Question 1

​Economists have found that entrepreneurs are likely to have subjective beliefs about the probability of entrepreneurial success that are higher than the actual objective probabilities. These beliefs are most closely related to which of the following behavior concepts?
A)​People are overconfident.
B)​People give too much weight to a small number of vivid observations.
C)​People are reluctant to change their minds.
D)​People are inconsistent over time.

Accepted Answer

Entrepreneurs' subjective beliefs about the probability of success being higher than the objective probabilities is an example of overconfidence bias. Overconfidence bias occurs when individuals overestimate their abilities or the likelihood of positive outcomes. Therefore, the entrepreneurs' subjective beliefs are most closely related to the behavior concept that people are overconfident.

Question 2

Which of the following statements is not correct?
A)The median voter theorem explains why politicians appeal to the middle of the voting distribution.
B)Based on studies of human decision making, most people prefer to procrastinate, both in the immediate future and in the distant future.
C)Screening refers to an uninformed party trying to extract information from an informed party.
D)Advertising can be an example of a company signaling the quality of its products.

Accepted Answer

The statement about human decision making preferring procrastination is not correct. Studies have shown that people have a tendency to procrastinate, but it is not a preference. It is often a result of other factors such as lack of motivation or time management skills.

Question 3

​Which of the following is best explained with behavioral economics rather than traditional economics?
A)​How people purchase apples from a grocery store.
B)​How people make tradeoffs between labor and leisure
C)​How firms choose prices to maximize profits
D)​How people tend to be overconfident in certain situations

Accepted Answer

This answer is best explained with behavioral economics because overconfidence is a cognitive bias that affects human decision making, which is a central focus of behavioral economics. Traditional economics assumes rational decision making and does not typically account for cognitive biases.

Question 4

Evidence from experiments in which real people play the ultimatum game supports the idea that people
A)are rational wealth-maximizers.
B)tend to be driven by fairness, without regard for their own self-interest.
C)are driven by both fairness and self-interest.
D)have trouble calculating their own levels of wealth.

Accepted Answer

The ultimatum game involves two players, one who is given a sum of money and asked to offer a portion of it to the other player. The second player can then either accept or reject the offer. If the offer is accepted, both players receive the agreed-upon amounts. If the offer is rejected, neither player receives anything. Studies show that most people will reject unfair offers, indicating a concern for fairness. However, people also tend to make offers that are somewhat fair but still favor their own self-interest. This suggests that both fairness and self-interest are driving factors in the decisions people make in the ultimatum game, making choice C the best answer.

Question 5

If individuals behave irrationally in some circumstances, why do economists typically assume that they behave rationally?​
A)​The assumption of rationality allows economists to make powerful statements that apply the majority of the time.
B)​The assumption of rationality was used before psychologists discovered ways in which individuals behave irrationally.
C)​The assumption of rationality is used because economists do not understand principles of psychology.
D)​The assumption of rationality has yet to be refuted with scientific evidence.

Accepted Answer

The assumption of rationality allows economists to make powerful statements that apply the majority of the time. While individuals may behave irrationally in some circumstances, the assumption of rationality allows economists to make generalizations about behavior and predict outcomes in many situations. It is a simplifying assumption that is useful in making models and predictions.

Question 6

Which of the following statements is not correct?
A)Based on studies of human decision making, most people value fairness.
B)Based on studies of human decision making, some people's preference are inconsistent over time.
C)Government intervention is the best remedy for the problems caused by asymmetric information.
D)Advertising can be an example of a company signaling the quality of its products.

Accepted Answer

While government intervention can be one solution for addressing problems caused by asymmetric information, it is not always the best or only remedy. Other solutions may include increasing transparency, improving education, or creating market incentives for companies to disclose information.

Question 7

In Homer's Odyssey, Odysseus instructs his crew members to tie him to the mast of the ship so that he is not later tempted by the Siren's song. Which of the following irrational behaviors was he trying to avoid?
A)​People are overconfident.
B)​People behave in a time inconsistent manner.
C)​People give too much weight to a small number of vivid observations.
D)​People are reluctant to change their minds.

Accepted Answer

Odysseus was trying to avoid giving in to his immediate impulse to follow the Siren's song, which would have led to long-term negative consequences. This is an example of time inconsistency, where people tend to prioritize short-term gains over long-term benefits.

Question 8

Suppose that an economics professor selects two students, Audrey and Michael, to participate in a classroom experiment. The professor gives Audrey twenty $1 bills. Audrey must pick an allocation of the twenty $1 bills to offer to Michael. If Michael accepts the allocation, each student keeps his or her portion of the money. If Michael rejects the allocation, the professor keeps the $20, and each student receives nothing. Audrey selects $19 for herself and $1 for Michael. Based on the studies of human decision making, which of the following statements is correct?
A)If Michael accepts the offer, he is behaving rationally.
B)If Michael rejects the offer, he may value fairness more than $1.
C)If Michael rejects the offer, Audrey made a bad choice by trying to keep $19 for herself.
D)Any of the above could be correct.

Accepted Answer

The answer of Suppose that an economics professor selects two...

Question 9

Experiments show that when real people play the ultimatum game, starting with $100,
A)Player A usually proposes giving Player B more than $50.
B)Player B usually accepts Player A's proposal if Player A proposes giving Player B $30 or $40.
C)players show themselves to be rational wealth-maximizers.
D)Player B will usually demand an even split.

Accepted Answer

In the ultimatum game, Player B often accepts offers that are less than an even split, such as $30 or $40, because rejecting the offer means getting nothing. However, offers perceived as too low are often rejected due to fairness considerations.

Question 10

In the context of an ultimatum game, the first player proposes a split of $100 to a second player. The second player can either accept the split or both players receive $0. A rational second player will accept any offer ​
A)​greater than $0.
B)​equal to $50.
C)​greater than $50.
D)​that she thinks is fair.

Accepted Answer

A rational second player will accept any offer greater than $0 because receiving some money is better than receiving nothing.

Question 11

Evidence suggests that, in the real world, people appear to care about fairness
A)only when it coincides with their own self-interest.
B)only when it coincides with their determination to be consistent over time.
C)even when it does not coincide with their own self-interest.
D)not at all.

Accepted Answer

Studies have shown that people are willing to give up their own potential gain in order to punish those who have acted unfairly, indicating that fairness is a value that goes beyond self-interest.

Question 12

The ultimatum game reveals that
A)it does not make sense to try to maximize profits.
B)people may have an innate sense of fairness that economic theory does not capture.
C)offering someone a wildly unfair outcome is usually ok since people tend to make decisions using a "something is better than nothing" philosophy.
D)Both a and b.

Accepted Answer

The ultimatum game shows that people often reject unfair offers, indicating that fairness plays a significant role in decision-making, which traditional economic theory may not fully account for.

Question 13

Mankiw argues that a primary difference between taxing products like gasoline and taxing soda and other sugary drinks is that
A)consumption of gasoline causes negative externalities on society while consumption of soda affects the consumer.
B)the government can generate significant revenue from the gas tax but not from a soda tax.
C)gasoline has inelastic demand but soda has elastic demand.
D)Both a and c are correct.

Accepted Answer

The answer of Mankiw argues that a primary difference between...

Question 14

Advocates of a tax on soda and other sugary drinks argue that such a tax
A)may encourage better nutrition.
B)will protect our future selves from the long run negative effects of consuming these drinks.
C)is needed because people tend to behave inconsistently over time.
D)All of the above are correct.

Accepted Answer

Advocates of a tax on soda and other sugary drinks argue that such a tax may encourage better nutrition, will protect our future selves from the long run negative effects of consuming these drinks, and is needed because people tend to behave inconsistently over time. Therefore, all of the above choices are correct.

Question 15

Which of the following statements is correct?
A)Based on studies of human decision making, most people are overconfident in their own abilities.
B)Arrow's impossibility theorem disproves the median voter theorem.
C)Romantic gifts are an example of adverse selection.
D)An efficiency wage encourages workers to shirk.

Accepted Answer

Studies have shown that most people tend to overestimate their abilities and make decisions based on overconfidence. This is known as the overconfidence bias, which is a common cognitive bias in decision-making.

Question 16

Robert and Neal are playing the ultimatum game, starting with $100. Based on the coin toss, Robert is the player to propose a division of the $100. If Robert acts as economic theory assumes and Neal acts as experimental evidence shows, Neal will
A)accept Robert's proposal of keeping $99 and offering Neal $1.
B)accept Robert's proposal of keeping $60 and offering Neal $40.
C)reject Robert's proposal of keeping $99 and offering Neal $1.
D)reject Robert's proposal of keeping $60 and offering Neal $40.

Accepted Answer

Experimental evidence shows that people tend to reject proposals that are perceived as unfair, even if that means receiving nothing. In this case, if Robert were to propose keeping $99 for himself and only offering $1 to Neal, it is very likely that Neal would reject the proposal. On the other hand, if Robert were to propose a fairer split such as $60 for himself and $40 for Neal, it is more likely that Neal would accept the proposal. Therefore, the best choice for Neal is to reject an unfair proposal, which is represented by Choice C.

Question 17

Anthony and Addie are playing the ultimatum game, starting with $100. The coin flip results in Anthony being the one to propose a division of the $100. Anthony proposes that he gets $99 and Addie gets $1. Which of the following statements is correct?
A)Because the 99-1 split isn't fair, Anthony should not make this offer.
B)Conventional economic theory predicts that Anthony will propose a 99-1 split, just as he did.
C)Experimental evidence suggests that Addie will accept the 99-1 split because, even though it isn't fair, it's better than nothing.
D)Economic theory predicts that Anthony should choose a 60-40 split to maximize his payoff.

Accepted Answer

Conventional economic theory predicts that Anthony will propose a 99-1 split because it maximizes his payoff, assuming Addie acts rationally and accepts any non-zero offer.

Question 18

In a dictator game, player A must divide $100 between player A and player B. In this game, player B does not have the opportunity to reject an offer - he or she goes home with whatever player A offers. Experiments have observed that when player A splits the $100, he or she consistently offers over $10 to player B. Which of the following comments fits best.
A)Although player A is acting as economic theory usually assumes, he or she makes such offers because they seem more fair.
B)Although player A is acting as economic theory usually assumes, he or she makes such offers although they are not fair.
C)Although player A is not acting as economic theory usually assumes, he or she makes such offers because they seem more fair.
D)Although player A is not acting as economic theory usually assumes, he or she makes such offers because they are not fair.

Accepted Answer

In traditional economic theory, player A is assumed to act in a purely self-interested way and offer as little as possible to player B. However, the fact that player A consistently offers over $10 suggests that they are taking into account fairness and the desire to not seem selfish. This goes against the traditional economic assumption, but it does not necessarily mean that the offers are unfair - player A may be trying to balance self-interest with a sense of equity. Choice C is the best answer because it acknowledges the deviation from traditional economic theory but still recognizes that fairness may be a motivating factor in the offers made by player A.

Question 19

Bill and Bev are playing the ultimatum game, starting with $50. A coin flip results in Bev being the one to propose a division of the $50. If Bev acts as economic theory assumes, she should propose that
A)she gets $30 and Bill gets $20.
B)she gets $25 and Bill gets $25.
C)she gets $24 and Bill gets $26.
D)she gets $49 and Bill gets $1.

Accepted Answer

Economic theory assumes that individuals act rationally to maximize their own utility. In the ultimatum game, Bev should propose a division that maximizes her share while still being acceptable to Bill. Theoretically, she should propose $49 for herself and $1 for Bill, as Bill would still receive more than nothing, which is the alternative if he rejects the offer.

Question 20

If you are assigned the role of Player A in the Ultimatum game and you propose that player B gets $1 and you get $99
A)you are behaving as a rational wealth-maximizer and player B is likely to accept your offer.
B)you are behaving as a rational wealth-maximizer and player B is likely to reject your offer.
C)you are not behaving as a rational wealth-maximizer and player B is likely to accept your offer.
D)you are not behaving as a rational wealth-maximizer and player B is likely to reject your offer.

Accepted Answer

Player A is proposing a very unequal split of the money ($1 for B, $99 for themselves). While this is rational for maximizing their own wealth, it is unlikely that Player B will accept such an unfair offer. Player B may reject the offer out of a sense of fairness or to punish Player A for offering such an unfair split. Thus, while Player A may be rational in proposing this split, it is not likely to be successful in the game.

Quiz 22: Frontiers in Microeconomics

​Economists have found that entrepreneurs are likely to have subjective beliefs about the probability of entrepreneurial success that are higher than the actual objective probabilities. These beliefs are most closely related to which of the following behavior concepts?

Which of the following statements is not correct?

​Which of the following is best explained with behavioral economics rather than traditional economics?

Evidence from experiments in which real people play the ultimatum game supports the idea that people

If individuals behave irrationally in some circumstances, why do economists typically assume that they behave rationally?​

Which of the following statements is not correct?

In Homer's Odyssey, Odysseus instructs his crew members to tie him to the mast of the ship so that he is not later tempted by the Siren's song. Which of the following irrational behaviors was he trying to avoid?

Experiments show that when real people play the ultimatum game, starting with $100,

In the context of an ultimatum game, the first player proposes a split of $100 to a second player. The second player can either accept the split or both players receive $0. A rational second player will accept any offer ​

Evidence suggests that, in the real world, people appear to care about fairness

The ultimatum game reveals that

Mankiw argues that a primary difference between taxing products like gasoline and taxing soda and other sugary drinks is that

Advocates of a tax on soda and other sugary drinks argue that such a tax

Which of the following statements is correct?

Robert and Neal are playing the ultimatum game, starting with $100. Based on the coin toss, Robert is the player to propose a division of the $100. If Robert acts as economic theory assumes and Neal acts as experimental evidence shows, Neal will

Anthony and Addie are playing the ultimatum game, starting with $100. The coin flip results in Anthony being the one to propose a division of the $100. Anthony proposes that he gets $99 and Addie gets $1. Which of the following statements is correct?

Bill and Bev are playing the ultimatum game, starting with $50. A coin flip results in Bev being the one to propose a division of the $50. If Bev acts as economic theory assumes, she should propose that

If you are assigned the role of Player A in the Ultimatum game and you propose that player B gets $1 and you get $99

Economists have found that entrepreneurs are likely to have subjective beliefs about the probability of entrepreneurial success that are higher than the actual objective probabilities. These beliefs are most closely related to which of the following behavior concepts?

Which of the following is best explained with behavioral economics rather than traditional economics?

If individuals behave irrationally in some circumstances, why do economists typically assume that they behave rationally?

In the context of an ultimatum game, the first player proposes a split of $100 to a second player. The second player can either accept the split or both players receive $0. A rational second player will accept any offer