Deck 3: Mental Accounting

Question 1

Mental accounting is a procedural rational model of consumer choice because

A) It follows the classic rational model.
B) It tells us what is motivating the individual to make the observed choices.
C) All consumers have mental accounts.
D) It is a decision heuristic.

Answer 1

It tells us what is motivating the individual to make the observed choices.

Question 2

Bob and Amy have the same utility functions and purchase the same two goods at the same prices. Bob works two jobs. He makes $\$ 100$ a week at his first job and $\$ 500$ at his second job. Amy works one job and makes $\$ 600$ a week. What does the rational model predict about their optimal consumption choices?

A) Amy consumes more than Bob.
B) Bob consumes more than Amy.
C) Bob and Amy consume the same total amount of goods, but different compositions of the two goods.
D) Bob and Amy's optimal consumption bundles are the same.

Answer 2

Bob and Amy's optimal consumption bundles are the same.

Question 3

The Food Stamp example in Example 1 demonstrates

A) Recipients were receiving too many stamps and so they reduced their spending when they received the debit card.
B) Recipients preferred to use the stamps and so they reduced their spending when they received the debit card.
C) Recipients treated money on the debit card differently than the stamps and so they purchased less with the debit card than they had with the stamps.
D) Recipients did not like to carry the debit card because of the stigma behind it and so they purchased less.

Answer 3

Recipients treated money on the debit card differently than the stamps and so they purchased less with the debit card than they had with the stamps.

Question 4

What is the main feature of the double-accounting system?

A) Each transaction is recorded twice: once as a benefit and once as a cost.
B) The gain of some transactions is so great that the benefit is doubled.
C) Each transaction is recorded once: either as a benefit or as a cost.
D) The net value of a transaction is always 0 .

Question 5

The most common heuristic in the theory of mental accounting is the segmenting of purchase. The segmenting of purchases means that

A) The consumer considers all consumption plans simultaneously.
B) The consumer enters each transaction into the ledger simultaneously.
C) The consumer enters each transaction on a piecemeal basis and keeps separate accounts for different types of transactions.
D) The consumer shares the decision-making responsibility with other consumers.

Question 6

Suppose a consumer as a value function over gains given by $U(z)=z$ . If $x>0$ and $y>0$ then which of the following is true?

A) The consumer should integrate over gains.
B) The consumer should segregate over gains.
C) The consumer is equally well off if he segregates or integrates.
D) The consumer should integrate if $x$ and $y$ are allocated to different budgets.

Question 7

Suppose a consumer as a value function given by $U(z)=z$ . If $x<0$ and $y<0$ then which of the following is true?

A) The consumer should integrate over gains.
B) The consumer should segregate over gains.
C) The consumer is equally well off if he segregates or integrates.
D) The consumer should integrate if $x$ and $y$ are allocated to different budgets.

Question 8

Which of the following value functions exhibit strong loss aversion?

A) $u_{g}=\ln (x) \cdot u_{l}=\sqrt{x}$
B) $u_{g}=\sqrt{x}, u_{l}=\ln (x)$
C) $u_{g}=\ln (x), u_{l}=\ln (\mathrm{x})$
D) $u_{g}=\sqrt{x}, u_{l}=\sqrt{x}$

Question 9

For which value function is the consumer strictly better off by integrating two gains, $=y>$ 0 ?

A) $U(z)=\ln (z)$
B) $U(z)=z$
C) $U(z)=\sqrt{ } z$
D) $U(z)=2 z$

Question 10

The gain from consuming a good and the loss from paying for purchasing the good is known as:

A) Transaction utility.
B) Loss aversion.
C) Consumption utility.
D) Acquisition utility.

Question 11

Suppose a consumer buys a very expensive bottle of wine. He consumes the entire bottle in one evening. However, he had to put the expense on a credit card and knows he will be paying it off for the next 12 months. The following morning, the consumer evaluates his utility for the purchase and decides that $v\left(\Sigma_{t=0}^{12}(-p)\right)$ describes his value of the purchase (where $p$ is the payment he makes on the bottle of wine each month). Which type of behavior does this consumer necessarily exhibit?

A) Loss aversion.
B) Payment Decoupling.
C) Reference dependent.
D) Risk Aversion.

Question 12

The idea that money in a savings account is different than money in a checking account is an example of segmenting.

Question 13

A consumer's indirect utility depends on whether gains and losses are integrated or segregated.

Question 14

A consumer's indirect utility function is given $v(x \mid 0)=\left\{\begin{array}{c}u_{g}=\ln (x) \text { if } x \geq 0 \\ u_{l}=x \text { if } x \leq 0\end{array}\right.$
The individual wins $\$ 500$ dollars at the casino, but gets a speeding ticket that requires him to pay $\$ 75$ on his drive home. Is he better off by integrating or segregating these two transactions?

Question 15

A consumer's indirect utility function is given $v(x \mid 0)=\left\{\begin{array}{c}u_{g}=2 \mathrm{x} \text { if } x \geq 0 \\ u_{l}=x \text { if } x \leq 0\end{array}\right.$
The individual wins $\$ 500$ dollars at the casino, but gets a speeding ticket that requires him to pay $\$ 75$ on his drive home. Is he better off by integrating or segregating these two transactions?

Question 16

A consumer is better of integrating if the marginal utility of a gain is increasing more slowly than the marginal disutility of a loss.

Question 17

Suppose a consumer has three jobs and keeps the income from his jobs in separate mental accounts. The income from job $i, y_{i}$ , is used to purchase $x_{i}$ . By keeping separate mental accounts, the consumer is never able to achieve the optimal consumption bundle that he would achieve if he kept all three in the same account.

Question 18

Whether a consumer is better off "integrating" or "segregating" is independent of whether is experiencing multiple losses or multiple gains.

Question 19

Strong loss aversion is observed when the slope over losses at the reference point is steeper than the slope over gains.

Question 20

Mental accounting is a theory of how individuals group and categorize money and transactions so that they can more easily evaluate the trade-offs.

Question 21

Under the rational model, the income expansion path varies depending on the source of the income.

Question 22

An indirect utility function is the utility function evaluated at the solution to the utility maximization problem.

Question 23

Payment decoupling causes the consumer to write-off past expenses and recognize future payments.

Question 24

Mental accounting is a procedure of keeping accounts of income and expenses.

Question 25

The disposition effect is the tendency to realize gains and avoid realizing losses.

Question 26

One implication of loss aversion is that an increase above a reference point has a much smaller utility gain than the equal size decrease below the reference point.

Question 27

Regret and temptation are key features of the rational model.

Question 28

An individual who prefers losses framed in an integrated way and gains framed in a segregated way is said to have a preference for what?

Question 29

Joe has a utility function given by $U\left(x_{1}, x_{2}\right)=\ln \left(x_{1}\right)+\ln \left(x_{2}\right)$ and a budget constraint given by $4 x_{1}+2 x_{2} \leq 40$ . What is Joe's indirect utility function?

Question 30

Describe how the sunk cost fallacy and the mental accounting model are related?