Deck 19: Behavioral Economics

Question 1

Behavioral economics is the study of:

A) rational behavior under the assumptions of utility maximization and perfect knowledge.
B) economic behavior when economic agents are not rational.
C) economic theories that focus on the psychological aspects of consumer and producer behavior.
D) economic problems that are not considered by traditional economic theory.

Answer 1

economic theories that focus on the psychological aspects of consumer and producer behavior.

Question 2

The assumption that consumers have clear preferences is:

A) a main axiom of behavioral economics.
B) an assumption that behavioral economics calls into question.
C) a logical conclusion of observed behavior.
D) a basic assumption of basic economic theory that carries over to behavioral economics.

Answer 2

an assumption that behavioral economics calls into question.

Question 3

A reference point may be anchored on:

A) our past consumption of a good.
B) our experience in a market.
C) our expectation about how prices should behave.
D) all of the above.

Answer 3

our past consumption of a good.

Question 4

Leaving a large tip at a restaurant to which you will never return is:

A) a manner of behavior that only traditional economic theory can explain.
B) an example of irrational behavior under the theory of behavioral economics.
C) an example of why an alternative theory to the basic theory of consumer behavior is needed to explain this sort of behavior.
D) a way of increasing utility, which places the consumer in a higher indifference curve.

Question 5

Suppose that after an increase in price, a consumer chooses not to purchase the good because she perceives that the price increase is fundamentally unfair. How does the traditional theory of consumer behavior treat this situation?

A) By adjusting the budget line
B) By shifting an indifference curve
C) By modifying the equal marginal principle
D) None of the above. The basic theory does not account for this type of situation.

Question 6

In traditional economic theory, producers are assumed to be rational, which means that they:

A) attempt to maximize profit with a limited knowledge about input prices.
B) have full knowledge of input prices and attempt to maximize profit in both the short- and the long-run.
C) look to maximize profit, often without regard to input prices or available technologies.
D) behave in unpredictable but observable ways of producing goods and services.

Question 7

In the classroom experiment where a mug is bought and sold,

A) those who possessed a mug where willing to sell it for less than the price that those who did not have a mug were willing to offer.
B) those who possessed a mug where willing to sell it for more than the price that those who did not have a mug were willing to offer.
C) the price that students were willing to pay to obtain a mug eventually coincided precisely with the price required by those who possessed a mug and were willing to sell it.
D) the price of a mug appeared to have no correlation with whether a student owned a mug or not.

Question 8

The assumption that consumer choices are utility-maximizing is:

A) a main axiom of behavioral economics.
B) an assumption that behavioral economics calls into question.
C) a logical conclusion of observed behavior.
D) a basic assumption of basic economic theory that carries over to behavioral economics.

Question 9

In traditional economic theory, consumers are assumed to be rational, which means that they:

A) attempt to maximize utility, subject to a budget constraint, and they do so with a limited knowledge about prices.
B) have full knowledge of prices and attempt to maximize utility, subject to a budget constraint.
C) look to maximize utility, often without regard to income or prices.
D) behave in unpredictable but observable ways of choosing goods and services.

Question 10

In the classroom experiment where a mug is bought and sold,

A) acquiring the mug was perceived to be a greater "gain" for those who acquired it than the "loss" for those who gave it up.
B) giving up the mug was perceived to be a greater "loss" to those who had one than the "gain" from obtaining a mug for those without one.
C) the price at which the mug was exchanged compensated precisely the value gained and lost by the traders.
D) the price at which the mug could be sold was always less than the price at which the mug was acquired.

Question 11

An example of a reference point is the fact that individuals tend to:

A) value an item more when they own it.
B) value an item more when they do not own it.
C) value an item the same, whether they own it or not.
D) value an item more when the lose it.

Question 12

Finish the following sentence: A reference point can influence how people make economic decisions,

A) but the theory does not claim that reference points have a large effect on those decisions.
B) and that influence can be very strong.
C) although there is no consensus on whether that influence is large or small.
D) but only traditional economic theory can fully explain their degree of influence in those decisions.

Question 13

The basic theory of consumer behavior is based on which of these assumptions?

A) Consumers have clear preferences.
B) Consumers face budget constraints.
C) Consumers look for combinations of goods that maximize their utility based on information about about preferences, income, and prices.
D) All of the above

Question 14

One manifestation of the endowment effect as a reference point is:

A) the willingness of an individual to trade a good based on his original endowment of that and other goods.
B) the willingness of an individual to buy a good based on the ownership of that good by other individuals.
C) the refusal of a person to sell a good for a price other than what she paid for it.
D) a difference between the price that a person is willing to pay for a good and the price that she es willing to sell the same good to someone else.

Question 15

In the field of Behavioral Economics, we challenge the concept that:

A) consumers behave in the manner described by the constrained maximization problem.
B) firms have incomplete knowledge of production technologies.
C) firms choose combinations of labor and capital that may not minimize cost.
D) psychological factors have little to do with consumer and producer decisions.

Question 16

A more realistic theory than the traditional theory of consumer behavior would:

A) the context, or setting one is in.
B) take into account the fairness of an economic transaction.
C) introduce some rules of thumb to explain complex behavior that the basic theory cannot explain.
D) do all of the above.

Question 17

A reference point in the theory of behavioral economics focuses on:

A) the preference of individuals toward risk rather than risk aversion.
B) a tendency for individuals to prefer avoiding loses over acquiring gains.
C) a tendency for individuals to behave in a manner such that the possible gains from an activity cancel out with the possible loses.
D) behavior that does not take into account gains against possible loses.

Question 18

A reference point refers to:

A) a point of equilibrium in the indifference map from which consumers may deviate.
B) a statement or assumption in basic consumer theory that serves as a starting point of contention in the theory of behavioral economics.
C) the point from which an individual makes a consumer decision.
D) the point of utility maximization from which a consumer departs, only to return later to it.

Question 19

The endowment effect refers to the tendency of individuals to:

A) value an item more when they own it than when they do not.
B) value an item more when they do not own it.
C) value an item the same, whether they own it or not.
D) value an item more when the lose it.

Question 20

Based on the assumptions of traditional economic theory,

A) we conclude that it is not possible to derive demand curves for consumers or cost curves for producers.
B) we construct a theory of consumer and producer behavior described by demand and cost curves, which assume that consumers and producers make decisions based on all available information.
C) we build theories that work, even when we assume a lack of perfect knowledge on the part of consumers and producers.
D) we build demand and cost curves that may behave in unpredictable ways, because we can't assume that consumers and producers make decisions based on all available information.

Question 21

Over time, endowment effects tend to:

A) disappear, as individuals gain experience.
B) be stronger as individuals gain expertise.
C) become a permanent condition.
D) cancel each other out.

Question 22

Basic consumer theory:

A) cannot possibly account for the effects of fairness.
B) can be modified to account for the effects of fairness.
C) fundamentally ignores fairness as a determinant of consumer behavior.
D) is a salient conclusion in the model.

Question 23

Emphasis on product reliability is a good example of:

A) Framing.
B) Endowment.
C) Salience.
D) Loss aversion.

Question 24

Figure 19.2.1
Refer to Figure 19.2.1 above. Consumers understand why the price of shovels would increase somewhat during a snow storm and would be willing to buy at higher prices. Which demand or portion of a demand curve best reflects that statement?

A) The demand curve D₁
B) The flat portion of demand curve D₂
C) The dashed portion of demand curve D₂
D) The steep, solid portion of D₂

Question 25

Consumer decisions may be affected by one or more features of a good that consumers perceived as important. This perception is called:

A) Framing.
B) Referencing.
C) Salience.
D) Differentiation.

Question 26

Which of the following is more important in sending a signal of the value of a good to consumers?

A) To inform consumers of the many features a good offers
B) To send a consistent message as a signal
C) To ensure that the signal is credible
D) To ensure that the signal reaches as many consumers.as possible

Question 27

In the classroom mug experiment, students receive the mug for free and are willing to sell it:

A) for less than it's perceived market value, since it was free in the first place.
B) for exactly the perceived market value, without enjoying a gain or suffering a loss.
C) only for more than its perceived market value; otherwise it would create a perceived loss.
D) for any amount the buyer would offer, since it was free in the first place.

Question 28

Figure 19.2.1
Refer to Figure 19.2.1 above. During a snow storm,

A) the price of shovels and the quantity demanded increase.
B) the price of shovels increases, but the quantity sold remains at its initial level, Q₁.
C) the quantity of shovels increases, but the price remains at $20.
D) the price of shovels settles at $40 and the quantity demanded decreases.

Question 29

Figure 19.2.1
Refer to Figure 19.2.1 above. Which of the following statements is true?

A) The price of a shovel increases to $40 during a snow storm, and Q₁ units are sold.
B) The price of shovels increases to $25 during a snow storm, and the quantity sold would range between Q₁ and Q₂.
C) The price of shovels during a snow storm remains at $20, but quantity demanded increases to Q₂ units.
D) An increase in the price of shovels, from $20 to as much as $40, is considered fair during a snow storm.

Question 30

The manner in which choices are described-and their appearance-can affect the decisions that individuals make. The tendency to rely on these contexts is known as:

A) Framing.
B) Stereotyping.
C) Referencing.
D) Salience.

Question 31

When an investor purchases a share of stock at $50 and the stock tumbles to $35, the investor with loss aversion prefers to:

A) sell the stock at $35 and use the proceeds to make a better investment.
B) the investor will keep the stock and avoid the losses, at least until the price returns to $50.
C) buy more shares at 35 dollars.
D) leave the stock market.

Question 32

Figure 19.2.1
Refer to Figure 19.2.1 above. The price level of $40 illustrates the fact that:

A) the price of a shovel increases to $40 during a snow storm.
B) $40 is an unfair price for shovels, so no consumer would ever pay that amount.
C) some consumers are willing to pay as much as $40 for a shovel, even in the absence of a snow storm.
D) all of the above are true.

Question 33

Figure 19.2.1
Refer to Figure 19.2.1 above. Consumers would not buy a shovel when they perceive price gauging. Which demand or portion of a demand curve best reflects that statement?

A) The demand curve D₁
B) The dashed portion of demand curve D₂
C) The flat portion of demand curve D₂
D) The steep, solid portion of D₂

Question 34

By placing emphasis on the important features of a good or service,

A) we can enrich traditional microeconomic theory.
B) consumers can be informed, but rarely convinced to improve the accuracy of their beliefs about available choices.
C) we can convince individuals to ignore their prior knowledge about the costs and benefits of their choices.
D) we can divert attention from features they don't like.

Question 35

Figure 19.2.1
Refer to Figure 19.2.1 above. Due to the perceived fairness of price increases during a snow storm, the demand curve:

A) is very elastic at prices above $25.
B) is very inelastic at prices above $25.
C) is elastic for price decreases but inelastic for price increases.
D) is inelastic throughout its entire range.

Question 36

In behavioral economics, we assert that: people sometimes do things because they think it is the fair thing to do,

A) even if there is no financial or other material benefit.
B) but actions based on fairness must also be backed by real financial gains or other material or tangible benefit.
C) sometimes expecting nothing in return, but most often expecting real gains also.
D) but only if the net gains exceed the net losses.

Question 37

Which pairs of effects are closely related?

A) Endowment and loss aversion
B) Framing and salience
C) Both of the above
D) None of the above

Question 38

Figure 19.2.1
Refer to Figure 19.2.1 above. The figure describes the demand for snow shovels before and during a snow storm. Many consumers buy shovels in anticipation of snow. Which curve or portion of a curve corresponds to those consumers?

A) The demand curve D₁
B) The flat portion of demand curve D₂
C) The dashed portion of demand curve D₂
D) The dashed and solid portions of demand curve D₂

Question 39

In the experiment that observes how people become less prone to violate a local ordinance on littering, the factor that changed their behavior was, predominantly:

A) the imposition of a strong financial disincentives.
B) the warnings issued by law enforcement about their activities.
C) a raising of public conscience about the effects of littering.
D) the potential benefits of littering.

Question 40

Which of the following are examples of actions involving fairness?

A) Charitable giving
B) Volunteering time
C) Tipping in a restaurant
D) All of the above

Question 41

Business firms have an easier time explaining price increases when those price increases are in response to:

A) higher costs.
B) higher demand.
C) unfair taxation.
D) a lack of competition.

Question 42

A bubble in the housing market occurs when, after watching housing prices rise for several years, house buyers come to believe that:

A) housing prices will eventually fall.
B) housing prices will continue to rise.
C) the housing market could be a risky investment.
D) the price increases cannot be explained, and uncertainly drives them out of the market.

Question 43

The basic model of consumer behavior does not include rules of thumb, mainly because:

A) the model is biased against hard rules.
B) the model does not believe that consumers are fully informed.
C) it does not allow for biases to be introduced in our economic decision making.
D) it allows for benchmarks that replace rules of thumb.

Question 44

To estimate the expected return on equity investments:

A) it is necessary to look only at recent data on stock returns.
B) one needs to look only at expected returns on debt instruments.
C) would require a study of stock market returns for many decades.
D) would require only a course in financial economics.

Question 45

A common bias in consumer decision making is to:

A) think that prices should be lower than they are.
B) ignore price and other key information when making decisions.
C) view shipping costs as unfair.
D) view prices to be lower than they really are.

Question 46

Anchoring is more closely associated with which of the following factors?

A) Stereotypes that affect your decisions
B) Bias against higher prices
C) Suggestions that affect your final decision
D) Manipulation of consumer prices

Question 47

In the efficiency wage theory of labor, an increase in wages is justified by a resulting:

A) increase in the workers' standard of living.
B) increase in the attractiveness of the work environment.
C) increase in productivity and the desire to work harder.
D) all of the above.

Question 48

People resort to rules of thumb to make complex decisions, especially:

A) if they have a good understanding of the factors involved.
B) when they have little experience with the issue at hand.
C) when the market system does not function freely.
D) when issues of fairness are involved.

Question 49

In the ultimatum game, the basic theory of utility would suggest that the optimal distribution of $100 is, for you and the stranger, respectively:

A) $99; $1.
B) $50; $50.
C) $67; $33.
D) none of the above

Question 50

In the basic model of consumer behavior,

A) fairness cannot be explained.
B) fairness depends more on income than on preferences.
C) fairness is manifested by the consumers' willingness to pay.
D) a reduction in demand and market price can be the result of even one consumer who perceives that prices are unfair.

Question 51

In understanding the concept of anchoring, which two factors play an essential role?

A) Price and quantity of equilibrium
B) Income and preferences
C) Utility maximization and the budget constraint
D) The context and the information available

Question 52

Rules of thumb are useful because:

A) they introduce biases in decision making.
B) they help to save time and effort.
C) anchoring can confuse consumers.
D) all of the above

Question 53

Increased uncertainty and lack of understanding of probability to make decisions

A) strengthen the case for rules of thumb.
B) can lead to strong biases that prevent optimal decisions.
C) do not interfere in the calculation of expected utility.
D) cause consumers to understate the probability of an event.

Question 54

In the efficiency wage theory,

A) fairness directly affects worker productivity.
B) fairness concerns do not apply.
C) fairness has a mixed influence on productivity.
D) fairness and wage increases depend on the level of employment.

Question 55

When the true probability of an event is unknown, individuals tend to:

A) form subjective probabilities when assessing that event.
B) avoid the event for which they cannot estimate probabilities.
C) assign very small probabilities to those events.
D) ignore the possibility that those events will occur.

Question 56

The law of small numbers refers to:

A) the tendency for events with the same likelihood of occurrence to even out , given enough trials.
B) a tendency to take unnecessary risks without full information.
C) the tendency to overstate the probability of an event when faced with little information.
D) the tendency to ignore events that have a small likelihood of occurrence.

Question 57

Research has shown that investors in the stock market are often subject to a small-numbers bias, meaning that they believe that:

A) the stock market is a zero-sum game, where long-term gains cancel out with long-term losses.
B) the likelihood of earning a steady positive return in the market over the long run is very small.
C) high returns over the past few years are likely to be followed by more high returns over the next few years
D) high returns over the past few years are likely to be followed by low returns eventually over the next few years.

Question 58

Using a traditional labor market explanation of the influence of fairness, we would assert that:

A) the dissatisfaction with unfair wages by just one or few workers is sufficient to push wages up.
B) unemployment caused by the imposition of minimum-wage laws is fundamentally unfair.
C) workers do not complain about unfair wages if there is a glut of unemployed workers.
D) if enough workers do not feel that their wages are fair, there will be a reduction in the supply of labor, and wage rates will increase.

Question 59

When the ultimatum game is played experimentally, the typical range of proposals for sharing $100 between you and the stranger is,

A) $99; $1 and $$50; $50.
B) $67; $33 and $50; $50.
C) $67; $33 and $99; $1.
D) none of the above

Question 60

The reason why so many price tags end in 95 or 99 is based on the understanding that consumers tend to overemphasize:

A) the first digit of prices.
B) the last two digits of prices.
C) the attractiveness of prices stated in cents.
D) the savings associated with even one cent.

Question 61

In the investor's choice problem, the budget line describes:

A) the trade-off between risk and expected return.
B) combinations of risk and return that leave the investor equally satisfied.
C) combinations of risk associated with combinations of stocks and riskless assets.
D) the quantity of stocks that can be purchased with a limited budget constraint.

Question 62

Some investors and stock analysts argued that the increases in the stock prices of many Internet companies between 1995 and 2000 were justified by fundamentals. This means that:

A) they recognized the potential of the Internet.
B) these companies were sure to make profits long into the future.
C) the purchase of those stocks at high prices were justified.
D) all of the above

Question 63

Which of the following best describe an unrealistic belief that things will work out well?

A) Overconfidence
B) Over-optimism
C) Over-precision
D) Overcorrection

Question 64

In the investor's choice problem, the slope of the budget line equals:

A) the difference between the expected return on the risky asset and return on the risk-free asset, divided by the standard deviation of the risky asset.
B) the difference between the expected return on the risky asset and return on the risk-free asset, divided by the standard deviation of the portfolio.
C) the difference between the expected return on the risky asset and the return on the entire portfolio., divided by the standard deviation of the portfolio.
D) the rate at which risky assets are traded for risk-free assets.

Question 65

In the investor's choice problem, the intercept of the budget line corresponds to:

A) the return on the risk-free asset.
B) the standard deviation of the risky asset.
C) the difference between the return on the risky asset and the return on the risk-free asset.
D) The quantity of stocks purchased when the entire budget is spent only on stocks.

Question 66

The Internet bubble of 1995-2000 was caused by the belief that the stock prices of Internet companies:

A) were justified by fundamentals.
B) would keep rising.
C) were probably temporary but certain.
D) all of the above

Question 67

Overconfidence leads an investor to:

A) invest too little money in stocks.
B) bear more risk than she should.
C) think that the riskiness of her portfolio is higher than it actually is.
D) all of the above

Question 68

When the probability of an event is very, very small, individuals tend to:

A) give a disproportionately large weight to its probability of occurring.
B) ignore that possibility in their decision making.
C) hesitate between assigning a large or a small likelihood that it will happen to them.
D) take unnecessary risks.

Question 69

The natural human tendency to underestimate the likelihood of a catastrophic medical emergency is a case of:

A) overconfidence.
B) over-optimism.
C) over-precision.
D) overcorrection.

Question 70

Over-precision is a form of:

A) the law of small numbers.
B) anchoring.
C) framing.
D) salience.

Question 71

Overestimating an individual's prospects or abilities is a case of:

A) overconfidence.
B) over-optimism.
C) over-precision.
D) overcorrection.

Question 72

When a CEO believes (unrealistically) that a new product her firm is developing will be a huge success, she suffers precisely from:

A) overconfidence.
B) over-optimism.
C) over-precision.
D) overcorrection.

Question 73

Investors caught in a bubble believe that:

A) prices; will not fall; prices will only keep going up.
B) prices might eventually fall, but they will know when to sell before that happens.
C) if the bubble bursts, they can sell and still earn a large profit.
D) if the bubble bursts, the losses would not be significant.

Question 74

Figure 19.3.1
Refer to Figure 19.3.1 above. In this diagram of an overconfident investor, the utility-maximizing investment portfolio is:

A) at the tangency of U₁ and the actual budget line.
B) at the tangency of U₁ and the perceived budget line.
C) at the tangency of U₂ and the perceived budget line.
D) at R' on the actual budget line.

Question 75

In the investor's choice problem, the dependent and independent variables are, respectively:

A) the quantity of risk-free assets and the quantity of risky assets.
B) the return on the risk-free asset and the return on the portfolio.
C) the standard deviation of the portfolio and the return on the portfolio.
D) the standard deviation of the risky asset and the return on the risky asset.

Question 76

When a worker believes that she can get a promotion much faster than her peers, she suffers precisely from:

A) overconfidence.
B) over-optimism.
C) over-precision.
D) overcorrection.

Question 77

When a consumer believes that she can pay her credit card much faster than it is realistic, she suffers precisely from:

A) overconfidence.
B) over-optimism.
C) over-precision.
D) overcorrection.

Question 78

Figure 19.3.1
Refer to Figure 19.3.1 above. In equilibrium on the perceived budget line, the investor:

A) reduces the purchase of stocks, but also reduces the risk in her portfolio.
B) reduces the purchase of stocks, but increases the risk in her portfolio.
C) makes the fraction of stocks in her portfolio larger than is optimal.
D) maintains the same fraction of stocks in her portfolio but reduces perceived risk.

Question 79

Figure 19.3.1
Refer to Figure 19.3.1 above. The slope of the perceived budget line is steeper because the investor:

A) decides to invest more in the risk-free asset and less in the stock market.
B) perceives an increase in the standard deviation of the return in the stock market .
C) perceives the riskiness of stocks to be smaller than it really is.
D) becomes more risk averse.

Question 80

Which of the following best describes an unrealistic belief that one can accurately predict outcomes?

A) Overconfidence
B) Over-optimism
C) Over-precision
D) Overcorrection