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Question : 7.4   Behavioral Economics: Do People Make Their Choices Rationally? 1) What : 1245194

Economics

 

7.4   Behavioral Economics: Do People Make Their Choices Rationally?

 

1) What is behavioral economics?

A) the study of how people make wealth-maximizing decisions

B) the study of how people behave in the face of scarcity

C) the study of situations in which people act in ways that are not economically rational

D) the study of how people make decisions at the margin

 

2) The observation that people tend to value something more highly when they own it than when they don’t is called the

A) wealth effect.

B) endowment effect.

C) path dependent effect.

D) endorsement effect.

 

3) What is the endowment effect?

A) the phenomenon that economic agents are endowed with different qualities and abilities so that trade among individuals increase efficiency

B) the tendency for economic agents with abundant resources to consume a proportionately greater quantity of goods and services

C) the tendency of people to be unwilling to sell something they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn’t already own it.

D) the tendency of firms to use celebrities endowed with good looks to promote their products

 

4) The endowment effect suggests that that people

A) have a strong attachment to their entitlement, regardless of whether they paid to acquire them.

B) have a strong sense of fairness.

C) are concerned about the welfare of others.

D) act in ways to distort market prices.

 

5) If you exhibit the endowment effect as a decision maker, then you are

A) deciding on the basis of sunk costs.

B) buying something you can’t really afford because you expect to save in the future.

C) ignoring non-monetary opportunity costs.

D) consuming based on celebrity endorsements.

 

6) Which of the following demonstrates the endowment effect?

A) Whelan inherits a cottage in Cape Cod from his grandfather and is unwilling to sell it for sentimental reasons.

B) Robert Pattinson commands a premium in the movie industry because he is endowed with dashing looks.

C) Isabella was not willing to part with her “Robert Pattinson” poster although she was offered $100 for it, a sum greater than what it costs to purchase another such poster.

D) If you received a good as a gift, you are less likely to attach a monetary value to the good.

 

7) The average price of gasoline in your neighborhood is $3.53 per gallon. Your neighbor, Diana tells you that you can “save a lot” by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $3.46 per gallon However, she cautions you that there usually long lines at that station. Is her suggestion beneficial to you?

A) Yes, since gasoline is a necessity for car owners, the total cost savings would be relatively substantial.

B) No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station.

C) Yes, the lower price of gasoline at the rival station increases my purchasing power and enables me to consume more of other goods.

D) No, my friend is misled; clearly, the lower priced gasoline must be of inferior quality and could damage vehicles.

8) Consider the following hypothetical scenarios:

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

Scenario B: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45. The sales attendant at the store tells you that the t-shirt you wish to buy is on sale for $30 at another store, located about a 20-minute drive away.

 

Based on standard economic theory, under which scenario would you make the 20-minute trip to the other store?

A) Scenario A because the pair of jeans is a very expensive item and $15 saving is quite substantial

B) Scenario B because a $15 saving amounts to a substantial discount (about 33 percent)

C) in either scenario if I think a $15 savings is worth the 20-minute trip

D) in none of these scenarios if I think the $15 saving is not worth the 20-minute trip

E) C and D are correct answers.

 

9) Psychologists Daniel Kahneman and Amos Tversky conducted the following experiments by asking a sample of people the following questions:

Scenario A: “Imagine that you have decided to see a play and paid the admission price of $10 per ticket. As you enter the theater you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $10 for another ticket?”

Scenario B: “Imagine that you have decided to see a play where admission is $10 per ticket. As you enter the theater you discover that you have lost a $10 bill. Would you still pay $10 for a ticket for the play?”

 

As long as additional tickets are available, there’s no meaningful difference between losing $10 in cash before buying a ticket, and losing the $10 ticket after buying it. In both cases, you are out $10. Yet, far more subjects (88 percent) in Scenario B say they would pay $10 for another ticket and see the play while in Scenario A, only 46 percent of the subjects say they would be willing to spend another $10 to see the play.

 

Which of the following is the best explanation for the results of the experiment?

A) The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable but this is not so in Scenario B.

B) In Scenario B, people had not anticipated spending an additional $10 so in effect the price of the ticket is $20 and not $10 whereas in Scenario A, the price of the ticket is still $10.

C) In Scenario A, people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket whereas in Scenario B, they do not make the connection between the lost $10 bill and the play.

D) The net benefit derived from watching the play is lower in Scenario A where the effective cost is $20 compared to the net benefit in Scenario B.

 

10) Most film processing companies have a policy of printing every picture on a roll of film and allowing customers to request a refund for pictures that were not clearly developed. The companies do this knowing that most customers do not ask for refunds. This is an example of consumers

A) failing to ignore sunk costs.

B) being overly optimistic about their future behavior.

C) not taking nonmonetary opportunity costs into account.

D) not making themselves aware of the policy regarding refunds.

 

 

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July 1, 2023
    

 

41. Which of the following statements is correct? 
A. When cost of goods sold as a percentage of sales increases the gross margin percentage will increase.
B. It is possible for cost of goods sold in dollars to increase while cost of goods sold as a percentage of sales decreases.
C. If gross margin percentage is the same for the current and past year, then sales and cost of goods sold in dollars did not change.
D. If gross margin percentage increases from one year to the next, then the net income percentage will also increase from one year to the next.

42. Which of the following statements is incorrect? 
A. If selling and administrative expenses as a percentage of sales increases, then gross margin percentage will decrease.
B. If the cost of goods sold percentage decreases and other expenses do not change, then profit margin will increase as a percentage of sales.
C. If sales dollars decrease, a company might still report a higher gross profit percentage if cost of goods sold decreases at a faster rate than the decrease in sales.
D. It is possible for selling and administrative expense in dollars to decrease, while selling and administrative expenses as a percentage of sales to increase.

43. During 2010, Home Style's cost of goods sold percentage was 68.2% and selling and store operating costs was 19.3% of sales. During 2009, their cost of goods sold percentage was 68.9% while selling and store operating costs was 19.2% of sales. What effect would the change in these percentages have on 2010's gross margin percentage and profit margin percentage? 
A. The decrease in the cost of goods sold percentage would increase both the gross margin and profit margin percentages, but the increase in the selling and store operating costs percentage would decrease both the gross margin and profit margin percentages.
B. The decrease in the cost of goods sold percentage would decrease both the gross margin and profit margin percentages, but the increase in the selling and store operating costs would increase both the gross margin and profit margin percentages.
C. The decrease in the cost of goods sold percentage would increase both the gross margin and profit margin percentages and the decrease in the selling and store operating costs percentage would decrease the profit margin percentage.
D. The decrease in the cost of goods sold percentage would decrease both the gross margin and profit margin percentages, but selling and store operating costs would increase the profit margin percentage.

44. Which of the following ratios is not considered to be a test of profitability? 
A. Current ratio
B. Profit margin
C. Return on assets
D. Earnings per share

45. The records of Everyday Electronics Corporation for a particular period include the following:
  
What is the return on equity ratio? 
A. 13.2%.
B. 23.8%.
C. 24.0%.
D. 8.4%.

46. The records of Marshall Company include the following:
  
The return on assets is (round to the nearest tenth of a percent) 
A. 14.9%.
B. 18.3%.
C. 15.3%.
D. 14.7%.

47. The records of Marshall Company include the following:
  
The return on equity is (round to the nearest tenth of a percent) 
A. 21.1%.
B. 10.2%.
C. 16.4%.
D. 17.1%.

48. The records of Marshall Company include the following:
  
The financial leverage percentage is which of the following? 
A. 1.8%
B. 2.8%.
C. 5.8%.
D. 6.4%.

49. Which of the following transactions decreases earnings per share? 
A. Declaring cash dividends payable to the common stockholders.
B. Purchasing treasury stock.
C. The accrual of revenue.
D. Declaring and distributing a 10% common stock dividend.

50. Which of the following transactions decreases earnings per share? 
A. Collection of an account receivable.
B. Selling treasury stock for an amount less than its cost.
C. A decrease in the market value per share.
D. Paying cash in advance for rent.

 

 

default image
July 1, 2023
    

 

41. Which of the following statements is correct? 
A. When cost of goods sold as a percentage of sales increases the gross margin percentage will increase.
B. It is possible for cost of goods sold in dollars to increase while cost of goods sold as a percentage of sales decreases.
C. If gross margin percentage is the same for the current and past year, then sales and cost of goods sold in dollars did not change.
D. If gross margin percentage increases from one year to the next, then the net income percentage will also increase from one year to the next.

42. Which of the following statements is incorrect? 
A. If selling and administrative expenses as a percentage of sales increases, then gross margin percentage will decrease.
B. If the cost of goods sold percentage decreases and other expenses do not change, then profit margin will increase as a percentage of sales.
C. If sales dollars decrease, a company might still report a higher gross profit percentage if cost of goods sold decreases at a faster rate than the decrease in sales.
D. It is possible for selling and administrative expense in dollars to decrease, while selling and administrative expenses as a percentage of sales to increase.

43. During 2010, Home Style's cost of goods sold percentage was 68.2% and selling and store operating costs was 19.3% of sales. During 2009, their cost of goods sold percentage was 68.9% while selling and store operating costs was 19.2% of sales. What effect would the change in these percentages have on 2010's gross margin percentage and profit margin percentage? 
A. The decrease in the cost of goods sold percentage would increase both the gross margin and profit margin percentages, but the increase in the selling and store operating costs percentage would decrease both the gross margin and profit margin percentages.
B. The decrease in the cost of goods sold percentage would decrease both the gross margin and profit margin percentages, but the increase in the selling and store operating costs would increase both the gross margin and profit margin percentages.
C. The decrease in the cost of goods sold percentage would increase both the gross margin and profit margin percentages and the decrease in the selling and store operating costs percentage would decrease the profit margin percentage.
D. The decrease in the cost of goods sold percentage would decrease both the gross margin and profit margin percentages, but selling and store operating costs would increase the profit margin percentage.

44. Which of the following ratios is not considered to be a test of profitability? 
A. Current ratio
B. Profit margin
C. Return on assets
D. Earnings per share

45. The records of Everyday Electronics Corporation for a particular period include the following:
  
What is the return on equity ratio? 
A. 13.2%.
B. 23.8%.
C. 24.0%.
D. 8.4%.

46. The records of Marshall Company include the following:
  
The return on assets is (round to the nearest tenth of a percent) 
A. 14.9%.
B. 18.3%.
C. 15.3%.
D. 14.7%.

47. The records of Marshall Company include the following:
  
The return on equity is (round to the nearest tenth of a percent) 
A. 21.1%.
B. 10.2%.
C. 16.4%.
D. 17.1%.

48. The records of Marshall Company include the following:
  
The financial leverage percentage is which of the following? 
A. 1.8%
B. 2.8%.
C. 5.8%.
D. 6.4%.

49. Which of the following transactions decreases earnings per share? 
A. Declaring cash dividends payable to the common stockholders.
B. Purchasing treasury stock.
C. The accrual of revenue.
D. Declaring and distributing a 10% common stock dividend.

50. Which of the following transactions decreases earnings per share? 
A. Collection of an account receivable.
B. Selling treasury stock for an amount less than its cost.
C. A decrease in the market value per share.
D. Paying cash in advance for rent.

 

 

default image
July 1, 2023
    

 

41. Which of the following statements is correct? 
A. When cost of goods sold as a percentage of sales increases the gross margin percentage will increase.
B. It is possible for cost of goods sold in dollars to increase while cost of goods sold as a percentage of sales decreases.
C. If gross margin percentage is the same for the current and past year, then sales and cost of goods sold in dollars did not change.
D. If gross margin percentage increases from one year to the next, then the net income percentage will also increase from one year to the next.

42. Which of the following statements is incorrect? 
A. If selling and administrative expenses as a percentage of sales increases, then gross margin percentage will decrease.
B. If the cost of goods sold percentage decreases and other expenses do not change, then profit margin will increase as a percentage of sales.
C. If sales dollars decrease, a company might still report a higher gross profit percentage if cost of goods sold decreases at a faster rate than the decrease in sales.
D. It is possible for selling and administrative expense in dollars to decrease, while selling and administrative expenses as a percentage of sales to increase.

43. During 2010, Home Style's cost of goods sold percentage was 68.2% and selling and store operating costs was 19.3% of sales. During 2009, their cost of goods sold percentage was 68.9% while selling and store operating costs was 19.2% of sales. What effect would the change in these percentages have on 2010's gross margin percentage and profit margin percentage? 
A. The decrease in the cost of goods sold percentage would increase both the gross margin and profit margin percentages, but the increase in the selling and store operating costs percentage would decrease both the gross margin and profit margin percentages.
B. The decrease in the cost of goods sold percentage would decrease both the gross margin and profit margin percentages, but the increase in the selling and store operating costs would increase both the gross margin and profit margin percentages.
C. The decrease in the cost of goods sold percentage would increase both the gross margin and profit margin percentages and the decrease in the selling and store operating costs percentage would decrease the profit margin percentage.
D. The decrease in the cost of goods sold percentage would decrease both the gross margin and profit margin percentages, but selling and store operating costs would increase the profit margin percentage.

44. Which of the following ratios is not considered to be a test of profitability? 
A. Current ratio
B. Profit margin
C. Return on assets
D. Earnings per share

45. The records of Everyday Electronics Corporation for a particular period include the following:
  
What is the return on equity ratio? 
A. 13.2%.
B. 23.8%.
C. 24.0%.
D. 8.4%.

46. The records of Marshall Company include the following:
  
The return on assets is (round to the nearest tenth of a percent) 
A. 14.9%.
B. 18.3%.
C. 15.3%.
D. 14.7%.

47. The records of Marshall Company include the following:
  
The return on equity is (round to the nearest tenth of a percent) 
A. 21.1%.
B. 10.2%.
C. 16.4%.
D. 17.1%.

48. The records of Marshall Company include the following:
  
The financial leverage percentage is which of the following? 
A. 1.8%
B. 2.8%.
C. 5.8%.
D. 6.4%.

49. Which of the following transactions decreases earnings per share? 
A. Declaring cash dividends payable to the common stockholders.
B. Purchasing treasury stock.
C. The accrual of revenue.
D. Declaring and distributing a 10% common stock dividend.

50. Which of the following transactions decreases earnings per share? 
A. Collection of an account receivable.
B. Selling treasury stock for an amount less than its cost.
C. A decrease in the market value per share.
D. Paying cash in advance for rent.

 

 

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