Question 1

A key difference between neoclassical economics and behavioral economics is that in behavioral economics, context affects preferences.

Accepted Answer

Neoclassical economics generally assumes that preferences are stable and independent of the context, while behavioral economics recognizes that preferences can be influenced by situational factors and social norms.

Question 2

Behavioral economists believe that while people try to make rational decisions, they are frequently subject to systematic errors.

Accepted Answer

Behavioral economists study the ways in which people deviate from rational decision-making, and believe that common biases and cognitive limitations can lead to systematic errors in decision-making.

Question 3

(Consider This) Solar City helped homeowners overcome their myopia by

Accepted Answer

Solar City's main strategy to overcome homeowners' myopia was to eliminate the upfront costs of solar systems by offering financing options and leasing agreements. This made it more financially feasible for homeowners to switch to solar energy and see long-term benefits without being immediately deterred by the initial expenses.

Question 4

Neoclassical theory suggests that to the extent impulse buying occurs, it is infrequent and does not affect the ability of economic models to predict behavior.

Accepted Answer

Neoclassical theory assumes that consumers are rational and have stable preferences, implying that impulse buying, which deviates from rational decision-making, would be an infrequent occurrence and not significantly impact the predictive power of economic models based on rational choice theory.

Question 5

(Consider This) According to the piece "Wannamaker's Lament," how have firms responded to the evidence that most advertising campaigns have little impact on sales?

Accepted Answer

According to "Wannamaker's Lament," firms have responded to the evidence that most advertising campaigns have little impact on sales by conducting a lot of simple experiments to determine what might increase sales. Firms are testing various ad formats, targeting strategies, messaging, and media placements to find out what resonates with their target markets. Therefore, option D, "Firms have conducted a lot of simple experiments to determine what might increase sales," is the most appropriate answer.

Question 6

(Last Word) The United Kingdom's Behavioral Insights Team substantially increased the amount of income tax collected each year by

Accepted Answer

The Behavioral Insights Team increased the amount of income tax collected each year by mailing letters to those who had not yet paid, telling them that their neighbors had already paid. This strategy appealed to people's social norms and created a sense of peer pressure to also pay their taxes.

Question 7

According to behavioral economics, temptation to make harmful decisions can be overcome by presenting decision makers with better information and more options.

Accepted Answer

Behavioral economics suggests that simply providing more information and options may not be effective in overcoming temptation for harmful decisions, as individuals often struggle with self-control and may be influenced by biases and heuristics that lead them to make suboptimal choices. Strategies such as nudges, commitment devices, or altering choice architectures are often recommended to help individuals make better decisions.

Question 8

Neoclassical economics and behavioral economics both recognize that people make errors in their decision making.

Accepted Answer

Both neoclassical economics and behavioral economics acknowledge that people can make mistakes or errors in their decision making processes, although they may differ in their approaches to modeling these errors and their implications for economic theory and policy.

Question 9

Neoclassical and behavioral economics are generally viewed as complementary.

Accepted Answer

Neoclassical economics focuses on rational decision-making by individuals and markets, while behavioral economics incorporates insights from psychology and studies how individuals often deviate from rationality. Both approaches have their strengths and limitations, and together they can provide a more comprehensive understanding of economic phenomena.

Question 10

(Consider This) According to the piece "Wannamaker's Lament,"

Accepted Answer

The piece "Wannamaker's Lament" suggests that most marketing efforts have little impact on sales, reflecting the sentiment that a significant portion of marketing expenditure does not directly translate into increased sales.

Question 11

(Consider This) In sunny parts of the country, solar panels generate net financial benefits in just a few years, despite having high installation costs. Despite their long-run profitability, the high upfront costs discourage many from installing solar panels. From a behavioral economics perspective, this is the result of

Accepted Answer

People tend to focus on immediate costs rather than long-term benefits, which is a form of myopia, leading them to avoid the high upfront costs of solar panels despite future savings.

Question 12

Both neoclassical and behavioral economics believe that people are mostly rational in both their decision making and their actions.

Accepted Answer

Neoclassical economics assumes that individuals are rational and seek to maximize utility or profit, while behavioral economics incorporates psychological insights, suggesting that people often act irrationally due to biases, heuristics, and other factors.

Question 13

(Last Word) The BIT helped poor people in the Philippines increase their saving by offering "commitment" savings accounts that restricted withdrawals until certain dates or savings targets were reached. This is an example of

Accepted Answer

The offering of "commitment" savings accounts by the BIT is an example of a nudge, as it is a small change to the default option that encourages people to save more by restricting their ability to withdraw funds until certain goals are met. This is a subtle way of encouraging people to make better financial decisions without coercing or forcing them to do so.

Question 14

(Consider This) The hedonic treadmill refers to a phenomenon where

Accepted Answer

The hedonic treadmill refers to the idea that increasing our level of consumption doesn't actually make us any happier in the long term. People may feel temporarily happier when they buy something new, but they quickly adapt to that new level of consumption and start craving even more. This can lead to a cycle of constantly seeking out more money, possessions, or experiences, without ever achieving lasting satisfaction.

Question 15

Heuristics generally help people make fewer errors in their decisions.

Accepted Answer

Heuristics are mental shortcuts that simplify decision-making but can lead to biases and errors in judgment.

Question 16

(Consider This) Kara was earning $40,000 per year. When her income rose to $60,000 per year, she enjoyed the higher level of consumption for a while, but eventually she was no more happy than when she earned $40,000 (assume prices didn't change over this time period). Economist Richard Easterlin described this as

Accepted Answer

The situation described is an example of the hedonic treadmill, which is the tendency for people to quickly adapt to changes in their level of consumption and return to their previous level of happiness. In this case, Kara initially enjoyed the higher level of consumption that came with her increased income but eventually returned to her previous level of happiness despite the increased income.

Question 17

Behavioral economics observes that people generally do not act according to their self-interest.

Accepted Answer

The answer of Behavioral economics observes that people generally do...

Question 18

Behavioral economics recognizes that people frequently make errors, but these errors generally cancel out in such a way that neoclassical models are sufficient for predicting economic outcomes.

Accepted Answer

Behavioral economics argues that these errors do not cancel out and can lead to systematic biases and departures from rationality that affect economic outcomes. Therefore, neoclassical models may not be sufficient for predicting economic outcomes in all cases.

Question 19

(Last Word) "Nudges" refer to

Accepted Answer

Nudges refer to subtle changes in policies or practices that result in large behavioral changes. They are often designed to encourage people to make better choices without limiting their freedom of choice. Examples of nudges include placing healthier food options at eye level in a cafeteria, adding calorie labels to menus, or defaulting organ donation consent to "opt-in" rather than "opt-out."

Question 20

Placement of goods in grocery and other retail stores is often done with the objective of encouraging impulse buying.

Accepted Answer

Placement of goods in retail stores is often strategically done to attract the attention of customers and encourage them to make spontaneous purchases, also known as impulse buying. This can be achieved through various techniques such as strategic product placement, attractive packaging, and offering discounts or promotions in certain sections of the store.

Quiz 8: Behavioral Economics