Quiz 10: Consumer Choice and Behavioral Economics

Economists assume that the goal of consumers is to A) do as little work as possible to survive. B) make themselves as well off as possible. C) expend all their income. D) consume as much as possible.

Utility is A) easily measured in units called utils. B) subjective and difficult to measure. C) the consumption of a quasi-public good like electricity or natural gas. D) the production of a quasi-public good like electricity or natural gas.

Marginal utility is the A) total satisfaction received from consuming a given number of units of a product. B) average satisfaction received from consuming a product. C) extra satisfaction received from consuming one more unit of a product. D) satisfaction achieved when a consumer has had enough of a product.

As a consumer consumes more and more of a product in a particular time period,eventually marginal utility A) rises. B) is constant. C) declines. D) fluctuates.

If a consumer receives 22 units of marginal utility for consuming the first can of soda,20 units from consuming the second,and 15 from the third,the total utility of consuming the three units is A) 57 utility units. B) 35 utility units. C) 15 utility units. D) unknown as more information is needed to determine the answer.

If a consumer receives 20 units of utility from consuming two candy bars,and 25 units of utility from consuming three candy bars,the marginal utility of the third candy bar is A) 25 utility units. B) 20 utility units. C) 5 utility units. D) unknown as more information is needed to determine the answer.

If a consumer receives 20 units of utility from consuming two candy bars,and 25 units of utility from consuming three candy bars,the marginal utility of the second candy bar is A) 25 utility units. B) 20 utility units. C) 5 utility units. D) unknown as more information is needed to determine the answer.

Total utility A) cannot decrease as a person consumes more and more of a good. B) has a constant rate of increase as a person consumes more and more of a good. C) is equal to the sum of the marginal utilities of all units consumed. D) is negative when marginal utility is declining.

If,as a person consumes more and more of a good,each additional unit adds less satisfaction than the previous unit consumed,we are seeing the workings of A) the law of demand. B) the law of supply. C) the law of increasing marginal opportunity cost. D) the law of diminishing marginal utility.

The law of diminishing marginal utility states that A) eventually total utility falls as more of a good is consumed, other things constant. B) the extra satisfaction from consuming a good decreases as more of a good is consumed, other things constant. C) the extra satisfaction from consuming a good increases slowly as more of a good is consumed, other things constant. D) when the extra satisfaction from consuming a good becomes negative, total utility starts falling, other things constant.

Marginal utility can be A) negative. B) zero. C) positive. D) positive, negative or zero.

Which of the following is likely to occur as the result of the law of diminishing marginal utility? A) Petra's utility from her second apple was less than her satisfaction from her first orange. B) Hudson enjoyed his second slice of pizza more than his first. C) Sabine's utility from her first granola bar is greater than Rachel's utility from her second granola bar. D) Wesley enjoyed his second bottle of iced tea less than his first bottle, other things constant.

If,when you consume another piece of candy,your marginal utility is zero,then A) you want more candy. B) you have maximized your total utility from consuming candy. C) you have not yet reached the point of diminishing marginal utility. D) you should consume less candy.

Consumers have to make tradeoffs in deciding what to consume because A) not all goods give them the same amount of satisfaction. B) the prices of goods vary. C) they are limited by a budget constraint. D) there are not enough of all goods produced.

If your total satisfaction increases when you consume another unit,your marginal utility must be A) increasing. B) decreasing. C) negative. D) positive.

If total utility increases at a decreasing rate as a consumer consumes more coffee,then marginal utility must A) remains constant. B) increase also. C) decrease. D) be negative.

An item has utility for a consumer if it A) is scarce. B) has a high price. C) is something everyone else wants. D) generates enjoyment or satisfaction.

Suppose your marginal utility from consuming the 3rd slice of cake is zero,then your total utility from consuming cake is A) maximized. B) decreasing. C) negative. D) increasing.

Consumers maximize total utility within their budget constraint by A) buying the cheapest goods they can find. B) buying whatever they like the best. C) buying the goods with the largest marginal utility per dollar spent. D) spending the same dollar amount for each good.

If a consumer always buys goods rationally,then A) the total utilities of the different goods consumed will be equal. B) the average utilities of the different goods consumed will be equal. C) the marginal utility per dollar spent on all goods will be equal. D) the marginal utility of the different goods consumed will be equal.

Table 10-1 Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is $6 and the price of a glass of Bubble Tea is $3. Table 10-1 shows his total utility from different quantities of the two items. -Refer to Table 10-1.What is Keegan's optimal consumption bundle? A) 3 pita wraps and 3 bubble teas B) 3 pita wraps and 4 bubble teas C) 4 pita wraps and 2 bubble teas D) 5 pita wraps and 0 bubble teas

Table 10-1 Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is $6 and the price of a glass of Bubble Tea is $3. Table 10-1 shows his total utility from different quantities of the two items. -Refer to Table 10-1.If Keegan can drink all the bubble tea he wants for free,how many glasses will he consume? A) 4 glasses B) 5 glasses C) 6 glasses D) 7 glasses

Carolyn spends her income on popular magazines and music CDs.If the price of a CD is four times the price of a magazine and if Carolyn is maximizing her utility,she buys A) both goods until the marginal utility of the last CD purchased is four times the marginal utility of the last magazine purchased. B) both goods until the marginal utility of the last magazine purchased is four times the marginal utility of the last CD purchased. C) four times as much magazines as CDs. D) four times as much CDs as magazines.

Suppose Joe is maximizing total utility within his budget constraint.If the price of the last pair of jeans purchased is $25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased is $20,then,using the rule of equal marginal utility per dollar spent,the extra satisfaction received from the last shirt must be A) 2,000 units of utility. B) 500 units of utility. C) 100 units of utility. D) 80 units of utility.

Avner is maximizing total utility by buying sports magazines and protein supplements.For him to buy more sports magazines, A) the price of protein supplements. has to fall. B) the price of sports magazines has to fall. C) the price of sports magazines has to rise. D) Since Avner is maximizing his utility, nothing can change the consumption of sports magazines.

Most people would prefer to drive a luxury car that has all the options,but more people buy less expensive cars even though they could afford the luxury car because A) car buyers are irrational. B) the total utility of less expensive cars is greater than that of luxury cars. C) the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars. D) luxury cars cost a lot more than non-luxury cars.

If Valerie purchases ankle socks at $5 and gets 25 units of marginal utility from the last unit,and bandanas at $3 and gets 12 units of marginal utility from the last bandana purchased,she A) is maximizing total utility and does not want to change their consumption of ankle socks or bandanas. B) wants to consume more ankle socks and fewer bandanas. C) wants to consume more of bandanas and fewer ankle socks. D) wants to consume less of both ankle sock and bandanas.

If Marlowe obtains 9 units of utility per dollar spent on apples and 6 units of utility per dollar spent on oranges,then Marlowe A) is maximizing total utility. B) should buy more apples and fewer oranges. C) should buy more oranges and fewer apples. D) should buy fewer oranges and fewer apples.

If Callum is consuming his utility maximizing bundle and the price of one good rises,what happens to the marginal utility per dollar spent on this good (MU/P),and what should Callum do? A) MU/P has increased and Callum should buy more of this good. B) MU/P has increased and Callum should buy less of this good. C) MU/P has decreased and Callum should buy more of this good. D) MU/P has decreased and Callum should buy less of this good.

If Ewan is consuming his utility maximizing bundle and the price of one good falls,what happens to the marginal utility per dollar spent on this good (MU/P),and what should Ewan do? A) MU/P has increased and Ewan should buy more of this good. B) MU/P has increased and Ewan should buy less of this good. C) MU/P has decreased and Ewan should buy more of this good. D) MU/P has decreased and Ewan should buy less of this good.

When the price of audio books,a normal good,falls,causing your purchasing power to rise,you buy more of them due to A) the substitution effect. B) the income effect. C) the deadweight loss effect. D) the elasticity effect.

When the price of summer tank tops falls and you buy more of them because they are relatively less expensive,this is called A) the substitution effect. B) the income effect. C) the deadweight loss effect. D) the elasticity effect.

The substitution effect of an increase in the price of Raisin Bran refers to A) the decrease in the demand for Raisin Bran when its price rises. B) the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Raisin Bran shifts to the left. C) the fact that the higher price of Raisin Bran lowers consumer's purchasing power, holding money income constant. D) the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, cause consumers to buy less Raisin Bran.

The income effect of an increase in the price of salmon A) is the change in the demand for salmon when income increases. B) refers to the relative price effect - salmon is more expensive compared to other types of fish - which causes the consumer to buy less salmon. C) refers to the effect on a consumer's purchasing power which causes the consumer to buy less salmon, holding all other factors constant. D) is the change in the demand for other types of fish, say trout, that result from a decrease in purchasing power.

If the price of lattes,a normal good you enjoy,falls, A) the income and substitution effects offset each other but the price effect leads you to buy more lattes. B) both the income and substitution effects lead you to buy more lattes. C) the income effect which causes you to increase your latte consumption outweighs the substitution effect which causes you to reduce your latte consumption, resulting in more latte purchased. D) the substitution effect which causes you to increase your latte consumption outweighs the income effect which causes you to reduce your latte consumption, resulting in more latte purchased.

If the price of muffins,a normal good you enjoy,rises, A) the income and substitution effects offset each other but the price effect leads you to buy fewer muffins. B) both the income and substitution effects lead you to buy fewer muffins. C) the substitution effect which causes you to decrease your muffin consumption outweighs the income effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. D) the income effect which causes you to decrease your muffin consumption outweighs the substitution effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased.

The demand curve for corn is downward sloping.If the price of corn,an inferior good,falls, A) the income effect which causes you to reduce your corn purchases is smaller than the substitution effect which causes you to increase your corn purchases, resulting in a net increase in quantity demanded. B) the income effect which causes you to increase your corn purchases is larger than the substitution effect which causes you to reduce your corn purchases, resulting in a net increase in quantity demanded. C) both the income and substitution effects reinforce each other to increase the quantity demanded. D) the income and substitution effects offset each other but the price effect of an inferior good leads you to buy less corn.

The demand curve for canned peas is downward sloping.If the price of canned peas,an inferior good,rises, A) the income effect which causes you to reduce your canned peas purchases is smaller than the substitution effect which causes you to increase your purchases, resulting in a net increase in quantity demanded. B) the income effect which causes you to increase your canned peas purchases is smaller than the substitution effect which causes you to reduce your purchases, resulting in a net decrease in quantity demanded. C) both the income and substitution effects reinforce each other to decrease the quantity demanded. D) the income and substitution effects offset each other but the price effect of an inferior good leads you to buy more canned peas.

Consider a downward-sloping demand curve.When the price of an inferior good increases,the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions and quantity demanded increases. D) work in opposite directions and quantity demanded decreases.

Consider a downward-sloping demand curve.When the price of an inferior good decreases,the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions and quantity demanded increases. D) work in opposite directions and quantity demanded decreases.

Consider a downward-sloping demand curve.When the price of a normal good increases,the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions and quantity demanded increases. D) work in opposite directions and quantity demanded decreases.

Consider a downward-sloping demand curve.When the price of a normal good decreases,the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions and quantity demanded increases. D) work in opposite directions and quantity demanded decreases.

Table 10-2 Table 10-2 above shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods. -Refer to Table 10-2.What is Keira's marginal utility per dollar spent on the third cup of soup? A) 72 units of utility B) 36 units of utility C) 12 units of utility D) 6 units of utility

Table 10-2 Table 10-2 above shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods. -Refer to Table 10-2.If Keira maximizes her utility,how many units of each good should she buy? A) 1 cup of soup and 5 sandwiches B) 3 cups of soup and 4 sandwiches C) 6 cups of soup and 2 sandwiches D) 4 cups of soup and 3.5 sandwiches

Table 10-2 Table 10-2 above shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods. -Refer to Table 10-2.Suppose Keira's income increases from $18 to $23 but prices have not changed.What is her utility maximizing bundle now? A) 6 cups of soup and 5 sandwiches B) 4 cups of soup and 5 sandwiches C) 5 cups of soup and 4 sandwiches D) 5 cups of soup and 5 sandwiches

Table 10-2 Table 10-2 above shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods. -Refer to Table 10-2.Holding prices constant,when Keira's income changed from $18 to $23,her utility maximizing bundle changed.Based on your answers to her optimal choices at the two income levels,what type of goods are soup and sandwiches? A) Soup is an inferior good and sandwiches are a normal good. B) Soup is a normal good and sandwiches are an inferior good. C) Both soup and sandwiches are normal goods. D) Both soup and sandwiches are inferior goods.

Table 10-2 Table 10-2 above shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods. -Refer to Table 10-2.Holding prices constant,when Keira's income changed from $18 to $23,what happens to her total utility and to the marginal utilities of the last cup of soup and the last sandwich purchased? A) Her total utility increases but the marginal utilities of the last cup of soup and the last sandwich consumed decrease. B) Her total utility, the marginal utility of the last cup of soup consumed and the marginal utility of the last sandwich consumed, all increase. C) Her total utility decreases but the marginal utilities of the last cup of soup and the last sandwich consumed increase. D) Her total utility and the marginal utility of the last cup of soup consumed increase but marginal utility of the last sandwich consumed decreases. E) Her total utility and the marginal utility of the last sandwich consumed increase but marginal utility of the last cup of soup consumed decreases.

Adhira buys chocolates and almonds.She has 3 bars of chocolates and 4 bags of almonds.The marginal utility of the third chocolate bar is 18 units of utility and the marginal utility from the fourth bag of almonds is also 18.Is Adhira maximizing her utility? A) Yes, the marginal utility from the last unit of each good is equal. B) No, she must buy 1 more chocolate bar to equate her quantities of the two goods. C) No, she must buy cut back to 3 bags of almonds to equate her quantities of the two goods. D) No, without information on her income and the prices of the two goods, we cannot answer the question.

If you received negative marginal utility from consuming the 4th slice of pizza,then your total utility from 4 slices of pizza must be less than your total utility from 3 slices of pizza.

When diminishing marginal utility sets in,total utility must be negative.

A consumer maximizes her total utility from a bundle of goods when her marginal utility from each good is equal.

The economic model of consumer behavior explains how consumers' tastes and preferences are formed.

The income effect of a price increase causes a decrease in the quantity demanded of a normal good.

The substitution effect of a price increase causes a decrease in the quantity demanded of an inferior good.

What is marginal utility and what is the law of diminishing marginal utility?

Eliza consumes 12 cappuccinos and 8 apple turnovers per week.The price of cappuccino is $4 each and apple turnovers are $1 each. a.What is the amount of income allocated to cappuccino and apple turnover consumption? b.What is the price ratio (the price of cappuccino relative to the price of apple turnovers)? c.Explain the meaning of the price ratio you computed. d.If Eliza maximize utility,what is the ratio of the marginal utility of cappuccino to the marginal utility of apple turnovers? e.If the price of apple turnovers falls,will Eliza consume more apple turnovers,fewer apple turnovers or the same amount of apple turnovers? Explain your answer using the rule of equal marginal utility per dollar.

After getting an A on your economics exam,you decide to go to your favorite Mexican restaurant to celebrate.You are having trouble deciding whether to order the chipotle chicken chimichanga or the cilantro seafood enchiladas.Use the rule of equal marginal utility per dollar to determine which one to purchase: (a)the chimichanga for $8 which gives you 120 units of utility,or (b)the enchiladas for $15 which gives you 195 units of utility?

Arnie Ziffel has $20 per week to spend on any combination of pineapples and green tea.The price of a pineapple is $4 and the price of a bottle of green tea is $2.The table below shows Arnie's utility values.Use the table to answer the questions that follow the table. a.Complete the table by filling in the blank spaces. b.Suppose Arnold purchases 4 pineapples and 2 bottles of green tea.Is he consuming the optimal consumption bundle? If so,explain why.If not,what combination should he buy and why?

Figure 10-1 -Refer to Figure 10-1.When the price of hoagies increases from $5.00 to $5.75,quantity demanded decreases from Q1 to Q0.This change in quantity demanded is due to A) the price and output effects. B) the income and substitution effects. C) the fact that marginal willingness to pay falls. D) the law of diminishing marginal utility.

Figure 10-1 -Refer to Figure 10-1.Which of the following statements is true? A) Quantities Q0 and Q1 are the utility-maximizing quantities of hoagies at two different prices of hoagies. B) Quantities Q0 and Q1 may not necessarily be the utility-maximizing quantities of hoagies at two different prices because we have no information on the consumer's budget or the price of other goods. C) Quantity Q0 could be a utility-maximizing choice if the price is $5.75, but quantity Q1 may not be because we have no information on the marginal utility per dollar when price changes. D) Quantities Q0 and Q1 are derived independently of the utility-maximizing model.

In order to derive an individual's demand curve for salmon,we would observe what happens to the utility-maximizing bundle when we change A) income and hold everything else constant. B) tastes and preferences and hold everything else constant. C) the price of the product and hold everything else constant. D) the price of a close substitute and hold everything else constant.

Along a downward-sloping linear demand curve, A) the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities increase. B) the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities remain constant. C) the marginal utility from the consumption of each unit of the good falls and the total utility from consuming larger quantities increases. D) the marginal utility from the consumption of each unit of the good rises and the total utility from consuming larger quantities remain constant.

Economists Robert Jensen and Nolan Miller reasoned that to be a Giffen good,with an income effect larger than its substitution effect,a good must be ________ and make up a ________ portion of a consumer's budget. A) a normal good; very small B) an inferior good; very small C) a normal good; very large D) an inferior good; very large

The demand curve for a Giffen good is A) non-linear but downward-sloping. B) vertical. C) upward-sloping. D) non-existent.

Giffen goods A) are theoretical and have never been discovered in the real world. B) have not existed since prior to the Industrial Revolution. C) were proven to exist in the 1890s by Sir Robert Giffen. D) were not shown to actually exist until 2006.

Each price-quantity combination on a consumer's demand curve shows the utility-maximizing quantity at the given price.

A Giffen good could be either a normal good or an inferior good.

The income effect of a price increase for a Giffen good outweighs the substitution effect.

The demand curve for an inferior good can never be downward-sloping.

The demand curve for a luxury good is upward-sloping.

What is a Giffen good?

What must be true in terms of the income effect,the substitution effect,and the type of good for the good's demand curve to be upward sloping?

Consider the following factors: a.culture B)religion C)customs D)prices E)income Which of the factors above are likely to influence the choices consumers make? A) a, d, and e only B) all the factors except b C) all the factors except c D) d and e only E) all the factors listed

What is the common feature displayed by the following items? a.eating in a newly opened "fusion" cuisine restaurant B)attending a Red Sox game in Fenway Park C)wearing Lucky Brand designer jeans A) They are all highly inelastic goods. B) The consumption of these goods takes place privately. C) The consumption of these goods takes place publicly. D) They tend to be consumed by better educated people.

Consider a good whose consumption takes place publicly.Your decision to buy that good depends A) both on the characteristics of the product and on how many other people are buying the good. B) only on the characteristics of the good. C) only on how many other people buy the good. D) only on the price of the good.

Which of the following does not explain why consumers buy products that many other consumers are already buying? A) technology B) the satisfaction people derive by being viewed as "fashionable" C) cost-effective way to gather information about a product D) differences in tastes and preferences

Identify the one statement that does not demonstrate how social effects influence consumer choice. A) Students in an Economics class are required to purchase a textbook assigned by the professor. B) There is utility gained from consuming goods or services that others are consuming. C) Some products that people consume are determined by the social popularity of the products. D) Companies such as Zappos.com and Netflix invite their consumers to write reviews about their experience with their products which are then posted on the internet for others to see.

Firms pay famous individuals to endorse their products because A) apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product. B) the firms are irrational and are wasting advertising expenditures. C) famous people obviously know what are the best goods and services. D) famous people only consume high quality products.

By hiring Justin Bieber to advertise its electronics Buy Back program,Best Buy is hoping to change its image and reach a new,younger target market.By using celebrities such as Bieber to endorse products,companies are hoping that its customers will respond positively and business will increase.All of the following are reasons why celebrity endorsements may increase sales for advertised products except A) consumers may believe that celebrities have more information than they do about the advertised product. B) consumers may feel closer to celebrities if they purchase the products being endorsed. C) consumers can be sure that a company would not pay a large sum for a celebrity to endorse its product unless the product is the best available in the market. D) consumers may believe they will appear more fashionable if they purchase products endorsed by certain celebrities.

A network externality occurs when A) there is production cost savings from being networked with suppliers. B) there is production cost savings from being networked with buyers. C) the usefulness of a good is affected by how many others use the good. D) the usefulness of a good is affected by celebrities who use the good.

Once a product becomes established,network externalities may create ________ costs that make consumers reluctant to buy a new product with better technology. A) external B) implicit C) switching D) marginal

A significant downside to network externalities is that A) there may be large switching costs to consumers of changing products so that consumers end up using products with inferior technologies. B) firms may network with unethical suppliers or distributors. C) the costs of hiring celebrity endorsements may be very high. D) there may be large switching costs to firms changing technologies.

All of the following products are most likely to have significant network externalities except A) cat food. B) cell phones. C) popular board games. D) fax machines.

Which of the following is used to explain why a consumer's willingness to buy Microsoft Office increases as the number of other people who use Microsoft Office increases? A) network externalities B) market failure C) diminishing marginal utility D) the income effect of a price change

A good is path dependent when A) consumers get utility from consuming goods that others are consuming, such as restaurants. B) the first technology that was adopted has an advantage over a better technology that came later. C) people who move location follow the path of people who moved before them. D) it can only be used in one way.

A standard which came to the market first,such as the QWERTY letter layout in typewriters,can become entrenched (this layout is still used in computer keyboards today).What is this phenomenon called? A) network externalities B) path dependency C) sunk cost D) comparative advantage

Many economists do not believe that network externalities lock consumers into the use of products that have technology inferior to other,similar products.These economists believe that A) consumers are always rational. B) in practice, the gains from using a superior technology exceed the losses consumers incur from switching costs. C) there is no good evidence that switching costs exist. D) the government will prevent products with inferior technology from being sold to consumers.

Economists would refer to the increase in product sales because of celebrity endorsements as being the result of A) network externalities. B) the endowment effect. C) social influence. D) the ultimatum game.

One explanation for the increase in product sales because of celebrity endorsements is that people seem to receive ________ from goods they believe are popular. A) more utility B) diminishing utility C) greater network externalities D) increased path dependency

Many airlines have not reduced or eliminated fuel surcharges despite the price of oil dropping.A logical reason for this is that the decline in fuel prices A) shifted the supply curve for airline tickets to the left, and at the same time an increase in demand for airline tickets shifted the demand curve to the right, so prices did not decline. B) shifted the supply curve for airline tickets to the right, and at the same time a decrease in demand for airline tickets shifted the demand curve to the left, so prices still increased. C) shifted the supply curve for airline tickets to the right, and at the same time an increase in demand for airline tickets shifted the demand curve to the right, so prices still increased. D) shifted the supply curve for airline tickets to the left, and at the same time a decrease in demand for airline tickets shifted the demand curve to the left, so prices did not decline.

Research by Daniel Kahneman,Jack Knetch,and Richard Thaler has shown that companies like airlines were explicitly able to include a fuel surcharge in their prices because A) consumers had no choice but to pay the price of the surcharges due to the lack of competition in the industry. B) a government-imposed price ceiling on airline ticket prices left the airlines not other way to cover the increase in costs. C) adding a separate fuel surcharge to the price of airline tickets did not actually increase the price of the tickets. D) consumers see it as fair for firms to raise prices after an increase in costs.

For which of the following products is social influence likely to have the greatest impact? A) toothpaste B) restaurants C) high-blood pressure medication D) school textbook

Jamal,Lawson and Kyle have been standing in line for almost an hour waiting to be served at Kirala,a popular new Japanese restaurant.It is possible that some of the people in line won't be served at all before the restaurant closes.Which of the following could explain why the restaurant does not simply raise prices high enough to eliminate the lines? a.In situations where consumption takes place publicly,demand for the product is also influenced by how many other people are buying the product.Consequently,a popular restaurant that increased its prices enough to eliminate lines might find that it had also eliminated its popularity. B)Firms may sometimes not raise their prices for fear that it violates people's sense of fairness and might alienate customers. C)The demand for restaurant meals is relatively elastic and if the firm raise prices it will lower its profits. A) a only B) a and b only C) a and c only D) a, b, and c

Which of the following is an experiment which tests whether fairness is important in consumer decision making? A) the fair trade principle B) the ultimatum game C) the preferential treatment game D) the behavioral experiment

In the ultimatum game,allocators usually offer recipients at least a 40 percent share of the money,and recipients almost always reject offers of less than a 10 percent share.Which of the following does not explain why allocators offer recipients a relatively generous share and why recipients reject meager offers? A) Fear of arousing outrage and abhorrence could influence economic decisions. B) People can and often do reject offers that offend their sense of fairness even if doing so means taking a monetary loss. C) Some people are careful not to engage in economic behavior that might offend and alienate others. D) Allocators can count on recipients to ignore all considerations except financial benefit.

Economists have used ________ and ________ in experiments designed to determine whether consumers care about fairness when they make decisions. A) Giffen goods; luxury goods B) the income effect; the substitution effect C) the ultimatum game; the dictator game D) network externalities; the endowment effect

A network externality refers to a situation in which the usefulness of a product decreases with the number of consumers who use it.

Economists have shown that when the ultimatum game experiment is carried out,both allocators and recipients act as if fairness is important.

The iPod is a product without any significant network externalities.

Why might network externalities result in products that contain inferior technologies?

List three reasons why demand for a product will often increase if the product is endorsed by a celebrity.

Professor Parallax chooses two students in his economics class,Jasmine and Cassandra,to participate in the ultimatum game.He chooses Jasmine to be the allocator and Cassandra to be the recipient.He gives Jasmine $50 and as the allocator,she gets to decide how to split the money with Cassandra.If Cassandra decides to accept the amount allocated to her by Jasmine,both students get to keep the money.If Cassandra decides to reject her allocation,neither student gets to keep the money.How much will each student end up with if each student acts as if fairness is important? How much will each student end up with if only Cassandra acts as if fairness is important? How much will each student end up with if neither student cares about fairness?

Music writer Anthony Kuzminski praised rock star Tom Petty in a 2007 article in the online Unrated Magazine.Kuzminski wrote: "Something Petty never can get enough credit for is his fan-friendly attitude.He kept ticket prices for [his concerts] at $50 when other acts this summer are charging upwards of $100 for stadium gigs.Petty could charge more,but he doesn't see the point.He has stated time and time again he still makes millions when he's on the road,regardless of his ticket prices.He is the last of the fan friendly rock stars out there." Use economic reasoning to write a rationale for Tom Petty's decision to charge prices for his band's ("Tom Petty and the Heartbreakers")concerts that are less than market clearing prices. Source: Anthony Kuzminski,"Tom Petty & The Heartbreakers at the Vic Theater" http://www.unratedmagazine.com/

What is behavioral economics? A) the study of how people make wealth-maximizing decisions B) the study of how people behave in the face of scarcity C) the study of situations in which people act in ways that are not economically rational D) the study of how people make decisions at the margin

The observation that people tend to value something more highly when they own it than when they don't is called the A) wealth effect. B) endowment effect. C) path dependent effect. D) endorsement effect.

What is the endowment effect? A) the phenomenon that economic agents are endowed with different qualities and abilities so that trade among individuals increase efficiency B) the tendency for economic agents with abundant resources to consume a proportionately greater quantity of goods and services C) the tendency of people to be unwilling to sell something they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it. D) the tendency of firms to use celebrities endowed with good looks to promote their products

The endowment effect suggests that that people A) have a strong attachment to their entitlement, regardless of whether they paid to acquire them. B) have a strong sense of fairness. C) are concerned about the welfare of others. D) act in ways to distort market prices.

If you exhibit the endowment effect as a decision maker,then you are A) deciding on the basis of sunk costs. B) buying something you can't really afford because you expect to save in the future. C) ignoring non-monetary opportunity costs. D) consuming based on celebrity endorsements.

Which of the following demonstrates the endowment effect? A) Whelan inherits a cottage in Cape Cod from his grandfather and is unwilling to sell it for sentimental reasons. B) Robert Pattinson commands a premium in the movie industry because he is endowed with dashing looks. C) Isabella was not willing to part with her "Robert Pattinson" poster although she was offered $100 for it, a sum greater than what it costs to purchase another such poster. D) If you received a good as a gift, you are less likely to attach a monetary value to the good.

The average price of gasoline in your neighborhood is $3.53 per gallon.Your neighbor,Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $3.46 per gallon However,she cautions you that there usually long lines at that station.Is her suggestion beneficial to you? A) Yes, since gasoline is a necessity for car owners, the total cost savings would be relatively substantial. B) No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station. C) Yes, the lower price of gasoline at the rival station increases my purchasing power and enables me to consume more of other goods. D) No, my friend is misled; clearly, the lower priced gasoline must be of inferior quality and could damage vehicles.

Consider the following hypothetical scenarios: Scenario A: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45.The sales attendant at the store tells you that the pair of jeans you wish to buy is on sale for $160 at another store,located about a 20-minute drive away. Scenario B: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45.The sales attendant at the store tells you that the t-shirt you wish to buy is on sale for $30 at another store,located about a 20-minute drive away. Based on standard economic theory,under which scenario would you make the 20-minute trip to the other store? A) Scenario A because the pair of jeans is a very expensive item and $15 saving is quite substantial B) Scenario B because a $15 saving amounts to a substantial discount (about 33 percent) C) in either scenario if I think a $15 savings is worth the 20-minute trip D) in none of these scenarios if I think the $15 saving is not worth the 20-minute trip E) C and D are correct answers.

Psychologists Daniel Kahneman and Amos Tversky conducted the following experiments by asking a sample of people the following questions: Scenario A: "Imagine that you have decided to see a play and paid the admission price of $10 per ticket.As you enter the theater you discover that you have lost the ticket.The seat was not marked and the ticket cannot be recovered.Would you pay $10 for another ticket?" Scenario B: "Imagine that you have decided to see a play where admission is $10 per ticket.As you enter the theater you discover that you have lost a $10 bill.Would you still pay $10 for a ticket for the play?" As long as additional tickets are available,there's no meaningful difference between losing $10 in cash before buying a ticket,and losing the $10 ticket after buying it.In both cases,you are out $10.Yet,far more subjects (88 percent)in Scenario B say they would pay $10 for another ticket and see the play while in Scenario A,only 46 percent of the subjects say they would be willing to spend another $10 to see the play. Which of the following is the best explanation for the results of the experiment? A) The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable but this is not so in Scenario B. B) In Scenario B, people had not anticipated spending an additional $10 so in effect the price of the ticket is $20 and not $10 whereas in Scenario A, the price of the ticket is still $10. C) In Scenario A, people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket whereas in Scenario B, they do not make the connection between the lost $10 bill and the play. D) The net benefit derived from watching the play is lower in Scenario A where the effective cost is $20 compared to the net benefit in Scenario B.

Most film processing companies have a policy of printing every picture on a roll of film and allowing customers to request a refund for pictures that were not clearly developed.The companies do this knowing that most customers do not ask for refunds.This is an example of consumers A) failing to ignore sunk costs. B) being overly optimistic about their future behavior. C) not taking nonmonetary opportunity costs into account. D) not making themselves aware of the policy regarding refunds.

Sunk costs A) are costs associated with repairing something you already own. B) are important for optimal decision making. C) are costs that have already been paid and cannot be recaptured in any significant way. D) are costs that firms sink into marketing.

Which of the following is a common mistake consumers commit when they make decisions? A) They take into account nonmonetary opportunity costs but ignore monetary costs. B) They are overly pessimistic about their future behavior. C) They fail to ignore sunk costs. D) They sometimes value fairness too much.

Which of the following is not a common mistake made by consumers? A) the failure to take into account the implicit costs of an activity B) the failure to ignore sunk costs C) being overly optimistic about their future behavior D) being overly pessimistic about their future behavior

Grace Makutsi finally bought a pair of blue shoes that she had been coveting for a long time.In less than a week she discovered that the shoes were uncomfortable.Grace went back to wearing her old pair and stashed away the new pair.When asked by her boss,Mme.Ramotswe why does she not simply give away the new pair,she said: "But I paid so much for them." Grace's behavior A) is rational: she should not discard a valuable item. B) ignores the fact that the purchase price is now a sunk cost and has no bearing on whether she should give them away or not. C) supports the endowment effect which states that ownership of an item makes it more valuable. D) is rational because the more you pay for an item the more valuable it is.

Standard economic theory asserts that sunk costs are irrelevant in making economic decisions,yet studies conducted by behavioral economists reveal that sunk costs often affect economic decisions.Which of the following could explain this observation? A) People measure the value of a good in terms of its purchase price. B) Even though sunk costs cannot be recovered, it has been incurred and therefore should be treated as part of the product's value. C) If consumers maximize their utility, it makes sense to consider the full purchase price of a product in their consumption decisions. D) Sunk costs have a higher opportunity cost than costs that can be recovered.

Many celebrities are paid to endorse products,but celebrity endorsements do come with risks.Once a firm is associated with a celebrity,consumers associate the product with the celebrity.This association can turn negative if the celebrity gets arrested or becomes associated with an embarrassing scandal.Should a company whose celebrity endorser was just arrested be guided by the amount it has already poured into making ads featuring the celebrity in its decision about whether or not to cancel the ad campaign? A) Yes, even in the case of negative publicity, celebrity endorsements really do have a significant effect on consumer choice so the amount already spent to purchase this endorsement is relevant. B) No, the amount spent to launch the campaign is a sunk cost; the firm's primary concern at this point is the effect of the negative publicity on the product's image. C) Yes, a firm must take in all costs in deciding whether or not to yank the campaign. If the revenue loss (due to the negative publicity) is small compared to the cost of the campaign, then it makes sense to continue the campaign. D) No, although the amount spent to launch the campaign cannot be recovered, the firm can still reap some benefit by taking out another ad in support of the celebrity.

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,Kim decided to ignore the money and time he spent on his education.Economists would say that Kim made a A) rational decision to ignore these sunk costs. B) poor decision since he had already invested his time and money on his medical career. C) poor decision since doctors are in greater demand than bloggers. D) hasty decision by not waiting to recoup his financial investment before giving up his medical career.

Research conducted by Professors Cass Sunstein and Richard Thaler show that employees are much more likely to enroll in a savings plan under automatic enrollment than under a default term of non-enrollment because it turns out that very few employees drop out if automatically enrolled. Source: Sunstein,Cass R.and Richard H.Thaler.2003."Libertarian Paternalism Is Not an Oxymoron," University of Chicago Law Review,70:1159-1202. What does this suggest about getting people to save for their retirement? A) Planning for one's retirement is complex and emotional and most people deliberately avoid confronting these financial decisions. B) People are overly pessimistic about their future financial prospects; many fear that the social security scheme may be non-existent by the time they retire. C) Many people need to be "tricked" into saving because they are unrealistic about their future behavior. They spend money today that they should be saving for retirement, partly because they overestimate their ability to save in the future. D) One way to get people to save more is to make mandatory contributions to a saving plan part and parcel of employment, and to make opting-out legally impossible.

A fair number of people buy expensive gym memberships to commit themselves to exercising.Yet,data from health clubs show that many do not follow through with their intentions and end up losing money on their membership contracts.Which of the following could explain this behavior? A) People have a tendency to pursue immediate gratification in a way that their 'long-run selves' do not appreciate (quoted from Ted O'Donoghue and Matthew Rabin, "Choice and Procrastination," Quarterly Journal of Economics, February 2001, pp. 125-26.) B) People tend to be overly optimistic about their future behavior so much so that after making an expensive investment in the membership, they overate the dividends they expect to reap. C) People fail to ignore the sunk cost of a gym membership when making the purchase. D) People realize after the fact that they have made a mistake but unfortunately memberships are often not transferable and not refundable.

A common mistake made by consumers is the failure to take into account the sunk costs of their actions.

The endowment effect is the tendency of people to be unwilling to sell a good they already own even if they are offered a price greater than they would be willing to pay to buy the good if they did not already own it.

Behavioral economics is the study of situations in which people make rational choices.

Molly received an autographed poster of David Hasselhoff for her 21st birthday.Her friend Helga offered her $50 for the poster,but Molly refused to sell the poster even though she knows she would never pay that much to replace it if it was ever damaged or destroyed.Explain this inconsistency in Molly's behavior.

A construction project in Congressman Foghorn's district is unfinished.Foghorn has asked that a new appropriations bill include funds to complete the project,despite a report by an independent agency that the project is a waste of taxpayer money.Foghorn's project is a bridge that crosses a river between two cities in his district.The press has criticized Foghorn and dubbed the project "a bridge too far" since another bridge,located closer to the same two cities Foghorn's bridge will connect,already exists and can accommodate all traffic between the two cities.Foghorn argues that if the bridge project is not completed,the $50 million already spent will have been wasted.Is Foghorn's argument economically rational? Explain your answer.

What is an indifference curve? A) It is a curve that shows the total utility and the marginal utility derived from consuming a bundle of goods. B) It is a curve that shows the combinations of consumption bundles that gives the consumer the same utility. C) It is a curve that shows ranks a consumer's preference for various consumption bundles. D) It is a curve that shows the tradeoff a consumer faces among different combinations of consumption bundles.

Figure 10-2 -Refer to Figure 10-2.The Bobsey twins,Laurel and Hardy,both enjoy watching romantic comedies and science fiction movies.Based on the diagrams above what can you conclude about their movie preferences? A) They have identical movie preferences. B) Laurel enjoys romantic comedies more than Hardy. C) Laurel enjoys science fiction movies more than Hardy. D) The diagrams do not provide any information about relative preferences.

If Dawson prefers pizza to hamburgers and hamburgers to hot dogs,then if preferences are transitive, A) at times she could be indifferent among the three items. B) she must prefer pizza to hot dogs. C) she could prefer hamburgers to pizza on some occasions but not hot dogs to pizza. D) she could prefer hot dogs to pizza on some occasions but not hamburgers to hot dogs.

If preferences are transitive,indifference curves A) intersect at the equilibrium consumption bundle. B) intersect at the optimum consumption bundle. C) intersect where the marginal rate of substitution for each indifference curve is equal. D) do not intersect.

The slope of an indifference curve A) is calculated by dividing the price of good on the vertical axis by price of the good on the horizontal axis. B) measures total utility. C) measures the marginal rate of substitution between the two goods in question. D) is calculated by dividing the quantity of the good on the vertical axis by the quantity of the good on the horizontal axis.

What is the marginal rate of substitution? A) the price ratio B) the rate at which the consumer must give up one good to purchase an additional unit of the other goods in the market C) the rate at which the consumer is willing to trade one good for another so that she increases her utility D) the rate at which the consumer is willing to trade one good for another without any loss in utility

Figure 10-3 -Refer to Figure 10-3.What is the marginal rate of substitution between g and h? A) cookie. B) cookie. C) 2 cookies. D) 3 cookies.

The absolute value of the slope of the budget constraint is equal to A) the marginal rate of substitution between the two goods in question. B) the price of good on the vertical axis divided by the price of the good on the horizontal axis. C) the price of good on the horizontal axis divided by the price of the good on the vertical axis. D) quantity of the good on the vertical axis divided by the quantity of the good on the horizontal axis.

A consumer's utility-maximizing combination of goods is given by the bundle that corresponds to the point on A) the indifference curve that intersects the horizontal axis. B) the indifference curve that intersects the vertical axis. C) an indifference curve that is tangent to the budget constraint. D) the budget constraint where it intersects one of the axes.

Figure 10-4 -Refer to Figure 10-4.The consumer can afford consumption bundles A) r, s, t and u. B) r, s, v and u. C) s, v and u only. D) s, v, t and u.

Figure 10-4 -Refer to Figure 10-4.Which of the following statements is true? A) The consumer gets more utility from bundle r than from bundle v. B) The consumer gets less utility from bundle w than from bundle v. C) Bundles r, s, t and u all cost the same. D) Bundles r and w are not affordable.

Figure 10-4 -Refer to Figure 10-4.Suppose the price of pizza increases while the price of hamburger remains constant.Then,the consumer's A) indifference curve becomes more concave away from the origin. B) indifference curve becomes straighter. C) budget constraint moves inward toward the origin on the pizza axis while the hamburger intercept remains the same. D) budget constraint moves outward away from the origin on the pizza axis while the hamburger intercept remains the same.

Aisha and Debbie both purchase milk and bread at the same Quik Mart.They have different tastes for milk and bread and different incomes.They both buy some milk and some bread,but they buy considerably different quantities of the two goods.Which of the following statements is true,given that Aisha and Debbie are utility-maximizers? A) In equilibrium, their marginal rate of substitution between milk and bread is the same. B) In equilibrium, their marginal rate of substitution between milk and bread is higher for the person with the higher income. C) In equilibrium, the marginal rate of substitution between milk and bread is greater for the person who prefers milk more than bread. D) No statement can be made about their respective marginal rates of substitution without their budget constraint/indifference curve diagrams.

Figure 10-5 -Refer to Figure 10-5.A change in income is shown in A) Panel A. B) Panel B. C) Panel C. D) none of the above panels.

Figure 10-5 -Refer to Figure 10-5.A change in the price of candy only is shown in A) Panel A. B) Panel B. C) Panel C. D) none of the above panels.

Figure 10-5 -Refer to Figure 10-5.A change in the price of popcorn only is shown in A) Panel A. B) Panel B. C) Panel C. D) none of the above panels.

Figure 10-5 -Refer to Figure 10-5.Which diagram demonstrates an increase in total utility following a decrease in the price of popcorn? A) the movement from d to e in Panel A B) the movement from f to g in Panel B C) the movement from h to k in Panel C D) none of the above

Figure 10-5 -Refer to Figure 10-5.Which diagram demonstrates a decrease in total utility following an increase in the price of candy? A) the movement from e to d in Panel A B) the movement from g to f in Panel B C) the movement from k to h in Panel C D) none of the above

Suppose the consumer's income increases while the prices of the goods remain constant.Then the A) budget constraint shifts inward parallel to the original budget constraint. B) budget constraint shifts outward parallel to the original budget constraint. C) indifference curves shift outward away from the origin. D) indifference curves become flatter.

Figure 10-6 Manuri has $300 to spend on Pilates classes and Yoga classes. The price of a group Pilates class is $20 and the price of a group Yoga class is $10. Manuri's optimal bundle is given by "A" in Figure 9-6. -Refer to Figure 10-6.Suppose the price of Pilates sessions rises to $30 while income and the price of Yoga sessions remain unchanged.What is her new optimal bundle? A) still remains at bundle A. B) bundle B. C) bundle C. D) bundle D.

Figure 10-6 Manuri has $300 to spend on Pilates classes and Yoga classes. The price of a group Pilates class is $20 and the price of a group Yoga class is $10. Manuri's optimal bundle is given by "A" in Figure 9-6. -Refer to Figure 10-6.Suppose the price of Pilates sessions rise to $30 while income and the price of Yoga sessions remain unchanged.The substitution effect of this price change is represented by the movement from A) A to B. B) A to C. C) A to D. D) D to B.

Figure 10-6 Manuri has $300 to spend on Pilates classes and Yoga classes. The price of a group Pilates class is $20 and the price of a group Yoga class is $10. Manuri's optimal bundle is given by "A" in Figure 9-6. -Refer to Figure 10-6.Suppose the price of Pilates sessions rise to $30 while income and the price of Yoga sessions remain unchanged.The income effect of this price change is represented by the movement from A) A to B. B) B to C. C) D to B D) D to C.

The marginal rate of substitution is determined by the slope of an indifference curve.

A consumer's indifference curves can never cross.

A consumer's utility-maximizing combination of goods is given by the bundle that corresponds to the highest point on his indifference curve.

Gowri has $6 per day to purchase lunch.She spends all of her lunch money on pizza and iced-tea.The price of pizza is $2.00 per slice and iced-tea costs $1 per bottle. a.Draw Gowri's budget constraint and label it BC0.Put pizza on the horizontal axis and iced-tea on the vertical axis.Be sure to identify the intercept values. b.If the price of iced-tea rises to $1.20 per bottle,show what will happen to her budget constraint in your diagram.Be sure to indicate any new intercept values.

Farah has $100 to spend each month on bread and chicken.Suppose the price of bread is $4 a loaf and the price of chicken is $5 per pound. a.Draw her budget constraint and label it BC0.Put bread on the horizontal axis and chicken on the vertical axis.Be sure to identify the intercept values. b.Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12 pounds of chicken.On the same graph you drew in part (a),draw an indifference curve to identify her optimal bundle.Label this bundle "E." c.Is her budget exhausted? Verify your answer. d.Now suppose Farah's income falls to so that she can now devote $80 to the two goods.Prices however remain unchanged.In the same diagram,graph her new budget constraint and label it BC1.Be sure to identify any new intercept values. e.Following the change in income,can Farah consume the same bundle "E"? Explain your answer. f.What must happen to her total utility following the decrease in her income?