proposes the split is fully rational and wishes to maximize his or her own playoff, whereas the player that chooses to accept or reject the split is irrational and wishes to maximize the other player's payoff.

Question 49

Consider the accompanying decision tree and information to answer the questions that follow.
The decision tree depicts two players (Jane and Aaron) playing an ultimatum game where Aaron is given $1,000 and asked to propose a way of splitting it with Jane. When Jane learns Aaron's proposal, Jane chooses whether to accept or reject the split. If Jane accepts the split, both players receive the money according to Aaron's split proposal. If Jane rejects the split, both players receive nothing. This game will be played only once, so Aaron does not have to worry about reciprocity when making his choice.
There are four sets of payoffs at the terminal nodes of the decision tree. In each node, the dollar amount to the left of the comma represents Aaron's payoff, and the dollar amount to the right of the comma represents Jane's payoff.

If Aaron were to offer an unfair proposal,experimental results show that Jane would likely punish him by making herself:

A) worse off by $1 and rejecting his offer.
B) better off by $1 and rejecting his offer.
C) worse off by $999 and rejecting his offer.
D) worse off by $500 and rejecting his offer.
E) worse off by $1,000 and rejecting his offer.

Question 50

Consider the accompanying decision tree and information to answer the questions that follow.
The decision tree depicts two players (Jane and Aaron) playing an ultimatum game where Aaron is given $1,000 and asked to propose a way of splitting it with Jane. When Jane learns Aaron's proposal, Jane chooses whether to accept or reject the split. If Jane accepts the split, both players receive the money according to Aaron's split proposal. If Jane rejects the split, both players receive nothing. This game will be played only once, so Aaron does not have to worry about reciprocity when making his choice.
There are four sets of payoffs at the terminal nodes of the decision tree. In each node, the dollar amount to the left of the comma represents Aaron's payoff, and the dollar amount to the right of the comma represents Jane's payoff.

Assume that Aaron and Jane are two experimental subjects who practice bounded rationality.If Aaron were to offer an unfair proposal,he would likely receive a payoff of ________,but if he were to offer a fair proposal,he would likely receive a payoff of ________.

A) $0; $0
B) $0; $999
C) $999; $0
D) $500; $0
E) $0; $500

Question 51

Consider the following scenario to answer the questions that follow.
Derek and Heriberto are playing an ultimatum game where Derek is given $500.00 and asked to propose a way of splitting it with Heriberto. When Heriberto learns Derek's proposal, Heriberto chooses whether to accept or reject the split. If Heriberto accepts the split, both players receive the money according to Derek's split proposal. If Heriberto rejects the split, both players receive nothing. This game will be played only once, so Derek does not have to worry about reciprocity when making his choice.
Suppose that Derek proposes a split such that Derek will receive $489.99 and Heriberto will receive $10.01.Traditional economic theory predicts that Heriberto will:

A) accept the $10.01 because he values receiving $10.01 more than receiving nothing.
B) accept the $10.01 because he wishes to punish Derek for proposing such an unfair split.
C) reject the $10.01 because he wishes to punish Derek for proposing such an unfair split.
D) reject the $10.01 and also would have rejected a split such that Derek receives $250.00 and Heriberto receives $250.00.
E) sometimes accept the $10.01 and sometimes reject the $10.01, depending on his mood at the time.

Question 52

Which general observation can be inferred from the observation of real people playing the ultimatum game?

A) People care about looks.
B) People care about body image.
C) People care about voice tone.
D) People care about fairness.
E) People care about respect.

Question 53

Consider the accompanying decision tree and information to answer the questions that follow.
The decision tree depicts two players (Jane and Aaron) playing an ultimatum game where Aaron is given $1,000 and asked to propose a way of splitting it with Jane. When Jane learns Aaron's proposal, Jane chooses whether to accept or reject the split. If Jane accepts the split, both players receive the money according to Aaron's split proposal. If Jane rejects the split, both players receive nothing. This game will be played only once, so Aaron does not have to worry about reciprocity when making his choice.
There are four sets of payoffs at the terminal nodes of the decision tree. In each node, the dollar amount to the left of the comma represents Aaron's payoff, and the dollar amount to the right of the comma represents Jane's payoff.

If Aaron could be 100% certain that Jane was rational,did not care about fairness,and always made decisions to maximize her payoff regardless of the situation in which she might find herself,Aaron would likely offer a(n)________ proposal and ultimately receive a payoff of ________.

A) unfair; $500
B) unfair; $999
C) unfair; $0
D) fair; $500
E) fair; $0

Question 54

Consider the following scenario to answer the questions that follow.
Sarah and Laura are playing an ultimatum game where Laura is given an eight-slice pizza and asked to propose a way of splitting it with Sarah. When Sarah learns Laura's proposal, Sarah chooses whether to accept or reject the split. If Sarah accepts the split, both players receive the slices of pizza according to Laura's split proposal. If Sarah rejects the split, both players receive nothing. This game will be played only once, so Laura does not have to worry about reciprocity when making her choice. Assume that both players enjoy pizza and each would strictly prefer to eat more pizza than less.
Assume the game is played in an experimental session and both players follow bounded rationality.If Laura offers Sarah ________ slice(s),Sarah will be more likely to accept the offer than if Laura were to offer ________ slice(s).

A) one; two
B) two; three
C) one; three
D) four; one
E) one; four

Question 55

The ________ game is an economic experiment in which two players decide how to divide a pot of money.

A) prisoner's dilemma
B) hawk-dove
C) behavioral economics
D) ultimatum
E) hot-hand dilemma

Question 56

Consider the following scenario to answer the questions that follow.
Derek and Heriberto are playing an ultimatum game where Derek is given $500.00 and asked to propose a way of splitting it with Heriberto. When Heriberto learns Derek's proposal, Heriberto chooses whether to accept or reject the split. If Heriberto accepts the split, both players receive the money according to Derek's split proposal. If Heriberto rejects the split, both players receive nothing. This game will be played only once, so Derek does not have to worry about reciprocity when making his choice.
According to traditional economic theory,which presumes both players are fully rational and wish to maximize their incomes,Derek should maximize his gains by offering Heriberto ________ and keeping ________ for himself.

A) $250.00; $250.00
B) $450.00; $50.00
C) $50.00; $450.00
D) $499.99; $0.01
E) $0.01; $499.99

Question 57

Consider the following scenario to answer the questions that follow.
Sarah and Laura are playing an ultimatum game where Laura is given an eight-slice pizza and asked to propose a way of splitting it with Sarah. When Sarah learns Laura's proposal, Sarah chooses whether to accept or reject the split. If Sarah accepts the split, both players receive the slices of pizza according to Laura's split proposal. If Sarah rejects the split, both players receive nothing. This game will be played only once, so Laura does not have to worry about reciprocity when making her choice. Assume that both players enjoy pizza and each would strictly prefer to eat more pizza than less.
The standard economic model predicts that Laura will offer Sarah ________ slice(s)and Sarah ________ accept the offer.

A) one; will
B) one; will not
C) four; will
D) four; will not
E) seven; will

Question 58

Proponents of fairness would likely believe that:

A) the poor should pay higher tax rates on their personal incomes than the rich do, a tax structure known as regressive taxation.
B) the rich should pay higher tax rates on their personal incomes than the poor do, a tax structure known as progressive taxation.
C) the poor should pay higher entrance fees to national parks whenever an entrance fee applies.
D) a bigger, less equal economic pie is more favorable than a smaller, more equal economic pie.
E) if the poor can receive free baby formula and diapers from the government, then the rich should also be able to receive free baby formula and diapers from the government.

Question 59

John and Rebecca are playing an ultimatum game where John is given $100.00 and asked to propose a way of splitting it with Rebecca.When Rebecca learns John's proposal,she chooses whether to accept or reject the split.If Rebecca accepts the split,both players receive the money according to John's split proposal.If Rebecca rejects the split,both players receive nothing.This game will be played only once,so John does not have to worry about reciprocity when making his choice.
Suppose that John proposes a split such that John will receive $99.99 and Rebecca will receive $0.01.Traditional economic theory predicts that Rebecca will:

A) accept the $0.01 because she values receiving $0.01 more than receiving nothing.
B) accept the $0.01 because she wishes to punish John for proposing such an unfair split.
C) reject the $0.01 because she wishes to punish John for proposing such an unfair split.
D) reject the $0.01 and also would have rejected a split such that John receives $50.00 and Rebecca receives $50.00.
E) sometimes accept the $0.01 and sometimes reject the $0.01, depending on her mood at the time.

Question 60

At the beginning of a semester,a group of five students (Jim,Andy,Beth,Brandy,and Duane)were asked to order a snack that the teacher will deliver to the students free of charge before the first class of the tenth week of the semester.The three choices were an apple,a banana,or a Snickers candy bar.The teacher collected the orders and found that two students ordered an apple,two students ordered a banana,and one student ordered a Snickers candy bar.The four students who ordered either an apple or a banana cited health consciousness as the reason for their choice.
Immediately before the orders are scheduled to be delivered,the teacher informs the students that they can switch their choices and order something else from the original menu if they wish,or they can receive what they originally ordered.Which of the following scenarios is the best example of inconsistent intertemporal decision-making?

A) Jim originally ordered an apple and did not change his choice when prompted.
B) Andy ordered a banana and switched to an apple when prompted.
C) Beth ordered an apple and switched to a banana when prompted.
D) Brandy ordered a banana and switched to a Snickers candy bar when prompted.
E) Duane ordered a Snickers candy bar and did not change his choice when prompted.

Question 61

Consider the following scenario to answer the questions that follow.
Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $50 with a 70% probability and $100 with a 30% probability.
Gamble B: The student will receive $50 with a 50% probability, $200 with a 25% probability, and $0 (nothing) with a 25% probability.
What is the expected value (EV)of Gamble A?

A) $0
B) $100
C) $50
D) $45
E) $65

Question 62

Consider the following scenario to answer the questions that follow.
Suppose that, in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $5 million with a 100% probability.
Gamble B: The student will receive $5 million with a 51% probability, $10 million with a 25% probability, and $0 million (nothing) with a 24% probability.
What is the expected value of Gamble A?

A) $5 million
B) $5.01 million
C) $5.05 million
D) $10 million
E) $0 million

Question 63

Consider the following scenario to answer the questions that follow.
Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $50 with a 70% probability and $100 with a 30% probability.
Gamble B: The student will receive $50 with a 50% probability, $200 with a 25% probability, and $0 (nothing) with a 25% probability.
Which of the following shows the correct formula for the expected value (EV)of Gamble A?

A) EV = 0.7 × ($50) + 0.3 × ($100)
B) EV = 0.5 × ($50) + 0.3 × ($100)
C) EV = 0.7 × ($50) + 0.5 × ($100)
D) EV = 0.5 × ($50) + 0.5 × ($100)
E) EV = 0.1 × ($50) + 0.2 × ($100)

Question 64

Consider the following scenario to answer the questions that follow.
Ivett and Brenda are considering playing a game called Twenties Versus Fifties. In this game, Ivett will place a $20 bill on the table, and Brenda will place a $50 bill on the table. Both players will then toss a fair coin. If both Ivett and Brenda toss heads or if they both toss tails, Ivett wins the $70 on the table. If one woman tosses heads and the other tosses tails, Brenda wins the $70 on the table.
For Ivett to be willing to play this game,Ivett would need to be ________.For Brenda to be willing to play this game,Brenda would need to be ________.

A) risk averse; risk averse
B) risk averse; risk neutral
C) risk neutral; a risk taker
D) a risk taker; risk neutral
E) a risk taker; risk averse

Question 65

Consider the following scenario to answer the questions that follow.
Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $50 with a 70% probability and $100 with a 30% probability.
Gamble B: The student will receive $50 with a 50% probability, $200 with a 25% probability, and $0 (nothing) with a 25% probability.
Which of the following formulas shows the correct formula for the expected value (EV)of Gamble B?

A) EV = 0.5 × ($50) + 0.25 × ($25)
B) EV = 0.5 × ($50) + 0.25 × ($100) + 0.25 × ($250)
C) EV = 0.5 × ($50) + 0.5 × ($200)
D) EV = 0.5 × ($50) + 0.25 × ($200)
E) EV = 0.25 × ($50) + 0.25 × ($200)

Question 66

Consider the following scenario to answer the questions that follow.
Ivett and Brenda are considering playing a game called Twenties Versus Fifties. In this game, Ivett will place a $20 bill on the table, and Brenda will place a $50 bill on the table. Both players will then toss a fair coin. If both Ivett and Brenda toss heads or if they both toss tails, Ivett wins the $70 on the table. If one woman tosses heads and the other tosses tails, Brenda wins the $70 on the table.
Which of the following is the formula that Brenda would use to compute the expected value (EV)of the game from her perspective?

A) EV = 0.5 × ($20) + 0.5 × ($50)
B) EV = 0.5 × (-$20) + 0.5 × ($50)
C) EV = 0.5 × ($20) + 0.5 × (-$50)
D) EV = 0.5 × (-$70) + 0.5 × ($50)
E) EV = 0.5 × ($70) + 0.5 × ($50)

Question 67

Economists generally assume that people make:

A) predictable, repeatable decisions that cannot be modeled.
B) predictable, repeatable decisions that can be modeled.
C) unpredictable, repeatable decisions that can be modeled.
D) unpredictable, repeatable decisions that cannot be modeled.
E) predictable, unrepeatable decisions that cannot be modeled.

Question 68

Consider the following scenario to answer the questions that follow.
Suppose that, in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $5 million with a 100% probability.
Gamble B: The student will receive $5 million with a 51% probability, $10 million with a 25% probability, and $0 million (nothing) with a 24% probability.
A risk-neutral student is:

A) likely to choose Gamble A because it has a higher expected value.
B) likely to choose Gamble B because it has a higher expected value.
C) likely to choose Gamble A because the student will win something (as opposed to nothing) with a higher probability.
D) likely to choose Gamble B because the student will win something (as opposed to nothing) with a higher probability.
E) indifferent toward Gambles A and B because they have the same expected value.

Question 69

Consider the following scenario to answer the questions that follow.
Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $50 with a 70% probability and $100 with a 30% probability.
Gamble B: The student will receive $50 with a 50% probability, $200 with a 25% probability, and $0 (nothing) with a 25% probability.
How much money would a risk-neutral student be willing to pay to play this game?

A) $85
B) $75
C) $150
D) $500
E) $225

Question 70

People who are risk neutral:

A) prefer a sure thing over a gamble with a higher expected value.
B) choose the outcome with the highest expected value.
C) choose the outcome with the lowest expected value.
D) prefer gambles with lower expected values, but potentially higher winnings, over a sure thing.
E) do not partake in any risky activities.

Question 71

Suppose that,in an experimental setting,100 students are asked to choose between Gamble A and Gamble B,where:
Gamble A: The student will receive $5,100 with a 70% probability and $200 with a 30% probability.
Gamble B: The student will receive $5,100 with a 50% probability,$200 with a 25% probability,and $0 (nothing)with a 25% probability.
What is the expected value of Gamble B?

A) EV = 0.7 × ($5,100) + 0.3 × ($200)
B) EV = 0.5 × ($5,100) + 0.25 × ($100) + 0.25 × ($25)
C) EV = 0.5 × ($5,100) + 0.25 × ($200) + 0.25 × ($25)
D) EV = 0.5 × ($5,100) + 0.25 × ($200) + 0.25 × ($0)
E) EV = 0.5 × ($2,600) + 0.25 × ($2,600) + 0.25 × ($0)

Question 72

Consider the following scenario to answer the questions that follow.
Ivett and Brenda are considering playing a game called Twenties Versus Fifties. In this game, Ivett will place a $20 bill on the table, and Brenda will place a $50 bill on the table. Both players will then toss a fair coin. If both Ivett and Brenda toss heads or if they both toss tails, Ivett wins the $70 on the table. If one woman tosses heads and the other tosses tails, Brenda wins the $70 on the table.
Which of the following is the formula that Ivett would use to compute the expected value (EV)of the game from her perspective?

A) EV = 0.5 × ($20) + 0.5 × ($50)
B) EV = 0.5 × (-$20) + 0.5 × ($50)
C) EV = 0.5 × ($20) + 0.5 × (-$50)
D) EV = 0.5 × (-$70) + 0.5 × ($50)
E) EV = 0.5 × ($70) + 0.5 × ($50)

Question 73

Consider the following scenario to answer the questions that follow.
Ivett and Brenda are considering playing a game called Twenties Versus Fifties. In this game, Ivett will place a $20 bill on the table, and Brenda will place a $50 bill on the table. Both players will then toss a fair coin. If both Ivett and Brenda toss heads or if they both toss tails, Ivett wins the $70 on the table. If one woman tosses heads and the other tosses tails, Brenda wins the $70 on the table.
For Brenda,the expected value of this game is:

A) -$15.
B) -$35.
C) $15.
D) $35.
E) $70.

Question 74

Consider the following scenario to answer the questions that follow.
Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $50 with a 70% probability and $100 with a 30% probability.
Gamble B: The student will receive $50 with a 50% probability, $200 with a 25% probability, and $0 (nothing) with a 25% probability.
What is the expected value of Gamble B?

A) $0
B) $75
C) $50
D) $500
E) $25

Question 75

A person who is ________ is likely to pay more for insurance to protect against financial loss than a person who is ________.

A) afflicted by the hot-hand fallacy; afflicted by the gambler's fallacy
B) a risk taker; risk averse
C) a risk taker; risk neutral
D) risk averse; a risk taker
E) risk neutral; risk averse

Question 76

Consider the following scenario to answer the questions that follow.
Suppose that, in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $5 million with a 100% probability.
Gamble B: The student will receive $5 million with a 51% probability, $10 million with a 25% probability, and $0 million (nothing) with a 24% probability.
What is the expected value of Gamble B?

A) $5 million
B) $5.01 million
C) $5.05 million
D) $10 million
E) $0 million

Question 77

Consider the following scenario to answer the questions that follow.
Ivett and Brenda are considering playing a game called Twenties Versus Fifties. In this game, Ivett will place a $20 bill on the table, and Brenda will place a $50 bill on the table. Both players will then toss a fair coin. If both Ivett and Brenda toss heads or if they both toss tails, Ivett wins the $70 on the table. If one woman tosses heads and the other tosses tails, Brenda wins the $70 on the table.
For Ivett,the expected value of this game is:

A) $0.
B) $15.
C) $35.
D) $70.
E) $140.

Question 78

Consider the following scenario to answer the questions that follow.
Ivett and Brenda are considering playing a game called Matching Fifties. In this game, Ivett and Brenda will each place a $50 bill on the table. Both players will then toss a fair coin. If both Ivett and Brenda toss heads or if they both toss tails, Ivett wins the $100 on the table. If one woman tosses heads and the other tosses tails, Brenda wins the $100 on the table.
Ivett decides that she is not willing to play this game because a loss of $50 to Brenda will cause her to lose more utility than she should gain if she won $50 from Brenda.Ivett would be considered risk ________,but if she was risk ________,she would be willing to play the game.

A) loving; averse
B) neutral; averse
C) averse; neutral
D) loving; neutral
E) neutral; loving

Question 79

People who are risk takers:

A) prefer a sure thing over a gamble with a higher expected value.
B) choose the outcome with the highest expected value.
C) choose the outcome with the lowest expected value.
D) prefer gambles with lower expected values, but potentially higher winnings, over a sure thing.
E) do not partake in any risky activities.

Question 80

Consider the following scenario to answer the questions that follow.
Ivett and Brenda are considering playing a game called Matching Fifties. In this game, Ivett and Brenda will each place a $50 bill on the table. Both players will then toss a fair coin. If both Ivett and Brenda toss heads or if they both toss tails, Ivett wins the $100 on the table. If one woman tosses heads and the other tosses tails, Brenda wins the $100 on the table.
For each player,the expected value of this game is:

A) $0.
B) $25.
C) $50.
D) $100.
E) $200.