Question 1

A sunk cost is

Accepted Answer

A sunk cost is a cost that has already been paid and cannot be recovered, regardless of whether or not a particular decision is made. It is not the same as opportunity cost (which is the cost of passing up the next best alternative), nor is it the same as the cost of capital invested in a business.

Question 2

Arnold Kim began blogging about Apple products during his fourth year of medical school.Kim's website,MacRumors.com,became so successful that he decided to give up his medical career and work full time on his website,despite the nearly $200,000 he had invested in his education.In making his decision,the $200,000 he spent on his education

Accepted Answer

The sunk cost fallacy is the tendency to make decisions based on the money or resources already invested in a project, rather than on the potential for future success. In this case, the money Kim invested in his medical education is a sunk cost and should be ignored in his decision to pursue a career in blogging. His decision should be based on the potential for future success in his new career, not on the money he has already spent.

Question 3

Which of the following is a common mistake made by consumers?

Accepted Answer

The answer of Which of the following is a common...

Question 4

Suppose you pre-ordered a non-refundable movie ticket to The Dark Knight Rises.On the day of the movie you decide that you would rather not go to the movie.According to economists,what is the rational thing to do?

Accepted Answer

Economists would suggest that the rational thing to do in this scenario is to make your decision based solely on whether you want to see the movie or not. The cost of the ticket is a sunk cost, meaning that it cannot be recovered, and should not influence your decision. Therefore, if you do not want to see the movie, it would not be rational to go simply because you have already paid for the ticket.

Question 5

Alan Krueger conducted a survey of fans at the 2001 Super Bowl who purchased tickets to the game for $325 or $400.Krueger found that (a)94 percent of those surveyed would not have paid $3,000 for their tickets,and (b)92 percent of those surveyed would not have sold their tickets for $3,000.These results are evidence of

Accepted Answer

The answer of Alan Krueger conducted a survey of fans...

Question 6

One reason that consumers and businesses might not act rationally is

Accepted Answer

Consumers and businesses might not act rationally because they may not realize that their actions are inconsistent with their goals. This is often due to cognitive biases or heuristics that individuals rely on when making decisions.

Question 7

What is the endowment effect?

Accepted Answer

The endowment effect refers to the tendency of individuals to value a good they already own more than they would if they did not own it. This often results in them being unwilling to sell the good for a price that is greater than what they would be willing to pay to buy the good if they did not already own it. This effect has been observed across different contexts, including in experiments involving trading cards, mugs, and other items.

Question 8

Suppose Adam Einberg pays $100 for a ticket to a new Broadway play and $100 was the maximum price he was willing to pay.On the day of the performance of the play Adam refuses to sell the ticket for $150.How would behavioral economists explain Adam's refusal to sell his ticket?

Accepted Answer

The endowment effect describes how people tend to place higher value on things they already own, simply because they own them. Adam's refusal to sell his ticket for more than he originally paid can be attributed to this effect.

Question 9

Assume that you had a ticket for a basketball playoff game that you bought for $50,the maximum price you were willing to pay.If a friend of yours offers to buy the ticket for $100 but you decide not to sell it,how can your decision be explained?

Accepted Answer

The answer of Assume that you had a ticket for...

Question 10

Alan Krueger conducted a survey of fans at the 2001 Super Bowl who purchased tickets to the game for $325 or $400.Krueger found that (a)94 percent of those surveyed would not have paid $3,000 for their tickets,and (b)92 percent of those surveyed would not have sold their tickets for $3,000.These results are an example of

Accepted Answer

This is an example of the endowment effect, which is the tendency for people to value something more highly simply because they own it. In this case, the fans who bought Super Bowl tickets for $325 or $400 value them more highly than they would if they didn't already own them, so they are unwilling to sell them for $3,000 even though they would not have paid that much for them. This is a common phenomenon in behavioral economics.

Question 11

Costs that have already been incurred,and which cannot be recovered,are known as

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, regardless of future actions or decisions. Examples of sunk costs include past investments, expenses, or resources that cannot be recovered or refunded. These costs should not be taken into account when making future decisions.

Question 12

Harvey Miller owns a baseball that was hit for a home run by Ted Williams.Harvey,a long-time Boston Red Sox fan,recently refused to sell his baseball for $75,000 even though he would not have paid someone more than $10,000 for the baseball if he did not already own it.Harvey explained his decision not to sell the baseball by noting that: "Ted Williams was my hero.This baseball has a great deal of sentimental value for me." Which of the following can explain Harvey's behavior?

Accepted Answer

The endowment effect is the tendency for people to value something more highly simply because they own it. In this case, Harvey values the baseball more highly than its market value because he owns it and has sentimental attachment to it due to his admiration for Ted Williams. It is not related to implicit/explicit costs, scarcity, or social influences.

Question 13

Behavioral economics refers to the study of situations

Accepted Answer

Behavioral economics specifically looks at situations where consumers and firms appear to behave in ways that are not economically rational or do not follow traditional economic models, leading to suboptimal choices.

Question 14

A new area of economics studies situations in which people appear to be making choices that do not appear to be economically rational.This area is called

Accepted Answer

The given description fits the field of behavioral economics, which studies how psychological, social, and emotional factors can influence economic decision-making, leading to choices that may not be strictly rational or in one's best interest. The other options (B, C, D) are not commonly used terms in economics.

Question 15

Health Clubs typically experience an increase in one-year memberships in January,but many new customers cancel their memberships before the end of the year.Which of the following is the best explanation for this behavior?

Accepted Answer

This behavior can be attributed to the phenomenon known as "optimism bias," where people tend to overestimate their ability to follow through with their goals and intentions. Therefore, they may sign up for a health club membership in January with the intention of using it regularly throughout the year and achieving their fitness goals, but as the year progresses, they may lose motivation, become too busy with other priorities, or face other obstacles that prevent them from continuing their membership.

Question 16

Wilbur Rickhiser,a financial advisor,recently told one of his clients: "The biggest mistake you can make is to hold onto a stock for too long in order to avoid a loss.Let's say you bought a stock for $50 per share but that six months later the price fell to $40 after a poor earnings report.Many of my clients in this situation will hold the stock,hoping the price will later rise above $50.In most cases like this the price does not rise and may even fall.You must know when to cut your losses." Which of the following is the best explanation for Rickhiser's advice?

Accepted Answer

Rickhiser's advice is to not hold onto a stock for too long in order to avoid a loss. This is because people often fail to ignore the sunk costs of their decisions, which is the cost of the stock bought at $50 per share in this scenario. Holding onto the stock in hopes that the price will rise above $50 is an example of not ignoring sunk costs, and can lead to further losses. Therefore, the best explanation for Rickhiser's advice is D.

Question 17

Which of the following is an example of consumers being unrealistic about their future behavior?

Accepted Answer

People often overestimate their future income and ability to save, leading them to postpone saving for retirement. This is an example of being unrealistic about their future behavior.

Question 18

Alan Krueger conducted a survey of fans at the 2001 Super Bowl who purchased tickets to the game for $325 or $400.Krueger found that (a)94 percent of those surveyed would not have paid $3,000 for their tickets,and (b)92 percent of those surveyed would not have sold their tickets for $3,000.These results are an example of

Accepted Answer

The results of the survey demonstrate the endowment effect, which is the tendency for people to value an object or good more highly simply because they own it. The fact that fans at the Super Bowl would not have sold their tickets for $3,000 (a price higher than what they paid) suggests that they placed a higher value on the tickets due to ownership than they would have if they did not already possess them. The other choices do not accurately explain the observed behavior in this scenario.

Question 19

Studies have shown that students who earn high grades in college will have earned much more over a 40 year period than students who receive low grades.Despite this,surveys show that many students fail to study enough hours outside of the classroom to earn high grades.Which of the following is the best explanation for this?

Accepted Answer

This option provides a plausible and likely reason why students may not study enough to earn high grades. It suggests that students may prioritize other activities over studying, such as socializing or participating in extracurricular activities, which they may view as more enjoyable or valuable. This could lead them to undervalue the future economic benefits of higher grades. Options A, B, and C are less relevant to explaining why students do not study enough outside of class. Option A suggests that some students can achieve high grades with less effort, but this does not explain why others do not study enough. Option B suggests that the surveys used to make the observation may not be reliable, but this does not necessarily imply that the observation is incorrect. Option C suggests that new technology may help students study more efficiently, but this option does not explain why students do not use the technology to study more.

Question 20

The highest-valued alternative that must be given up to engage in an activity is the definition of

Accepted Answer

Opportunity cost is the highest-valued alternative that must be given up when making a choice. It is the cost of the next best alternative that is forgone. This concept is important in economics as it helps in analyzing the cost of any economic decision or activity.

Quiz 10: Consumer Choice and Behavioral Economics

A sunk cost is

Which of the following is a common mistake made by consumers?

Suppose you pre-ordered a non-refundable movie ticket to The Dark Knight Rises.On the day of the movie you decide that you would rather not go to the movie.According to economists,what is the rational thing to do?

One reason that consumers and businesses might not act rationally is

What is the endowment effect?

Suppose Adam Einberg pays $100 for a ticket to a new Broadway play and $100 was the maximum price he was willing to pay.On the day of the performance of the play Adam refuses to sell the ticket for $150.How would behavioral economists explain Adam's refusal to sell his ticket?

Assume that you had a ticket for a basketball playoff game that you bought for $50,the maximum price you were willing to pay.If a friend of yours offers to buy the ticket for $100 but you decide not to sell it,how can your decision be explained?

Costs that have already been incurred,and which cannot be recovered,are known as

Behavioral economics refers to the study of situations

A new area of economics studies situations in which people appear to be making choices that do not appear to be economically rational.This area is called

Health Clubs typically experience an increase in one-year memberships in January,but many new customers cancel their memberships before the end of the year.Which of the following is the best explanation for this behavior?

Which of the following is an example of consumers being unrealistic about their future behavior?

The highest-valued alternative that must be given up to engage in an activity is the definition of