Question 1

Behavioral economics theory suggests that consumers will be indifferent between a furniture store that offers free delivery and a furniture store that gives a discount to customers who pick up their furniture.

Accepted Answer

Behavioral economics theory suggests that consumers are often influenced by framing effects and perceived value, meaning they might not be indifferent between a store offering free delivery and one offering a discount for pickup due to how the offer is presented and perceived benefits or conveniences.

Question 2

Behavioral economists suggest that consumers will be indifferent between a price of 99¢ and a price of $1.

Accepted Answer

Behavioral economists argue that consumers perceive a significant difference between a price of 99¢ and $1 due to the left-digit effect, making them more likely to buy at 99¢.

Question 3

Francois does not complete his class assignments on time because he routinely underestimates how long it will take and does not allow enough time to complete each assignment. Francois's behavior can be explained by overconfidence.

Accepted Answer

Francois's behavior is an example of overconfidence because he consistently underestimates the time needed for assignments, indicating an overestimation of his own efficiency or productivity.

Question 4

Some people hold on to a lagging stock because they are confident of their ability to predict future movements in stock prices, even though their confidence may not be justified. A behavioral economist would say that people who hang on to a flagging stock for this reason are subject to a framing bias.

Accepted Answer

This behavior is better attributed to overconfidence bias, where investors overestimate their ability to predict future events, rather than framing bias, which involves reacting differently based on how information is presented.

Question 5

Some parents do not set aside money for their children's college because they want to buy toys for their children now. They reason that college is a long way off and that they have plenty of time to save in the future. A behavioral economist might warn these parents against overvaluing the present relative to the future.

Accepted Answer

This behavior is an example of "hyperbolic discounting," where individuals give stronger preference to immediate rewards over future benefits, a concept well-studied in behavioral economics.

Question 6

A behavioral economist would say that people who hold on to a failing stock because they paid so much money for it are overvaluing the present relative to the future.

Accepted Answer

This behavior is better described as an example of the "sunk cost fallacy," where individuals continue a behavior or endeavor as a result of previously invested resources (time, money, or effort), rather than overvaluing the present relative to the future.

Question 7

Current economic theory has no explanation for why people volunteer at homeless shelters and contribute to disaster relief when doing so reduces their ability to consume goods and services.

Accepted Answer

Current economic theory explains altruistic behaviors, such as volunteering at homeless shelters and contributing to disaster relief, through concepts like utility maximization, where individuals derive satisfaction not just from consuming goods and services, but also from the act of giving or helping others, thus increasing their overall utility.

Question 8

Indifference curve analysis uses more restrictive assumptions than marginal utility analysis.

Accepted Answer

Indifference curve analysis is generally considered less restrictive than marginal utility analysis because it does not require the assumption of cardinal utility (measuring utility in numerical terms), relying instead on ordinal utility (ranking preferences without assigning specific values).

Question 9

The marginal utility approach requires fewer assumptions than does the indifference curve approach.

Accepted Answer

The indifference curve approach requires fewer assumptions than the marginal utility approach, as it does not assume cardinal measurability of utility, only ordinal.

Question 10

Indifference curves have negative slopes because it is assumed that consumers want more and not less of a product.

Accepted Answer

The answer of Indifference curves have negative slopes because it...

Question 11

Indifference curves cannot be concave to the origin because the satisfaction consumers get from consuming additional units of a good declines.

Accepted Answer

Indifference curves are typically convex to the origin due to the principle of diminishing marginal rate of substitution, which reflects the decreasing additional satisfaction from consuming more of one good while giving up another.

Question 12

Indifference curves must be concave to the origin because the satisfaction consumers get from consuming additional units of a good declines.

Accepted Answer

Indifference curves are typically convex to the origin, reflecting the principle of diminishing marginal rate of substitution, not the satisfaction from consuming additional units.

Question 13

Indifference curves are bowed inward toward the origin because of the law of diminishing marginal utility.

Accepted Answer

Indifference curves are typically bowed inward toward the origin due to the law of diminishing marginal utility, which states that as a person consumes more of a good, the additional satisfaction (marginal utility) gained from consuming an additional unit of that good decreases, leading to a consumer being willing to give up less of one good to get more of another, hence the inward bow shape.

Question 14

An indifference map shows all the market baskets that give equal satisfaction to a consumer.

Accepted Answer

The answer of An indifference map shows all the market...

Question 15

Hector has a budget for bottled water and soda pop. If the price of soda pop decreases, Hector will achieve the same level of satisfaction because his budget has not changed.

Accepted Answer

A decrease in the price of soda pop allows Hector to buy more soda pop for the same amount of money, potentially increasing his level of satisfaction due to the ability to consume more or allocate savings to other goods.

Question 16

Lucy has a budget for manicures and haircuts. If the price of manicures increases, Lucy will maximize her satisfaction at a higher level.

Accepted Answer

If the price of manicures increases, Lucy will have to adjust her consumption, likely reducing the number of manicures she gets or reallocating her budget, which could lead to a decrease in overall satisfaction, not an increase.

Question 17

Chelsea enjoys tanning sessions and pedicures. If the price of tanning sessions decreases, Chelsea will maximize her satisfaction at a higher level.

Accepted Answer

If the price of tanning sessions decreases, Chelsea can afford more tanning sessions for the same amount of money, potentially increasing her utility or satisfaction if she values tanning sessions.

Question 18

Indifference curve analysis makes the same assumptions as marginal utility analysis.

Accepted Answer

Indifference curve analysis does not rely on the assumption of measurable utility, unlike marginal utility analysis which is based on the quantification of satisfaction or utility derived from consumption. Indifference curves represent combinations of goods between which a consumer is indifferent, focusing on the relative preferences without requiring utility to be measured.

Question 19

The demand curve for any commodity can be derived using indifference curve analysis.

Accepted Answer

Indifference curve analysis can be used to derive the demand curve for a commodity by showing how a consumer's preference between different bundles of goods changes as the price of one of the goods changes, while keeping the consumer's income and the prices of other goods constant. This analysis helps in understanding how the quantity demanded of the commodity varies with its price, thus leading to the derivation of the demand curve.

Question 20

Austin just lost his job and as a result has reduced his budget for baseball games and movies. Because of his lower budget, Austin will not be able to maximize his satisfaction.

Accepted Answer

Austin can still maximize his satisfaction within the constraints of his reduced budget by allocating his resources according to his preferences and the principle of marginal utility.

Quiz 6: Consumer Choice and Demand