Question 1

Mary goes ahead and buys a new car because she expects to receive a 10% increase in her salary next year.What type of irrational behavior does this represent?
A.status quo bias
B.overconfidence
C.misperception of opportunity
D.costs risk aversion

Accepted Answer

The answer of Mary goes ahead and buys a new...

Question 2

An "either-or" decision is a choice between two activities.

Accepted Answer

An "either-or" decision is a choice between two activities or options. An "either-or" decision is a choice between two activities, making it a true statement.

Question 3

Cindy just graduated from college and started working at a large accounting firm.Although the firm will match her contributions to a retirement account, Cindy wants to wait several years before participating, since there are so many things she needs to buy right now.What type of irrational behavior does this represent?
A.unrealistic expectations about the future
B.loss aversion
C.mental accounting
D.risk aversion

Accepted Answer

The answer of Cindy just graduated from college and started...

Question 4

Accounting profit takes into account depreciation, but economic profit does not.

Accepted Answer

Accounting profit includes depreciation as an expense, while economic profit considers both explicit costs (like depreciation) and implicit costs, such as opportunity costs.

Question 5

When making decisions, it is important to consider only those costs that actually involve an explicit money outlay.This is because such costs actually have to be paid, whereas implicit costs are only notional or hypothetical.

Accepted Answer

This statement is false. Implicit costs, such as the opportunity cost of using your time and resources for one option versus another, should also be considered when making decisions. These costs may not involve an explicit money outlay, but they still represent a real cost to the decision maker.

Question 6

The tendency to avoid making a decision is:
A.status quo bias.
B.bounded rationality
C.loss aversion.
D.mental accounting.

Accepted Answer

The tendency to avoid making a decision is known as status quo bias. This bias refers to individuals' preference for maintaining the current state of affairs instead of making a change, even if the change may be more beneficial in the long run. It is a cognitive bias that affects decision-making and can lead to missed opportunities and suboptimal outcomes. Bounded rationality refers to the limitations of human decision-making, loss aversion is the tendency to avoid losses more than acquiring gains, and mental accounting refers to the tendency to treat money differently based on its source or intended use.

Question 7

Part of the explicit cost of owning a restaurant is depreciation on the kitchen equipment.

Accepted Answer

Depreciation on kitchen equipment is a cost of owning a restaurant and is considered an explicit cost.

Question 8

Because resources are scarce, the true cost of anything is its opportunity cost.

Accepted Answer

This is a fundamental economic principle that recognizes that when resources are used for one purpose, they cannot be used for another. Therefore, the true cost of any decision includes the value of the next best alternative that was not chosen. This is known as the opportunity cost. This is true. Opportunity cost refers to the value of the next best alternative that must be given up in order to pursue a certain action or decision. When resources are limited or scarce, choosing one option means sacrificing the potential benefits of another option. Thus, the true cost of anything is not just its monetary price, but also the opportunities that must be foregone.

Question 9

Economic profits can be negative even if accounting profits are positive.

Accepted Answer

Economic profits take into account the opportunity cost of all resources used in a business, including the owner's time and capital. If the opportunity cost of these resources is higher than the accounting profits, the economic profits may be negative. Economic profit takes into account not only explicit accounting costs but also implicit opportunity costs, while accounting profit only considers the former. Therefore, if implicit costs outweigh explicit costs, economic profit can be negative while accounting profit is still positive.

Question 10

In cities, a mile of road lane may cost $30 million or more, while in rural areas a mile of road lane may cost only $5 million.This means there should be more road lanes in rural areas than in urban areas.

Accepted Answer

The cost per mile of road lane is not the only factor determining the need for more road lanes in a particular area. Urban areas typically have higher traffic volumes and population densities, which may require more road lanes to accommodate the demand. Rural areas, on the other hand, may have lower traffic volumes and population densities, and therefore, fewer road lanes may be needed. The need for more road lanes in a particular area should be determined based on various factors, including traffic volume, population density, and overall transportation needs. The cost of building a mile of road lane is only one factor in determining how many road lanes should be built in a particular area. Urban areas typically have much higher levels of traffic and population density than rural areas, which means they require more road infrastructure to accommodate this demand. Therefore, the number of road lanes needed in a particular area depends on a variety of factors beyond just the cost of construction.

Question 11

Joshua is tired of school and his part-time job and decides on the spur of the moment to take a weekend trip to Cabo San Lucas.he pays for it with his credit card rather than with money from his checking account.Which type of irrational behavior does this represent?
A.status quo bias
B.mental accounting
C.loss aversion
D.risk aversion

Accepted Answer

The answer of Joshua is tired of school and his...

Question 12

Which of the following is not a common mistake that leads to irrational decisions?
A.mental accounting
B.loss aversion
C.risk aversion
D.misperceptions about opportunity costs

Accepted Answer

The answer of Which of the following is not a...

Question 13

Most economic models:
A.assume that people behave irrationally.
B.assume that people behave rationally.
C.assume that people are reluctant to learn from their mistakes.
D.are useless because they use too many simplifying assumptions.

Accepted Answer

Most economic models assume that people behave rationally. While this assumption is not always accurate, it allows for the creation of simple and predictive models of human behavior. It also serves as a useful starting point for understanding economic phenomena.

Question 14

Lucy bought some stock 10 years ago that has been priced at half of her purchase price for the past 5 years.However, Lucy refuses to sell the stock, thinking that if she waits long enough, she will recover her investment.What type of irrational behavior does this represent?
A.mental accounting
B.bounded rationality
C.risk aversion
D.loss aversion

Accepted Answer

The answer of Lucy bought some stock 10 years ago...

Question 15

Sally must submit a form to enroll in her company's flexible medical benefits program.Although she has been employed over a year, she has yet to complete the form.Which type of irrational behavior does this represent?
A.status quo bias
B.mental accounting
C.loss aversion
D.risk aversion

Accepted Answer

Sally's behavior represents a status quo bias, which is the tendency to stick with the default or current option, even if it's not the best choice. In this case, Sally may be hesitant to enroll in the program because she's used to not having it, or simply because she hasn't taken the time to fill out the form. This is a common behavior that can lead to missed opportunities or suboptimal choices.

Question 16

Marginal analysis should be used in "either-or" decisions.

Accepted Answer

Marginal analysis is best used for decisions that involve making small changes, such as producing one more unit of a product, rather than for "either-or" decisions, which typically require a different approach such as cost-benefit analysis.

Question 17

It is not possible to earn an economic profit without also earning an accounting profit.

Accepted Answer

Economic profit takes into account both explicit (accounting) costs and implicit (opportunity) costs, whereas accounting profit only considers explicit costs. Therefore, if a firm is earning an economic profit, it must also be covering all its explicit costs, thus earning an accounting profit.

Question 18

If a star college quarterback turns down a multi-million-dollar offer from the NFL to return for his senior year of college, he may be exhibiting which of the following types of irrational behavior?
A.status quo bias
B.mental accounting
C.misperception of opportunity costs
D.risk aversion

Accepted Answer

The answer of If a star college quarterback turns down...

Question 19

Which of the following is a systematic mistake that leads to irrational decisions?
A.risk aversion
B.bounded rationality
C.maximizing profit rather than minimizing costs
D.overconfidence

Accepted Answer

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

Question 20

Star athletes, singers, and actors often start their career very young, forgoing a college education.This is an example of poor decision making, since a college education provides benefits that will be invaluable later in their lives.

Accepted Answer

While a college education can provide many benefits, it is not always necessary for success in certain industries such as entertainment and sports. It ultimately depends on the individual's goals and career path.

Quiz 9: Decision Making by Individuals and Firms

Mary goes ahead and buys a new car because she expects to receive a 10% increase in her salary next year.What type of irrational behavior does this represent? A.status quo bias B.overconfidence C.misperception of opportunity D.costs risk aversion

An "either-or" decision is a choice between two activities.

Accounting profit takes into account depreciation, but economic profit does not.

When making decisions, it is important to consider only those costs that actually involve an explicit money outlay.This is because such costs actually have to be paid, whereas implicit costs are only notional or hypothetical.

The tendency to avoid making a decision is: A.status quo bias. B.bounded rationality C.loss aversion. D.mental accounting.

Part of the explicit cost of owning a restaurant is depreciation on the kitchen equipment.

Because resources are scarce, the true cost of anything is its opportunity cost.

Economic profits can be negative even if accounting profits are positive.

In cities, a mile of road lane may cost $30 million or more, while in rural areas a mile of road lane may cost only $5 million.This means there should be more road lanes in rural areas than in urban areas.

Which of the following is not a common mistake that leads to irrational decisions? A.mental accounting B.loss aversion C.risk aversion D.misperceptions about opportunity costs

Most economic models: A.assume that people behave irrationally. B.assume that people behave rationally. C.assume that people are reluctant to learn from their mistakes. D.are useless because they use too many simplifying assumptions.

Sally must submit a form to enroll in her company's flexible medical benefits program.Although she has been employed over a year, she has yet to complete the form.Which type of irrational behavior does this represent? A.status quo bias B.mental accounting C.loss aversion D.risk aversion

Marginal analysis should be used in "either-or" decisions.

It is not possible to earn an economic profit without also earning an accounting profit.

If a star college quarterback turns down a multi-million-dollar offer from the NFL to return for his senior year of college, he may be exhibiting which of the following types of irrational behavior? A.status quo bias B.mental accounting C.misperception of opportunity costs D.risk aversion

Which of the following is a systematic mistake that leads to irrational decisions? A.risk aversion B.bounded rationality C.maximizing profit rather than minimizing costs D.overconfidence

Star athletes, singers, and actors often start their career very young, forgoing a college education.This is an example of poor decision making, since a college education provides benefits that will be invaluable later in their lives.