Question : 10.4   Behavioral Economics: Do People Make Their Choices Rationally? 1) What : 1387714

 

 

10.4   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.