Question 1

Explain how the ultimatum theory works and its likely results.

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Question 2

Mfundo's friend dies of a sudden heart attack. Mfundo rushes to his doctor for an expensive physical examination. This response demonstrates that people

Accepted Answer

Mfundo's response to his friend's sudden heart attack demonstrates the availability heuristic, where people give too much weight to a small number of vivid observations. This can lead to overestimating the likelihood of rare events and prompt irrational or excessive behavior, such as rushing to the doctor for expensive physical examinations.

Question 3

Which of the following statements is not correct?

Accepted Answer

While government intervention can be a remedy for problems caused by asymmetric information, it is not always the best solution. Other solutions such as market competition, transparency, and consumer education can also be effective. Additionally, government intervention can sometimes create unintended consequences and inefficiencies.

Question 4

Identify and explain the two basic types of problems that arise when there is asymmetric information.

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Question 5

What is herd mentality?

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Question 6

William is preparing to study for the economics final exam. William is happy to get an honours degree, even though he could likely earn his honours degree cum laude if he would study harder. William is a(n)

Accepted Answer

William is a satisficer because he is content with achieving an honours degree rather than striving for the higher achievement of cum laude. A rational maximiser would seek to maximise their outcome, whereas William is not doing so. An agent is someone who acts on behalf of another, which does not apply to William in this scenario. A screener is someone who evaluates or tests, which does not apply to William in this scenario.

Question 7

In the ultimatum game, what split would be rational for both the person proposing the split and the person who must accept or reject the split?

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Question 8

Explain and provide examples of what is meant by "asymmetric information."

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Question 9

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)

Accepted Answer

A limited warranty is an example of a signal, as it is a way for the seller to convey information to the buyer about the quality and condition of the used car being sold.

Question 10

Which is an example of people trying to make better choices for themselves?

Accepted Answer

All three options listed are examples of people making better choices for themselves. Taking out a pension plan with monthly contributions can provide a better future retirement income. Insisting on healthier food choices at the supermarket can help with achieving dietary goals. Paying for and regularly attending a gym can improve physical fitness.

Question 11

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

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Question 12

A mother gives her teenage daughter two choices: spend 20 minutes cleaning her room now or spend 25 minutes cleaning her room tomorrow. The same mother gives her same daughter two additional choices: clean out the garage for 20 minutes next Tuesday or 25 minutes next Wednesday. What are her likely choices?

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Question 13

How does the prospect theory work?

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Question 14

Provide three examples of screening.

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Question 15

According to one survey most South Africans said they were not saving enough for retirement. This example of inconsistency over time

Accepted Answer

The inconsistency over time in South Africans' savings behavior is likely due to the fact that saving requires a sacrifice in the present for a reward in the distant future. This is a common challenge for many individuals and is not necessarily irrational behavior. While earning a greater return on investments could potentially help individuals save more consistently over time, it is not a guaranteed solution to the challenge of balancing present and future financial needs.

Question 16

How have insights from the field of psychology influenced the thinking of economists in recent years?

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Question 17

Which of the following help explain why firms pay bonuses to workers during particularly profitable years to prevent workers from becoming disgruntled? People

Accepted Answer

The fact that firms pay bonuses to workers during particularly profitable years to prevent workers from becoming disgruntled suggests that workers care about fairness. They may feel entitled to a share of the profits that they helped to generate and could become unhappy if they perceive the distribution of profits as unfair. By paying out bonuses, firms can help to maintain workers' motivation and satisfaction.

Question 18

What is the purpose of signalling?

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Question 19

The ultimatum game reveals that

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...

Question 20

Which of the following is a response to people's inconsistent behaviour over time?

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Quiz 12: Information and Behavioural Economics