Question 1

A person who is risk averse:
A.always makes irrational decisions.
B.always makes rational decisions.
C.is willing to pay in order to avoid economic loss.
D.enjoys taking risks.

Accepted Answer

The answer of A person who is risk averse:
A.always makes...

Question 2

When a decision maker makes a quick decision without taking the time to compare the opportunity cost of all possible options, he is using:
A.bounded rationality.
B.risk aversion.
C.loss aversion.
D.the status quo.

Accepted Answer

The answer of When a decision maker makes a quick...

Question 3

A decision maker who is irrational:
A.chooses an option that makes him or her worse off rather than choosing another available option.
B.chooses the option that makes him or her better off rather than choosing another available option.
C.allocates income in order to maximize his or her satisfaction from consuming goods and services.
D.seeks to maximize business profit.

Accepted Answer

The answer of A decision maker who is irrational:
A.chooses an...

Question 4

The decision to give a birthday present to a friend is:
A.an example of decision making using bounded rationality.
B.an example of behavior based on risk aversion.
C.a rational decision if the person giving the gift is concerned about the recipient's welfare.
D.an irrational economic decision because it reduces the economic payoff of the tipper.

Accepted Answer

The answer of The decision to give a birthday present...

Question 5

The purpose of behavioral economics is to determine why:
A.people maximize utility.
B.firms maximize profit and minimize costs.
C.people make decisions that appear to be irrational.
D.markets usually behave in an efficient manner.

Accepted Answer

The purpose of behavioral economics is to study why people make decisions that do not always align with standard economic assumptions and appear to be irrational. It examines the various cognitive, emotional, and social factors that influence human behavior in economic decisions.

Question 6

When a decision maker makes a choice that is close to but not exactly the one that leads to the best possible economic outcome, he or she is:
A.making an irrational decision.
B.usually ignoring opportunity costs.
C.being overconfident.
D.operating with bounded rationality.

Accepted Answer

The answer of When a decision maker makes a choice...

Question 7

The willingness to sacrifice some economic payoff in order to avoid a potential loss is:
A.irrational behavior.
B.bounded rationality.
C.the result of a concern about fairness.
D.risk aversion.

Accepted Answer

The answer of The willingness to sacrifice some economic payoff...

Question 8

Which of the following is an example of bounded rationality?
A.Ann proofreads her term paper six times.
B.Mary feels that she has studied enough to make an A+ on her economics exam but studies another 2 hours just to be sure.
C.Tim studies only an hour on the morning of his economics exam because he is satisfied just to make a passing grade.
D.Terry does his economics homework twice to be sure that he has a thorough understanding of the topic.

Accepted Answer

The answer of Which of the following is an example...

Question 9

A person who is oversensitive to loss and is unwilling to recognize the loss and move on suffers from
A.loss aversion.
B.risk aversion.
C.status quo bias.
D.mental accounting.

Accepted Answer

The answer of A person who is oversensitive to loss...

Question 10

The habit of mentally assigning dollars to different accounts so that some dollars are worth more
than others is:
A.status quo bias.
B.bounded rationality.
C.loss aversion.
D.mental accounting.

Accepted Answer

This is the definition of mental accounting, where individuals treat money differently depending on the account it is assigned to, rather than viewing it as a single pool of funds.

Question 11

People are willing to buy insurance because of
A.risk aversion.
B.the status quo.
C.the miscalculation of opportunity costs.
D.bounded rationality.

Accepted Answer

Risk aversion refers to an individual's willingness to pay to avoid risk. Insurance provides a sense of security and protection against financial loss, which appeals to individuals who are risk-averse. Therefore, people are willing to buy insurance because of risk aversion.

Question 12

If a person engages in mental accounting, he or she:
A.is unwilling to recognize a loss and move on.
B.values some dollars more than others.
C.tends to avoid making decisions.
D.tries to balance his or her bank account mentally, without writing anything down.

Accepted Answer

Mental accounting refers to the tendency of individuals to assign different values to the same amount of money depending on how and where they received it or how they plan to spend it. This means that someone may value $100 earned from a bonus more than $100 earned from regular work due to the perception of it being "extra" money. Therefore, choice B is the correct answer.

Question 13

A person with loss aversion:
A.is unwilling to spend money to buy insurance.
B.is likely to maximize total revenue rather than profit.
C.is unlikely to ignore sunk costs.
D.is more likely to use a credit card than to pay cash.

Accepted Answer

The answer of A person with loss aversion:
A.is unwilling to...

Question 14

If a decision maker chooses an option that leaves him or her worse off than choosing another available option, he or she is:
A.using bounded rationality.
B.basing the decision on risk aversion.
C.making an irrational decision.
D.making a rational decision.

Accepted Answer

Choosing an option that leaves the decision maker worse off than choosing another available option is an irrational decision because it goes against the goal of decision making – to choose the option that maximizes the decision maker's overall utility or satisfaction. Choosing such an option may be due to a lack of information, flawed reasoning or biases, which are all examples of irrational decision making.

Question 15

Economists' and psychologists' attempts to understand and explain why people make decisions that appear to be irrational is the field of study called:
A.international economics.
B.irrational economics.
C.rational economics.
D.behavioral economics.

Accepted Answer

The answer of Economists' and psychologists' attempts to understand and...

Question 16

When a decision maker chooses the option leading to the outcome that he or she most prefers, he or she has made a decision.
A.irrational
B.rational
C.profit-maximizing
D.loss-minimizing

Accepted Answer

A rational decision is one where the decision maker analyzes all available options and chooses the one that leads to the outcome they most prefer. This process involves weighing the pros and cons and considering all relevant information to arrive at the best possible decision. Therefore, when the decision maker chooses the option leading to their most preferred outcome, they have made a rational decision.

Question 17

Suppose Joan buys a new refrigerator to replace her old one that suddenly quit working.If Joan buys the model on closeout sale and doesn't take time to do research on repair records and energy efficiency of various other models, she is using:
A.status quo decision making.
B.bounded rationality.
C.marginal analysis
D.risk aversion.

Accepted Answer

Joan is using bounded rationality because she is making a decision based on limited information and without thoroughly researching her options. She is accepting the first available option that meets her immediate need.

Question 18

The "good enough" method of decision making is also called:
A.utility-maximizing behavior.
B.profit-maximizing behavior.
C.bounded rationality.
D.irrational decision making.

Accepted Answer

The "good enough" method of decision making is also called bounded rationality, which means that on occasions that we do not have access to all information necessary, we will opt for a satisfactory outcome rather than an optimal one. It is a decision-making process that takes into account limitations such as incomplete information, cognitive biases, and time constraints. Therefore, it is the best answer to this question. A and B are not applicable to the concept of "good enough" decision-making, while D undermines the rational basis of decision-making.

Question 19

A rational economic decision:
A.must always result in the largest economic payoff.
B.usually results in the smallest economic payoff.
C.may or may not result in the largest economic payoff.
D.is concerned with efficiency but not with equity or fairness.

Accepted Answer

A rational economic decision is one that weighs the costs and benefits of each available option and chooses the option that results in the greatest net benefit. However, the "largest economic payoff" is not always the same thing as the "greatest net benefit." Other factors, such as risk and time preferences, may impact the decision. Additionally, a rational economic decision does not necessarily prioritize efficiency over equity or fairness, so option D is not accurate. Therefore, the best answer is C, which acknowledges that a rational economic decision may or may not result in the largest economic payoff.

Question 20

The decision to tip a waiter or waitress is:
A.a rational decision if the person leaving the tip is concerned about fairness.
B.an irrational economic decision because it reduces the economic payoff of the tipper.
C.an example of decision making using bounded rationality.
D.an example of behavior based on risk aversion.

Accepted Answer

The answer of The decision to tip a waiter or...

Quiz 9: Decision Making by Individuals and Firms

A person who is risk averse: A.always makes irrational decisions. B.always makes rational decisions. C.is willing to pay in order to avoid economic loss. D.enjoys taking risks.

When a decision maker makes a quick decision without taking the time to compare the opportunity cost of all possible options, he is using: A.bounded rationality. B.risk aversion. C.loss aversion. D.the status quo.

The purpose of behavioral economics is to determine why: A.people maximize utility. B.firms maximize profit and minimize costs. C.people make decisions that appear to be irrational. D.markets usually behave in an efficient manner.

When a decision maker makes a choice that is close to but not exactly the one that leads to the best possible economic outcome, he or she is: A.making an irrational decision. B.usually ignoring opportunity costs. C.being overconfident. D.operating with bounded rationality.

The willingness to sacrifice some economic payoff in order to avoid a potential loss is: A.irrational behavior. B.bounded rationality. C.the result of a concern about fairness. D.risk aversion.

A person who is oversensitive to loss and is unwilling to recognize the loss and move on suffers from A.loss aversion. B.risk aversion. C.status quo bias. D.mental accounting.

The habit of mentally assigning dollars to different accounts so that some dollars are worth more than others is: A.status quo bias. B.bounded rationality. C.loss aversion. D.mental accounting.

People are willing to buy insurance because of A.risk aversion. B.the status quo. C.the miscalculation of opportunity costs. D.bounded rationality.

If a person engages in mental accounting, he or she: A.is unwilling to recognize a loss and move on. B.values some dollars more than others. C.tends to avoid making decisions. D.tries to balance his or her bank account mentally, without writing anything down.

A person with loss aversion: A.is unwilling to spend money to buy insurance. B.is likely to maximize total revenue rather than profit. C.is unlikely to ignore sunk costs. D.is more likely to use a credit card than to pay cash.

If a decision maker chooses an option that leaves him or her worse off than choosing another available option, he or she is: A.using bounded rationality. B.basing the decision on risk aversion. C.making an irrational decision. D.making a rational decision.

Economists' and psychologists' attempts to understand and explain why people make decisions that appear to be irrational is the field of study called: A.international economics. B.irrational economics. C.rational economics. D.behavioral economics.

When a decision maker chooses the option leading to the outcome that he or she most prefers, he or she has made a decision. A.irrational B.rational C.profit-maximizing D.loss-minimizing

The "good enough" method of decision making is also called: A.utility-maximizing behavior. B.profit-maximizing behavior. C.bounded rationality. D.irrational decision making.

A rational economic decision: A.must always result in the largest economic payoff. B.usually results in the smallest economic payoff. C.may or may not result in the largest economic payoff. D.is concerned with efficiency but not with equity or fairness.