Deck 8: Cognitive Limitations and Consumer Behavior

Question 1

The Kahneman-Tversky value function shows that a gain of $100

A)Is valued less than two gains of $50
B)Would be offset in one's mind by a loss of less than $100
C)Would be offset in one's mind by a loss of more than $100
D)Would be offset by a gain of $100

Answer 1

B

Question 2

The Kahneman-Tversky value function is

A)Risk-averse in gains, risk-seeking in losses
B)Risk-seeking in gains, risk-averse in losses
C)Risk-averse in gains and losses
D)Risk-neutral in gains and losses

Answer 2

A

Question 3

If you were to behave according to the rational choice model when confronted with a loss of $25 on the same day in which you receive an unexpected gift of $25 you would

A)Value the loss of $25 more heavily than the gain of $25
B)Discount the loss and value the gain so that you feel you have gained welfare
C)See the two events as exactly offsetting and thereby of no consequence in your overall welfare
D)Value the gift of $25 more than the loss of $25

Answer 3

C

Question 4

Weber and Fecher found

A)That it is easier to tell the difference between a 25 and a 50-watt light bulb than it is to tell the difference between a 100-watt bulb and a 300-watt bulb
B)That the minimally perceptible difference is roughly proportional to the original intensity of the stimulus
C)That the minimally perceptible difference is inversely proportional to the original intensity of the stimulus
D)Consumers are more likely to drive 10 blocks to save $5 on a $500 television than they are to drive 10 blocks to save $5 on a $25 clock

Question 5

According to the text, one important economic application of the anchoring and adjustment bias is

A)To estimate production costs of simple operations
B)To evaluate consumer behavior with regard to luxury spending
C)To increase productivity in volunteer organizations
D)In estimating the failure rates of complex projects

Question 6

Say the day of the concert for which you had bought tickets almost a month you find yourself very ill. Since you paid almost $40 for the tickets, you are considering whether to go to the concert anyway. Rational choice theory says that you should go to the concert only if:

A)the benefits of going outweigh the $40 dollars you spent on the tickets
B)the benefits of going outweigh the $40 dollars plus any additional pains associated with getting out of bed while being sick.
C)the benefits of going outweigh any pains associated with getting out of bed while being sick.
D)you feel better.

Question 7

According to the rational choice model which of this two events should be valued more rational consumers: i.A gift of mug valued at $10
Ii)Finding the mug you thought was lost, which cost you $10 to purchase.

A)Both events should have the same value
B)Event A
C)Event B
D)There is really no way to rationally decide.

Question 8

If Kahneman and Tversky are correct about "mental accounts", household budgeting

A)Should help families cut back on spending
B)Leads families to spend more than if they did not budget
C)Should have no effect on spending
D)Will encourage families to earn more money than they would if they did not budget

Question 9

One person out of every 1000 is an economist and 90% of them are math oriented.If only 5 % of the population is math oriented and you pick a person at random who happens to be math oriented, it is

A)Likely that the person chosen is an economist rather than an non-economist
B)Likely that the person chosen is not an economist rather than an economist
C)Almost certain the person will be an economist
D)Almost impossible the person will be an economist

Question 10

A fundamental axiom of rational choice theory is

A)Choices should be independent of relevant alternatives
B)Choices should be independent of irrelevant alternatives
C)Consumers should be risk-neutral
D)Consumers should disregard recent performance data

Question 11

Which of the following is true?

A)People prefer the toll ways where they throw in some change every dozen miles or so to a toll road that has one payment at the end of the trip
B)Budgeting your income will often result in more total spending
C)High prices and rebates on cars simply irritate the consumer and make him feel treated like a fool
D)People tend to enjoy the process of buying a car more when the process involved difficult choices

Question 12

The story in the text at the beginning of this chapter about playing tennis outside even though you paid for an inside court.This story illustrates which if the following?

A)Psychologically, people often do not treat sunk cost as irrelevant to a decision
B)Rational choice analysis is what comes naturally to most people
C)People will make efficient decisions without knowing what they are doing
D)All of the above are implied by the tennis court story

Question 13

The Kahneman-Tversky value function is

A)A conventional utility function
B)Much steeper in losses than in gains
C)Much steeper in gains than in losses
D)Mot defined over changes in wealth

Question 14

When people are in financial difficulty an advisor will usually recommend establishing a budget for spending.One reason is that a budget will act to discipline behavior if people psychologically are subject to

A)Bounded rationality
B)Mental accounts
C)Segregated gains
D)The halo effect

Question 15

Say one morning you are considering weather to take a taxi cab or riding the train to work. Both mediums would cost you about $4, but you have already paid in advance for the train (since you pay a flat fee at the beginning of the month). If the cab ride would take slightly less time than the train ride, and you are mostly concerned with the time it takes you to get to work, you should:

A)take the train since you already paid for it
B)take the cab
C)be indifferent between either modes of transportation
D)find another way to get to work

Question 16

Some sports writers seem so sure that rookies of the year and MVPs will not repeat the following year.They could be relying on which of the following to make that judgment.

A)Bounded rationality
B)Psychophysics of perception
C)Anchoring and adjustment
D)Hedonic framing
E)Regression effect

Question 17

The Kahneman-Tversky value function provides a rationale for

A)Putting several Christmas gifts in one big box for your special friend
B)Paying cash rather than using a credit card
C)Requiring employees to take all their vacation days in two weeks rather than taking scattered days throughout the year
D)Car dealers offering rebates rather than a price reduction on a car

Question 18

If Kahneman and Tversky are correct, I should

A)Buy individual stocks rather than put my money into a mutual fund
B)Put my money in a mutual fund instead of individual stocks
C)Be indifferent which type of investment I make
D)Have opposite strategies depending on whether my investments will rise or fall

Question 19

According to the Kahneman-Tversky value function,

A)Small gains should be combined with large losses
B)Small gains should be combined with large gains
C)Small losses should be segregated from large losses
D)Small gains should be segregated from large losses

Question 20

Kahneman and Tversky have found that

A)People tend to weigh each event separately
B)People tend to treat gains and losses symmetrically
C)People attach more importance to the gain than to the loss
D)People tend to act rationally

Question 21

It has be said that people would never build a house if they had to go to the lumberyard and buy the framing lumber and each building material by the piece.Where did such a notion come from? Might it be true?

Question 22

Bounded rationality effects people in more ways than simply expenditure patterns.Think of ways in which your behavior is bounded so that it appears irrational at times.Be careful not to lump together concepts that are discussed in Chapter 8 under other names.Is bounded rationality a good or bad thing in your view?

Question 23

According to the textbook, an efficient manager will be one who:

A)Does not have the tendency to put too much weight on recent performance
B)Has the tendency to put too much weight on recent performance
C)Who never considers recent performance
D)Only considers recent performance.

Question 24

The Weber-Fechner law says that just noticeable difference in a stimulus tends to be:

A)smaller the more intense the stimulus is
B)larger the more intense the stimulus is.
C)unrelated to the intensity of the stimulus
D)larger than the stimulus

Question 25

According to Kahneman and Tversky's value function, which of the following gifts provide higher total values:

A)4 different gains of $25 each
B)2 different gains of $50 each
C)1 gain of $100 each
D)All provide exactly the same value

Question 26

Judgmental heuristics indicate that people are more influenced by the present than the past.Develop a critique of this suggestion in your text.

Question 27

Suppose a rational consumer faced with a choice between blue pencils and red pencils will always choose the red ones.If she is also offered a choice of green pencils then

A)She will always choose the green ones
B)She will change her mind and choose the blue pencils
C)She will continue to choose the red pencils
D)May choose either the blue or the red pencils

Question 28

According to the text, the procedure of "anchoring and adjustment":

A)Often leads to biased estimates
B)Usually leads to correct estimates
C)Occurs only when the "anchor" is completely related to the value to be estimated
D)Explains why people tend to succeed at new business ventures

Question 29

Suppose you have tickets to tonight's concert.Nevertheless, you are also in bed with a very high fever.In considering weather to go to the concert or not, a rational consumer should:

A)Go to the concert if the price you paid for the tickets is very high
B)Stay in bed if the price of the tickets is very low
C)Go to the concert if the value of the concert for you offset the discomfort of getting out of bed
D)stay in bed if the fever is the discomfort of getting out of bed is too high

Question 30

My golfing friends and I were having a tough time trying to figure out whether to go on our annual summer golf outing in June or August this year.Both had their advantages.Then some non-teacher in the group wondered if September would be possible.Since that was after the start of school, the teachers in the group immediately came to a decision to go in August.Explain why the September dates suddenly made August the clear choice.

Question 31

Say you are at the bar trying to decide which drink to buy. The waiter informs you they have two drinks available: red wine and stout beers. Since you like red wine much more than beer, you decide to order wine. Nevertheless, as you prepare to inform the waiter your decision he tells you that they also have Pale Ale beers, and you happened to like stouts much more than pale ales. If we take into consideration the halo effect you are probably going to order:

A)the red wine
B)the stout
C)the pale ale
D)a completely different drink