Question 1

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

Accepted Answer

Economists have found that in the ultimatum game, both parties (allocators and recipients) are influenced by notions of fairness, which results in more equitable outcomes.

Question 2

What is the endowment effect?

Accepted Answer

The endowment effect is the psychological phenomenon where people place a higher value on things they already own compared to similar goods they do not own, even if the value of the two items is objectively the same. People tend to be unwilling to sell something they already own, even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it. This endowment effect has been observed in various contexts, from buying and selling goods to negotiations and decision-making.

Question 3

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 4

The observation that people tend to value something more highly when they own it than when they don't is called the

Accepted Answer

The observation described is the endowment effect, which is the tendency for people to place a higher value on an object that they already own, compared to the value they would place on the same object if they did not own it.

Question 5

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.

Accepted Answer

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

Question 6

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 7

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

Accepted Answer

The answer of If you exhibit the endowment effect as...

Question 8

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's 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 answer of Psychologists Daniel Kahneman and Amos Tversky conducted...

Question 9

Which of the following is a common mistake consumers commit when they make decisions?

Accepted Answer

Failing to ignore sunk costs is a common mistake consumers make when making decisions. This means they take into account money and resources they have already invested, even though those costs are irrecoverable and should not be a factor in future decision-making.

Question 10

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

Accepted Answer

The surveys conducted by Kahneman, Knetsch and Thaler found that people believed it was fair for firms to increase prices following an increase in their costs, but considered it unfair for firms to raise prices due to an increase in demand. This aligns with the economic theory of supply and demand, where an increase in demand should lead to an increase in supply rather than an increase in price. This suggests that consumers have a sense of fairness and equity when it comes to pricing, and expect firms to adhere to certain norms and standards. Option D captures this finding accurately.

Question 11

Sunk costs

Accepted Answer

Sunk costs are costs that have already been paid and cannot be recaptured in any significant way. They should not be considered when making decisions about future actions, as they are already irretrievably lost.

Question 12

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

The answer of Most film processing companies have a policy...

Question 13

The iPod is a product without any significant network externalities.

Accepted Answer

The iPod actually has significant network externalities because its value increases with the number of people who also own iPods, since it allows for sharing of music and other media.

Question 14

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

Accepted Answer

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

Question 15

The endowment effect suggests that people

Accepted Answer

The endowment effect refers to the tendency of people to overvalue items they own or possess, even if they did not pay to acquire them. This suggests that people have a strong attachment to their entitlements, which can lead to irrational decision-making and distortion of market prices.

Question 16

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

This statement accurately reflects the findings of research on the ultimatum game. People tend to reject offers that are perceived as unfair, even if it means they will receive no benefit from the transaction. This suggests that fairness and social norms play an important role in decision making, alongside considerations of self-interest.

Question 17

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 18

Explain the concept of network externalities.

Accepted Answer

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

Question 19

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

Accepted Answer

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

Question 20

What is behavioural economics?

Accepted Answer

Behavioural economics is the study of situations in which people act in ways that are not economically rational. It combines insights from psychology, sociology, neuroscience, and other disciplines to understand human behavior and decision-making in economic contexts. It is concerned with how individuals make choices, how they respond to incentives, how they evaluate risk and uncertainty, and how they can be nudged towards better outcomes.

Quiz 6: Consumer Choice and Behavioural Economics