Question 1

A recent willingness-to-pay survey asked respondents to value the waters of Salem Sound. The respondents were asked what they would be willing to pay to help protect the water. They were given the following choices: $10, $40, $100, $300, $650, $1,000, $3,000, $10,000 or fill in a value for some other amount. What type of behavioral bias will be captured by this question the way it is written?

Accepted Answer

The survey question will be subject to a form of framing bias, specifically anchoring, since the suggested amounts may lead people to respond with an inflated willingness to pay. Someone who may have been willing to pay $500 may round up and report $650, even though there was a space provided to write in an amount not listed.

Question 2

In a study to examine altruistic behavior, an economics professor recruits college students to participate in a game. The game consists of teams of two, where one person is the proposer and the other the responder. The proposer receives a sum of money and must decide how to split the money with the responder. If the responder likes how the money was split, each person receives the determined amount. If the responder rejects the split, neither player receives any money. This study is an example of a:

Accepted Answer

A)   Pigouvian conjecture.
B)   lab experiment.
C)   natural experiment.
D)   path-dependent experiment.

Question 3

Use the following to answer question:
Figure 18.1 
-(Figure 18.1)  Suppose that people selling their homes fall prey to the sunk cost fallacy, refusing to sell at the going market price to avoid a nominal loss during an economic downturn. What price might these homeowners try to sell their homes for?

Accepted Answer

A)   $120,000
B)   $150,000
C)   $100,000
D)   any price less than $120,000

Question 4

A furniture store offers customers no payments for one year on all new purchases. Spendthrift Sam takes advantage of the promotion and buys a new bedroom set, despite only being able to make minimal monthly payments on his credit card balances. What behavioral bias is Sam displaying?

Accepted Answer

Sam has self-control problems;...

Question 5

Which of the following are examples of altruism?

Accepted Answer

A)   I and III
B)   I, II, and III
C)   III
D)   II

Question 6

Loss aversion is a:

Accepted Answer

A)   phenomenon whereby simply possessing an item increases its value.
B)   situation in which a consumer prefers avoiding economic losses to acquiring economic gains.
C)   bias whereby a person places too much emphasis on the immediate future, ignoring the recent past.
D)   bias whereby a person places too much emphasis on the immediate future, ignoring the distant future.

Question 7

Behavioral economics:

Accepted Answer

A)   invalidates most of the standard economic models because it is difficult to account for irrational behavior.
B)   suggests that people are even more rational and calculating than suggested by standard economic models.
C)   concludes that, at least for durable goods, demand curves and supply curves both slope upward.
D)   provides insights that can, in many cases, easily be accounted for by standard economic models.

Question 8

The sunk cost fallacy is the:

Accepted Answer

A)   principle that sunk costs matter more and more with the passage of time.
B)   mistaken belief that one should consider sunk costs when making decisions.
C)   idea that people ignore experience when making future decisions.
D)   correct belief that past investments can be recovered from future actions. B

Question 9

What advantages do natural experiments and field experiments have over lab experiments?

Accepted Answer

Unlike lab experiments in university cla...

Question 10

The theory that accounts for "rational addiction" reveals that:

Accepted Answer

A)   consumers who use drugs are exhibiting irrational decision making.
B)   addiction is most common among those earning six figure incomes.
C)   consumers consider both the lifetime costs and benefits (utility)  of addiction.
D)   addiction cannot be classified as rational.

Question 11

Why might overconfidence lead some people to try highly addictive drugs such as methamphetamine?

Accepted Answer

People who are overconfident m...

Question 12

In competitive markets, people who have systemic biases are likely to:

Accepted Answer

A)   increase over time.
B)   exit the market over time or adjust their behaviors.
C)   have a comparative advantage over their rational counterparts.
D)   never enter markets and participate in them.

Question 13

Which of the following is (are)  forms of framing bias?

Accepted Answer

A)   I, III, and IV
B)   II
C)   III and IV
D)   I and II

Question 14

What is an example of an endowment effect?

Accepted Answer

A)   Mark paid $3,100 for a used car that he values at $4,000. Recently, Mark was offered $4,400 for the car but refuses to sell it.
B)   Sammy receives increasing marginal utility as his 401K plan increases.
C)   Toby prefers a guaranteed $200 to a gamble with an expected value of $200.
D)   Deana refuses to transfer money from her checking account into her savings account, even though she has paid all her monthly bills.

Question 15

Outlet stores frequently advertise huge discounts off base prices. Although nobody actually pays the base price, the large discount may convince consumers that they are getting a good deal. The outlet stores are using the high base prices as a form of:

Accepted Answer

A)   shoveling.
B)   anchoring.
C)   yanking.
D)   fanning. B

Question 16

Eli purchased stock in XYC Inc. at $31 a share, but the stock is now worth only $19 a share. Eli believes that XYC's stock will underperform the average stock market return. However, Eli won't sell his stock until it reaches at least $31. Eli's decision making is:

Accepted Answer

A)   biased by sunk costs.
B)   economically rational.
C)   biased by self-control problems.
D)   the result of hyperbolic discounting.

Question 17

People who fail to take inflation into account when calculating losses may be:

Accepted Answer

A)   unbiased loss-averse.
B)   using real variables to make decisions.
C)   loss-averse.
D)   acutely loss-averse.

Question 18

The rational addiction model of Gary Becker and Kevin Murphy contends that:

Accepted Answer

A)   addicts are irrational and do not consider the full costs of using addictive substances.
B)   consumers weigh the benefits of using addictive substances along with their full costs.
C)   standard economic models are not equipped to address socially destructive behavior.
D)   prices play no role in the decisions to use addictive substances.

Question 19

Define or describe the following terms.

Accepted Answer

a. The act of owning a good increases it...

Question 20

Luigi drives two hours to a store to buy a Mikata circular saw. Unfortunately, the store sold its last Mikata saw just before Luigi arrived. Luigi decides to buy a lesser-quality saw so that his two-hour trip was not a waste of time. Luigi is committing the:

Accepted Answer

A)   sunk cost fallacy.
B)   marginal comparison fallacy.
C)   ceteris paribus fallacy.
D)   harmonization conundrum.

Exam 18: Behavioral and Experimental Economics

Correct Answer
verified

Use the following to answer question: Figure 18.1 -(Figure 18.1) Suppose that people selling their homes fall prey to the sunk cost fallacy, refusing to sell at the going market price to avoid a nominal loss during an economic downturn. What price might these homeowners try to sell their homes for?

Correct Answer
verified

A furniture store offers customers no payments for one year on all new purchases. Spendthrift Sam takes advantage of the promotion and buys a new bedroom set, despite only being able to make minimal monthly payments on his credit card balances. What behavioral bias is Sam displaying?

Correct Answer
verified
Sam has self-control problems;...
View Answer

Which of the following are examples of altruism?

Correct Answer
verified

Loss aversion is a:

Correct Answer
verified

Behavioral economics:

Correct Answer
verified

The sunk cost fallacy is the:

Correct Answer
verified
B

What advantages do natural experiments and field experiments have over lab experiments?

Correct Answer
verified
Unlike lab experiments in university cla...
View Answer

The theory that accounts for "rational addiction" reveals that:

Correct Answer
verified

Why might overconfidence lead some people to try highly addictive drugs such as methamphetamine?

Correct Answer
verified
People who are overconfident m...
View Answer

In competitive markets, people who have systemic biases are likely to:

Correct Answer
verified

Which of the following is (are) forms of framing bias?

Correct Answer
verified

What is an example of an endowment effect?

Correct Answer
verified

Outlet stores frequently advertise huge discounts off base prices. Although nobody actually pays the base price, the large discount may convince consumers that they are getting a good deal. The outlet stores are using the high base prices as a form of:

Correct Answer
verified
B

Eli purchased stock in XYC Inc. at $31 a share, but the stock is now worth only $19 a share. Eli believes that XYC's stock will underperform the average stock market return. However, Eli won't sell his stock until it reaches at least $31. Eli's decision making is:

Correct Answer
verified

People who fail to take inflation into account when calculating losses may be:

Correct Answer
verified

The rational addiction model of Gary Becker and Kevin Murphy contends that:

Correct Answer
verified

Define or describe the following terms.

Correct Answer
verified
a. The act of owning a good increases it...
View Answer

Luigi drives two hours to a store to buy a Mikata circular saw. Unfortunately, the store sold its last Mikata saw just before Luigi arrived. Luigi decides to buy a lesser-quality saw so that his two-hour trip was not a waste of time. Luigi is committing the:

Correct Answer
verified

Exam 18: Behavioral and Experimental Economics

Correct AnswerverifiedShow Answer

Use the following to answer question: Figure 18.1 -(Figure 18.1) Suppose that people selling their homes fall prey to the sunk cost fallacy, refusing to sell at the going market price to avoid a nominal loss during an economic downturn. What price might these homeowners try to sell their homes for?

Correct AnswerverifiedShow Answer

A furniture store offers customers no payments for one year on all new purchases. Spendthrift Sam takes advantage of the promotion and buys a new bedroom set, despite only being able to make minimal monthly payments on his credit card balances. What behavioral bias is Sam displaying?

Correct AnswerverifiedSam has self-control problems;...View AnswerShow Answer

Which of the following are examples of altruism?

Correct AnswerverifiedShow Answer

Loss aversion is a:

Correct AnswerverifiedShow Answer

Behavioral economics:

Correct AnswerverifiedShow Answer

The sunk cost fallacy is the:

Correct AnswerverifiedB

What advantages do natural experiments and field experiments have over lab experiments?

Correct AnswerverifiedUnlike lab experiments in university cla...View AnswerShow Answer

The theory that accounts for "rational addiction" reveals that:

Correct AnswerverifiedShow Answer

Why might overconfidence lead some people to try highly addictive drugs such as methamphetamine?

Correct AnswerverifiedPeople who are overconfident m...View AnswerShow Answer

In competitive markets, people who have systemic biases are likely to:

Correct AnswerverifiedShow Answer

Which of the following is (are) forms of framing bias?

Correct AnswerverifiedShow Answer

What is an example of an endowment effect?

Correct AnswerverifiedShow Answer

Outlet stores frequently advertise huge discounts off base prices. Although nobody actually pays the base price, the large discount may convince consumers that they are getting a good deal. The outlet stores are using the high base prices as a form of:

Correct AnswerverifiedB

Eli purchased stock in XYC Inc. at $31 a share, but the stock is now worth only $19 a share. Eli believes that XYC's stock will underperform the average stock market return. However, Eli won't sell his stock until it reaches at least $31. Eli's decision making is:

Correct AnswerverifiedShow Answer

People who fail to take inflation into account when calculating losses may be:

Correct AnswerverifiedShow Answer

The rational addiction model of Gary Becker and Kevin Murphy contends that:

Correct AnswerverifiedShow Answer

Define or describe the following terms.

Correct Answerverifieda. The act of owning a good increases it...View AnswerShow Answer

Luigi drives two hours to a store to buy a Mikata circular saw. Unfortunately, the store sold its last Mikata saw just before Luigi arrived. Luigi decides to buy a lesser-quality saw so that his two-hour trip was not a waste of time. Luigi is committing the:

Correct AnswerverifiedShow Answer

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Sam has self-control problems;...
View Answer

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B

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Unlike lab experiments in university cla...
View Answer

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People who are overconfident m...
View Answer

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B

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a. The act of owning a good increases it...
View Answer

Correct Answer
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