Question 1

Many people leave their servers tips in restaurants, even when they are not likely to visit the restaurant again. This is evidence that

Accepted Answer

This is evidence that people treat others fairly even if doing so makes them worse off financially. Leaving a tip is not a requirement, but it is a social norm that is seen as a way to reward good service. People may leave tips even if they know they will not visit the restaurant again, as a way to treat the server fairly and acknowledge their hard work.

Question 2

All but one of the following economists were awarded a Nobel prize for their contributions to experimental economics and their explorations of the influence fairness has on consumer decision-making. Which economist did not receive a Nobel Prize for this work?

Accepted Answer

While Vernon Smith, Daniel Kahneman, and Maurice Allais were all awarded Nobel prizes for their contributions to experimental economics and their studies on the impact of fairness on consumer decision-making, Alan Krueger was not awarded a Nobel prize for this particular work. However, Krueger did make significant contributions to the field of labor economics and was awarded the prize in 2021 (after this question was written) posthumously.

Question 3

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

Accepted Answer

The surveys conducted by Kaheman, Knetsch and Thaler found that people considered a price increase following an increase in firm costs to be fair, but not an increase in response to increased demand. This aligns with the concept of fairness based on the idea that prices should reflect the actual cost of production, rather than being driven by market factors.

Question 4

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 is a well-established finding from studies of the ultimatum game. People tend to reject offers that they perceive as unfair, even when accepting the offer would result in financial gain. This suggests that a sense of fairness and equity is important to many people, even when economic self-interest might dictate a different choice.

Question 5

The ultimatum game and the dictator game are used in economic experiments to test whether fairness is an important influence on consumer decision-making.

Accepted Answer

The ultimatum game and the dictator game are both used in economic experiments to test the role of fairness in decision-making. The ultimatum game measures how people respond to unfairness, while the dictator game examines how much people are willing to share when they have all the power. Both games are commonly used to study consumer behavior and decision-making.

Question 6

Professor Parallax chooses two students in his economics class, Jasmine and Cassandra, to participate in the ultimatum game. He chooses Jasmine to be the allocator and Cassandra to be the recipient. He gives Jasmine $50 and as the allocator, she gets to decide how to split the money with Cassandra. If Cassandra decides to accept the amount allocated to her by Jasmine, both students get to keep the money. If Cassandra decides to reject her allocation, neither student gets to keep the money. How much will each student end up with if each student acts as if fairness is important? How much will each student end up with if only Cassandra acts as if fairness is important? How much will each student end up with if neither student cares about fairness?

Accepted Answer

The answer of Professor Parallax chooses two students in his...

Question 7

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 8

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

Accepted Answer

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

Question 9

What is behavioral economics?

Accepted Answer

Behavioral economics is the study of situations in which people act in ways that are not economically rational. It combines insights from psychology and economics to investigate how people make decisions and the factors that influence those decisions. It explores the cognitive biases and heuristics that affect how people evaluate options, and how social norms and other contextual factors shape behavior.

Question 10

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. Therefore, the statement in the question is false.

Question 11

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 12

The iPod is a product without any significant network externalities.

Accepted Answer

The iPod does have significant network externalities as it was designed to work with iTunes software and the iTunes Store, creating a network effect where consumers are more likely to buy the iPod because of the availability and convenience of using the iTunes ecosystem.

Question 13

Economists have used the ultimatum game and the dictator game in experiments designed to determine

Accepted Answer

The ultimatum game and the dictator game are often used by economists to determine whether people value fairness in decision-making. These games involve offering participants a sum of money and allowing them to decide how to divide it with a partner, with different variations in the rules of the game. These experiments can shed light on how much people are willing to sacrifice their own self-interest to ensure that outcomes are perceived as fair.

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

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

Accepted Answer

Numerous studies have shown that both allocators and recipients in the ultimatum game experiment often reject unfair offers, indicating that they value fairness. This suggests that fairness may be an important factor in economic decision-making, contrary to traditional economic theories that assume humans always act in their self-interest.

Question 16

Music writer Anthony Kuzminski praised rock star Tom Petty in a 2007 article in the online Unrated Magazine. Kuzminski wrote: "Something Petty never can get enough credit for is his fan-friendly attitude. He kept ticket prices for [his concerts] at $50 when other acts this summer are charging upwards of $100 for stadium gigs. Petty could charge more, but he doesn't see the point. He has stated time and time again he still makes millions when he's on the road, regardless of his ticket prices. He is the last of the fan friendly rock stars out there." Use economic reasoning to write a rationale for Tom Petty's decision to charge prices for his band's ("Tom Petty and the Heartbreakers") concerts that are less than market clearing prices.
Source: Anthony Kuzminski, "Tom Petty & The Heartbreakers at the Vic Theater" http://www.unratedmagazine.com/

Accepted Answer

The answer of Music writer Anthony Kuzminski praised rock star...

Question 17

Studies on consumer behavior have found that most people value fairness enough that they will refuse to participate in transactions they consider unfair, even if they are worse off as a result. How does this affect a firm's decision to raise prices in the event of a temporary increase in demand?

Accepted Answer

The answer of Studies on consumer behavior have found that...

Question 18

In an experiment that employed the dictator game, economists at Cornell University gave student "allocators" the option of dividing $20 in only two ways (a) $18 for themselves and $2 to another student, or (b) $10 for themselves and $10 to another student. What was one result from this experiment?

Accepted Answer

The experiment was designed to test the extent to which people value fairness. The fact that the allocators were given a choice between an unequal distribution ($18 for themselves and $2 to another student) and an equal distribution ($10 for themselves and $10 to another student), and that many of them chose the equal distribution, suggests that they placed value on acting fairly. Option A is incorrect as it is stated that the allocators were given a choice between the two distributions, and it is not specified which option they chose more frequently. Option B is not supported by the information given in the question. Option C is also incorrect as there is no information given on whether there was a gender difference in the choice of distribution.

Question 19

Explain the concept of network externalities.

Accepted Answer

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

Question 20

In a survey of consumers, Daniel Kaheman, Jack Knetsch and Richard Thaler asked their opinion of a hardware store's decision to

Accepted Answer

The survey by Kahneman, Knetsch, and Thaler found that 82 percent of respondents considered it unfair for a hardware store to raise the price of snow shovels the day after a snowstorm.

Quiz 10: Consumer Choice and Behavioral Economics