Question 1

Which general observation can be inferred from the observation of real people playing the ultimatum game?

Accepted Answer

The observation of real people playing the ultimatum game suggests that people care about fairness, as they often reject unfair offers despite the potential for personal gain. Observations about looks, body image, voice tone, and respect are not directly related to this game and are not supported by the given information.

Question 2

At the beginning of a semester,a group of five students (Marcus,Gerard,Penelope,Zendaya,and Duane)are asked to order a snack that the teacher will deliver to the students free of charge before the first class of the tenth week of the semester.The three choices are an apple,a banana,or a Snickers candy bar.The teacher collects the orders and finds that two students have ordered an apple,two students have ordered a banana,and one student has ordered a Snickers candy bar.The four students who ordered either an apple or a banana cite health consciousness as the reason for their choice.
Immediately before the orders are scheduled to be delivered,the teacher informs the students that they can switch their choice and order something else from the original menu if they wish,or they can receive what they originally ordered.Which of the following scenarios is the best example of inconsistent intertemporal decision-making?

Accepted Answer

Zendaya's decision to switch from a banana to a Snickers candy bar, after initially citing health consciousness as a reason for her choice, represents inconsistent intertemporal decision-making. This inconsistency arises from her initial health-conscious choice followed by a switch to a less healthy option.

Question 3

Consider the following scenario when answering the following questions:
In 2000,researchers Brigitte Madrian and Dennis Shea analyzed the 401(k)savings behavior of employees in a large U.S.corporation before and after an interesting change in the company 401(k)plan.
Before the plan change,employees were not automatically enrolled as participants in the company 401(k)plan upon being hired and were required to complete paperwork if they wanted to opt in.After the plan change,new employees were automatically enrolled in the 401(k)plan and were required to complete paperwork if they wanted to opt out.The amount of time and effort required to either opt in or opt out was approximately equal.None of the economic features of the plan changed.
-A finding of no significant difference in 401(k)plan participation after the plan change provides evidence that employee 401(k)participation decisions are made ________,and ________ effects do not exist in the context of 401(k)plan participation.

Accepted Answer

The finding would suggest that decisions are made irrationally, as the change in enrollment method (opt-in vs. opt-out) significantly affected participation rates, demonstrating the impact of framing effects on decision-making.

Question 4

Mario knows that,over the long run,it is in his best interest to save at least 10 percent of his paycheck for retirement.However,each time he receives his weekly paycheck of $1,000,he ends up spending it all and not depositing any to a retirement account.Mario has resolved to contact his employer's Human Resources Department to set up a 401(k)work-sponsored retirement account where the 10 percent would be deducted automatically from his paycheck before it is issued to him each week.It is apparent from this information that Mario realized

Accepted Answer

Mario realized that he was not consistently saving for retirement despite knowing that it was in his best interest to do so. He took action by setting up an automatic deduction from his paycheck, which indicates that he realized he needed to make his intertemporal decisions consistent.

Question 5

Regina and Brenda are considering playing a game called Matching Twenties.In this game,Regina and Brenda will each place a $20 bill on the table.Both players will then toss a fair coin.If both Regina and Brenda toss heads or both Regina and Brenda toss tails,Regina wins the $40 on the table.If one woman tosses heads and the other tosses tails,Brenda wins the $40 on the table.
Regina decides that she is not willing to play this game because a loss of $20 to Brenda would cause her to lose more utility than she would gain if she won $20 from Brenda.Which concept best explains Regina's choice not to play the game?

Accepted Answer

Prospect theory explains Regina's choice not to play the game because it describes how people value gains and losses differently, leading to decisions that deviate from expected utility theory. Regina values the potential loss of $20 more negatively than the potential gain of $20, which is a key concept in prospect theory.

Question 6

According to traditional economic theory,which presumes both players are fully rational and wish to maximize their incomes,Derek should maximize his gains by offering Heriberto ________ and keeping ________ for himself.

Accepted Answer

The answer of According to traditional economic theory,which presumes both...

Question 7

In behavioral economics,________ suggests that people place more value on avoiding losses than attempting to realize gains.

Accepted Answer

The concept of prospect theory suggests that individuals are more affected by the possibility of loss than the potential for gain. This means that individuals are more likely to take risks to avoid losses rather than to gain something. Therefore, option A is the correct answer.

Question 8

The ________ game is an economic experiment in which two players decide how to divide a pot of money.

Accepted Answer

The ultimatum game involves one player proposing a division of the money and the other player accepting or rejecting the proposal. If the proposal is rejected, neither player receives any money. This game is often used to study fairness and social norms in economic decision-making. Choosing option D allows for a fair division of the money, as the proposing player is incentivized to make a reasonable offer in order to avoid rejection.

Question 9

In 1980,the Schlitz Brewing Company conducted several beer taste tests on live television during NFL football games.One hundred confirmed Budweiser drinkers (who had each signed an affidavit stating that he or she drank at least 12 bottles of Budweiser each week)were each served a glass of both Schlitz and Budweiser in unmarked containers.After tasting both beers,the members of the group were asked which beer they preferred.Between 45 percent and 55 percent of the participants responded that they preferred Schlitz,even though they were confirmed Budweiser drinkers.
Which bias can likely explain why the participants in the group displayed such strong brand allegiance to Budweiser prior to the taste test?

Accepted Answer

The status quo bias can likely explain why the participants in the group displayed strong brand allegiance to Budweiser prior to the taste test. This bias refers to a preference for the current state of affairs or the way things are currently done, and in this case, the participants may have developed a habit or routine of drinking Budweiser without actively considering other options.

Question 10

When people want to maintain their current lifestyles and are reluctant to change,they may exhibit what is known as the

Accepted Answer

The status quo bias refers to a person's preference for maintaining the current situation or decision, even when there are better alternatives available. This bias often stems from a reluctance to change and a desire to avoid potential losses, discomfort, or the effort required to adapt to new circumstances. The other choices (A), (B), (D) and (E) are related to biases related to random sequences or patterns of outcomes, which are not directly relevant to this scenario.

Question 11

Suppose that Derek proposes a split such that Derek will receive $489.99 and Heriberto will receive $10.01.Traditional economic theory predicts that Heriberto will

Accepted Answer

Traditional economic theory assumes that individuals are rational and will therefore accept any amount of money that is greater than nothing, as receiving $10.01 is better than receiving nothing at all.

Question 12

________ applies when a person places more value on avoiding losses than attempting to realize gains.

Accepted Answer

Prospect theory, which was developed by Kahneman and Tversky, proposes that people's decisions are often influenced by their attitudes towards risk. In particular, it suggests that people tend to place more emphasis on avoiding losses than on maximizing gains. Therefore, option B is the best choice for the question.

Question 13

Trevor has been purchasing Fruity Pebbles brand cereal each week for the past two years,even though a different brand,such as Captain Crunch or Rice Krispies,would in all likelihood bring him more utility per dollar spent.A behavioral economist would suspect Trevor is suffering from the ________ bias.

Accepted Answer

The status quo bias is the tendency to stick with familiar options, even when other alternatives provide a greater benefit or value. In this scenario, Trevor is continuing to purchase Fruity Pebbles even though he is aware that other brands may provide more utility for his money.

Question 14

The ________ game is a common game that behavioral economists use in an experimental setting to study how fairness enters into the rational decision-making process.

Accepted Answer

The ultimatum game is specifically designed to study how fairness affects rational decision-making. In this game, one player is given a sum of money and must propose how to divide it with the other player. The other player can either accept or reject the proposal. If they accept, the money is divided as proposed, but if they reject, neither player receives anything. This game allows researchers to study how people weigh their desire for financial gain against their sense of fairness and justice.

Question 15

Jocelyn and Rhonda are playing an ultimatum game where Jocelyn is given $100 and asked to propose a way of splitting it with Rhonda.When Rhonda learns Jocelyn's proposal,Rhonda chooses whether to accept or reject the split.If Rhonda accepts the split,both players receive the money according to Jocelyn's split proposal.If Rhonda rejects the split,both players receive nothing.This game will be played only once,so Rhonda does not have to worry about reciprocity when making her choice.Traditional economic theory presumes that

Accepted Answer

Traditional economic theory presumes that both players are rational and wish to maximize their own payoff. In this game, Jocelyn (the proposer) will propose a split that she believes will be acceptable to Rhonda, but that will maximize her own payoff. Rhonda (the responder) will choose to accept or reject the split based on her own self-interest. Therefore, the best choice is to assume that both players are rational and wish to maximize their own payoff, which is represented by choice D.

Question 16

The ________ is a cognitive bias that leads people to prefer things to change as little as possible.

Accepted Answer

The status quo bias is the cognitive bias that leads people to prefer things to remain the same and change as little as possible. This bias can manifest in various ways, such as resistance to new ideas or reluctance to adopt new technologies or processes.

Question 17

For the past five years,Benjamin has been purchasing Citizens of Humanity brand jeans each time he needs a new pair of jeans,even though a different brand,such as RocaWear or Ecko,would in all likelihood bring him more utility per dollar spent.A behavioral economist would suspect Benjamin is suffering from the ________ bias.

Accepted Answer

Benjamin is exhibiting the status quo bias, which is the tendency to stick with familiar options and resist change, even if a different option might be better. He continues to purchase Citizens of Humanity jeans simply because he has done so in the past, rather than considering other options that may offer better value.

Question 18

The ________ bias leads decision-makers to try to protect what they have,even when an objective evaluation of their circumstances suggests that a change would be beneficial.

Accepted Answer

The description of the bias fits the definition of the status quo bias, which refers to the tendency of people to prefer things to stay the same, even when a change might be beneficial. The other options are not as relevant or specific to the scenario described.

Question 19

Reese and Rebecca are playing an ultimatum game where Reese is given $100 and asked to propose a way of splitting it with Rebecca.When Rebecca learns Reese's proposal,she chooses whether to accept or reject the split.If Rebecca accepts the split,both players receive the money according to Reese's split proposal.If Rebecca rejects the split,both players receive nothing.This game will be played only once,so Reese does not have to worry about reciprocity when making his choice.
Suppose that Reese proposes a split such that Reese will receive $99.99 and Rebecca will receive $0.01.Traditional economic theory predicts that Rebecca will

Accepted Answer

CTraditional economic theory posits that rational agents will accept any amount of money that is greater than nothing, as it increases their utility (A). However, behavioral economics suggests that individuals value fairness and may reject unfair offers to punish the proposer, even at a cost to themselves (C).

Question 20

Peggy and Marcy are playing an ultimatum game where Peggy is given $500 and asked to propose a way of splitting it with Marcy.When Marcy learns Peggy's proposal,Marcy chooses whether to accept or reject the split.If Marcy accepts the split,both players receive the money according to Peggy's split proposal.If Marcy rejects the split,both players receive nothing.This game will be played only once,so Peggy does not have to worry about reciprocity when making her choice.
Which of the following split proposals would Marcy be most likely to accept if she and Peggy were playing the game in an experimental session and both players adhered to bounded rationalism?

Accepted Answer

Given that both players adhere to bounded rationalism, they are likely to prefer fair outcomes. Option E, which proposes an equal split of $250 each, is the most equitable distribution and thus the most likely to be accepted by Marcy.

Quiz 17: Behavioral Economics and Risk Taking