Question 1

The endowment effect is

Accepted Answer

The endowment effect refers to the tendency of people to place a higher value on something they own compared to something they do not own, simply because they own it. This leads to individuals being unwilling to sell something they already own, even if they are offered a price that is greater than what they would be willing to pay for the same item if they did not already own it.

Question 2

Behavioural economics is

Accepted Answer

Behavioural economics is concerned with studying situations where people do not always behave in a way that is economically rational, such as making decisions based on emotions, social norms, or biases. It examines how human psychology and other social factors influence economic decision-making.

Question 3

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

Accepted Answer

Multiple studies have confirmed that in the ultimatum game experiment, both the allocator and recipient typically reject unfair offers, indicating that fairness is an important factor in their decision-making.

Question 4

Economists have noted that businesses of a certain type tend to congregate geographically, attracting workers with skills in those fields.This, in turn, lures more firms seeking employees with those skills.Some examples include commercial banking, software development, and the automobile industry.What mechanism is at work here? Briefly explain how the mechanism works to the advantage of employers and employees.
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Accepted Answer

The answer of Economists have noted that businesses of a...

Question 5

Explain the concept of network externalities.
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Accepted Answer

The answer of Explain the concept of network externalities.
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Question 6

Sunk costs

Accepted Answer

Sunk costs are costs that have already been paid and cannot be recaptured in any significant way, regardless of any future action. They are not relevant for decision making because the cost has already been incurred and cannot be reversed.

Question 7

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 theatre 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 theatre 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 is 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 per cent)in Scenario B say they would pay $10 for another ticket and see the play while in Scenario A, only 46 per cent 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?

Accepted Answer

The correct explanation is that in Scenario A, people directly associate the lost ticket with the play, feeling a greater sense of loss specific to the event, whereas in Scenario B, the lost $10 bill is not directly connected to the play, so the psychological impact of the loss is less, and they are more willing to spend another $10 for a ticket.

Question 8

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

The answer of Why might network externalities result in products...

Question 9

A network externality causes firms to sacrifice profits in the short run in order to satisfy their customers and increase their long-run profits.

Accepted Answer

The answer of A network externality causes firms to sacrifice...

Question 10

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

Accepted Answer

Consumers are not considering the nonmonetary opportunity costs, such as the time and effort required to request a refund, which leads them to not pursue refunds even when they are entitled to them.

Question 11

Results of the ultimatum game indicate that most people value fairness enough that they will refuse to participate in a transaction they consider unfair, even if they are worse off financially as a result.

Accepted Answer

The results of the ultimatum game show that many people will reject a financial transaction if they perceive it as unfair, even if it means they will be worse off financially. Therefore, this statement is true.

Question 12

The iPod is a product without any significant network externalities.

Accepted Answer

The iPod is a product with significant network externalities as its value increases for users as more people own and use it (e.g. compatibility with accessories, sharing of music libraries, increased availability of software updates, etc.).

Question 13

In their surveys of consumers, Daniel Kahneman, Jack Knetsch and Richard Thaler found that

Accepted Answer

According to the surveys conducted by Kahneman, Knetsch and Thaler, most people considered an increase in price by firms following an increase in their costs to be fair. However, they believed it was unfair for firms to raise their prices because of an increase in demand. This shows that people differentiate between price increases that reflect a firm's cost structure versus those that reflect market dynamics.

Question 14

If you exhibit the endowment effect as a decision maker, then you are

Accepted Answer

The endowment effect refers to the tendency to overvalue something simply because you own it, which can lead to ignoring non-monetary opportunity costs.

Question 15

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

The answer of List three reasons why demand for a...

Question 16

A common mistake consumers commit when they make decisions is

Accepted Answer

Failing to ignore sunk costs means that consumers consider costs that have already been incurred and cannot be recovered, which should not be relevant for current decisions. This can lead to inefficient decisions and a waste of resources. The other options presented are less common mistakes and do not present such a clear bias in decision-making.

Question 17

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

Accepted Answer

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

Question 18

The endowment effect suggests that people

Accepted Answer

The endowment effect reflects a psychological bias where individuals assign more value to items they own than the same item that they do not own. This suggests that people have a strong attachment to their entitlements, regardless of whether they paid to acquire them.

Question 19

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?

Accepted Answer

The correct answers are B and C because the decision to make the trip for a $15 saving depends on the individual's valuation of their time and the perceived value of the saving, which can be significant in both scenarios but for different reasons (a larger percentage saving on the t-shirt in Scenario B, and the same monetary saving in both scenarios).

Question 20

What do economists call the observation that people tend to value something more highly when they own it than when they do not?

Accepted Answer

This is known as the endowment effect, where people tend to assign a higher value to something they own compared to the same thing if they did not own it. It is a well-known phenomenon in behavioral economics. The wealth effect refers to the change in spending patterns due to changes in wealth, while the path-dependent effect refers to how past events and decisions influence current outcomes. The endorsement effect is not a recognized term in economics.

Quiz 6: Consumer Choice and Behavioural Economics