Question 1

Which of the following is an example of the systematic bias of paying attention to sunk costs?

Accepted Answer

D is correct because it illustrates the sunk cost fallacy, where individuals continue an activity due to the investment they've already made (in this case, money spent on greens fees), despite not enjoying the current experience (playing in a rainstorm). This is a classic example of paying attention to sunk costs, which are past costs that cannot be recovered.

Question 2

Which of the following behaviors is (are) consistent with hyperbolic discounting?
I. having unprotected sex
II. not studying enough for a final exam
III. spending too much money today
IV. using addictive substances

Accepted Answer

Hyperbolic discounting refers to the tendency for people to prefer smaller, immediate rewards over larger, delayed rewards. This can lead to behaviors such as having unprotected sex, not studying enough for exams, spending too much money today, and using addictive substances, as individuals prioritize immediate pleasure or relief over long-term benefits or consequences.

Question 3

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

Luigi is committing the sunk cost fallacy by letting his past investment (the two-hour drive) influence his decision to buy a lesser-quality saw, even though that investment cannot be recovered.

Question 4

During a down market in Boston, homeowners tried to sell at prices based on what they originally paid. As a result, the Boston real estate market:

Accepted Answer

When homeowners try to sell their houses at prices based on what they originally paid during a down market, it often results in prices that are too high relative to current market conditions. This leads to an excess supply of housing because the prices are more than what buyers are willing to pay, causing houses to remain unsold.

Question 5

Consider 200 people with a disease. Which of the following possibilities are identical?
I. Of the 200 people, 160 will be cured and the rest will die.
II. There is a 40% probability of death and 60% probability of cure.
III. There is a 20% probability of cure and 80% probability of death.
IV. Of the 200 people, 1 in 5 will die and the rest will be cured.

Accepted Answer

I and IV both describe scenarios where 160 out of 200 people are cured (80% cure rate) and 40 out of 200 people die (20% death rate), making them identical in outcome.

Question 6

What is an example of an endowment effect?

Accepted Answer

The endowment effect is a cognitive bias where people value an owned object higher than its market value simply because they own it. Riku's refusal to sell the car for more than he values it, despite the offer being higher than his valuation, is an example of the endowment effect.

Question 7

Suppose a college student was given a university mug that sells for $4 in the university bookstore, and now he is unwilling to sell it even for $10. Which of the following statements best reflects the student's behavior?

Accepted Answer

The student's behavior reflects the endowment effect, which is the phenomenon where people ascribe more value to things merely because they own them. This explains why the student values the mug more highly once it's theirs, even beyond its market price.

Question 8

Which economists accounted for "rational addiction" in utility functions?

Accepted Answer

Gary Becker and Kevin Murphy developed the concept of "rational addiction," which incorporates the idea that individuals can make forward-looking decisions regarding their addictive behaviors, factoring these into their utility functions.

Question 9

Which of the following is an example of the systematic bias of falling prey to framing due to anchoring?

Accepted Answer

Anchoring occurs when individuals rely too heavily on an initial piece of information (the "anchor") to make subsequent judgments or decisions. In choice C, the inflated price serves as an anchor, making the discount appear more significant than it might actually be, thus influencing the person's decision to buy the product. This is a clear example of how framing and anchoring can bias decision-making.

Question 10

Chris purchased a 21-speed road bike for $1,000 but found after a couple of weeks that he did not ride it as often as he thought he would, so he decided to sell it. He listed the bike on a local bike selling website and received several offers less than $1,000, but he refuses to sell for less than what he paid for it. This is an example of _____.

Accepted Answer

Chris is exhibiting the sunk cost fallacy by refusing to sell the bike for less than $1,000, despite the fact that the money spent is a sunk cost and should not influence his decision to sell.

Question 11

Adele doesn't like to wait to purchase items that she wants, but Agnes prefers to pay for things she wants in full. They are both planning on buying a video game system. The store is running an offer that consumers can buy the system for $400 or pay $120 per month for four months. If Adele is a hyperbolic discounter and if the discount rate for the first two months is 50% and then 2% thereafter, then Adele is better off _____ because _____.

Accepted Answer

The answer of Adele doesn't like to wait to purchase...

Question 12

Altruism is:

Accepted Answer

Altruism refers to the unselfish concern for the welfare of others, which means acting with the intention of helping or benefiting someone else without expecting any reward or benefit in return.

Question 13

In an experiment, students were asked to consider the last two digits of their social security number. Next, students were asked to submit bids for a product. There was a positive correlation between the size of the bid and the last two digits of a student's social security number. This experiment highlights the behavioral economic issue of:

Accepted Answer

The experiment demonstrates the concept of "anchoring," where individuals rely too heavily on an initial piece of information (in this case, the last two digits of their social security number) to make subsequent judgments or decisions, such as the size of their bid for a product.

Question 14

A person prefers $50 today to $100 a year from now but prefers $100 in six years to $50 in five years. This best describes the behavioral bias of _____.

Accepted Answer

This behavior is an example of hyperbolic discounting, where the value of future rewards decreases more significantly as the delay to receive those rewards increases, but this effect lessens over longer delays. This leads to inconsistent preferences over time, as seen in the preference for a smaller-sooner reward over a larger-later reward in the short term, but a reversal of this preference over longer time horizons.

Question 15

Which of the following is (are) shortcomings of lab experiments?
I. People in lab experiments know that they are being studied, so they may not behave normally.
II. The amount of money involved in lab experiments is small, which means the participants do not stand to gain or lose much from their choices.
III. Many people in experiments are asked to do things that they have never done before.

Accepted Answer

Lab experiments often face several shortcomings, including the awareness of participants that they are being studied, which can alter their behavior (I); the typically small stakes involved, which might not accurately reflect real-world decision-making pressures (II); and the novelty of tasks, which can affect how participants respond due to unfamiliarity (III).

Question 16

Researchers examined the effect of hurricanes on Florida counties to see how storms affect local labor markets. Because the path and intensity of hurricanes are random, the researchers are conducting a:

Accepted Answer

The researchers are conducting a natural experiment because they are observing the effects of hurricanes, which are random events, on local labor markets without manipulating any variables.

Question 17

Adele doesn't like to wait to purchase items that she wants, but Agnes prefers to pay for things she wants in full. They are both planning on buying a video game system. The store is running an offer that consumers can buy the system for $400 or pay $120 per month for four months. Either choice allows the consumer to leave the store with the video game system. Using the discount rate of 2% per month, a consumer would be better off by _____ because _____.

Accepted Answer

The net present value of paying $120 per month for four months at a 2% monthly discount rate is greater than $400, making the one-time payment of $400 the better financial choice.

Question 18

The field that examines how human psychology affects economic decision making is:

Accepted Answer

Behavioral economics is the field that combines insights from psychology with economic theory to understand how people make decisions, often in ways that deviate from the predictions of traditional economic models.

Question 19

An infomercial is selling a thigh toner for either $99 or three monthly payments of $39 (in which the first payment occurs immediately and remaining payments occur at the end of the next two months). The net present value of the three-month installment plan at a discount rate of 1% per month is _____ which means _____ makes the consumer better off.

Accepted Answer

The answer of An infomercial is selling a thigh toner...

Question 20

Sasha keeps her money in specific accounts for specific purposes. For example, when she saves for a car, she has a car savings account. Sasha is exhibiting _____.

Accepted Answer

Sasha is demonstrating the framing effect, specifically mental accounting, by categorizing her savings into different accounts for different purposes, which influences how she perceives and spends her money.

Quiz 18: Behavioral and Experimental Economics