Question 1

Firms pay famous individuals to endorse their products because

Accepted Answer

Firms pay famous individuals to endorse their products because apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product. Famous people tend to have a large following and their endorsement can influence their followers to purchase the product, even if they wouldn't have otherwise. This ultimately increases demand for the product and generates more revenue for the company.

Question 2

Consider a good whose consumption takes place publicly. Your decision to buy that good depends

Accepted Answer

When consumption takes place publicly, the decision to buy that good depends not only on the characteristics of the product but also on how many other people are buying the good. This is because public consumption creates a social effect where people's consumption decisions can influence each other. For example, if a particular brand of clothing becomes popular, more people may want to buy it because they perceive it as socially desirable or fashionable. Therefore, the best choice is A.

Question 3

Identify the one statement that does not demonstrate how social effects influence consumer choice.

Accepted Answer

This statement does not mention any social effects influencing consumer choice. It simply describes a requirement for students to purchase a specific textbook assigned by a professor.

Question 4

A significant downside to network externalities is that

Accepted Answer

Network externalities can result in a situation where consumers may have to pay high switching costs if they decide to switch to a different product. This can be a significant downside because it can cause consumers to continue using products with inferior technologies just because they don't want to incur the switching costs. Similarly, firms may face high switching costs if they decide to change technologies, which can discourage innovation and competition in the market.

Question 5

Which of the following is used to explain why a consumer's willingness to buy Microsoft Office increases as the number of other people who use Microsoft Office increases?

Accepted Answer

Network externalities refer to the phenomenon in which a good or service becomes more valuable to the consumer as more people use it. In this case, as more people use Microsoft Office, it becomes more valuable to the consumer, leading to an increase in willingness to buy.

Question 6

What did economists Robert Jensen and Nolan Miller determine must be true for a good to be a Giffen good, where the income effect is larger than its substitution effect?

Accepted Answer

The answer of What did economists Robert Jensen and Nolan...

Question 7

For which of the following products is social influence likely to have the greatest impact?

Accepted Answer

Restaurants are a product/service that people are likely to talk about and recommend to their social circle. Good experiences at a restaurant can lead to positive word-of-mouth, while bad experiences can lead to negative word-of-mouth. Therefore, social influence is likely to have the greatest impact on restaurants.

Question 8

Which of the following does not explain why consumers buy products that many other consumers are already buying?

Accepted Answer

The answer of Which of the following does not explain...

Question 9

A standard which came to the market first, such as the QWERTY letter layout in typewriters, can become entrenched (this layout is still used in computer keyboards today). What is this phenomenon called?

Accepted Answer

Path dependency refers to the tendency for an early decision or technology to become entrenched and continue to be used even when better options are available. The QWERTY keyboard layout is a classic example of path dependency. Network externalities refer to the phenomenon where the value of a product or service increases as more people use it, sunk cost is a cost that has already been incurred and cannot be recovered, and comparative advantage refers to a country's ability to produce a good or service at a lower opportunity cost than another country.

Question 10

Research by Daniel Kahneman, Jack Knetch, and Richard Thaler has shown that companies like airlines were explicitly able to include a fuel surcharge in their prices because

Accepted Answer

Consumers perceive it as fair for companies to increase prices when costs rise, allowing airlines to add a fuel surcharge without significant backlash.

Question 11

Many airlines have not reduced or eliminated fuel surcharges despite the price of oil dropping. A logical reason for this is that the decline in fuel prices

Accepted Answer

The decline in fuel prices would typically shift the supply curve to the right, indicating a potential for lower prices. However, if there is also an increase in demand, shifting the demand curve to the right, prices can still increase or remain stable despite the lower fuel costs.

Question 12

All of the following products are most likely to have significant network externalities except

Accepted Answer

Cat food is not a product that is likely to have significant network externalities as it is not consumed or used in a way that creates interdependence between users.

Question 13

Consider the following factors: a. culture
B. religion
C. customs
D. prices
E. income
Which of the factors above are likely to influence the choices consumers make?

Accepted Answer

All the factors listed are likely to influence the choices consumers make as they all play a role in shaping consumer behavior. Culture, religion, and customs can influence consumer preferences and attitudes towards certain products. Prices and income can affect the affordability of products and the willingness of consumers to purchase them. Therefore, all these factors must be taken into consideration while studying consumer behavior.

Question 14

Describe the demand curve for a Giffen good.

Accepted Answer

The answer of Describe the demand curve for a Giffen...

Question 15

Once a product becomes established, network externalities may create ________ costs that make consumers reluctant to buy a new product with better technology.

Accepted Answer

Switching costs refer to the costs that a consumer incurs when moving from one product to another. In the case of established products with network externalities, consumers may be reluctant to switch because of the investments they have already made in the established product's ecosystem. This creates switching costs that can make it difficult for new products with better technology to gain a foothold in the market.

Question 16

A network externality occurs when

Accepted Answer

Network externality refers to the effect that the number of users of a good or service has on the value of that good or service to other users. In other words, the more people use a particular product or service, the more valuable it becomes to others. This occurs in situations such as social media platforms, where the number of users affects the usefulness of the platform to its users. Option A and B are not correct because production cost savings from networking with suppliers or buyers is not related to network externality. Option D is not correct because the usefulness of a good is not affected by celebrities who use the good in the context of network externality.

Question 17

What is the common feature displayed by the following items? a. eating in a newly opened "fusion" cuisine restaurant
B. attending a Red Sox game in Fenway Park
C. wearing Lucky Brand designer jeans

Accepted Answer

The consumption of all three goods takes place publicly – eating in a restaurant, attending a sporting event, and wearing designer jeans are all visible to others.

Question 18

Jamal, Lawson and Kyle have been standing in line for almost an hour waiting to be served at Kirala, a popular new Japanese restaurant. It is possible that some of the people in line won't be served at all before the restaurant closes. Which of the following could explain why the restaurant does not simply raise prices high enough to eliminate the lines? a. In situations where consumption takes place publicly, demand for the product is also influenced by how many other people are buying the product. Consequently, a popular restaurant that increased its prices enough to eliminate lines might find that it had also eliminated its popularity.
B. Firms may sometimes not raise their prices for fear that it violates people's sense of fairness and might alienate customers.
C. The demand for restaurant meals is relatively elastic and if the firm raise prices it will lower its profits.

Accepted Answer

Option A is a valid reason why the restaurant doesn't raise prices too high, as it can affect the overall popularity of the restaurant. Option B is also a possible reason, as raising prices too high can be seen as unfair to customers and potentially drive them away. However, option C is less plausible as the demand for restaurant meals is not necessarily elastic, and the restaurant may still be able to increase profits even with higher prices.

Question 19

Many economists do not believe that network externalities lock consumers into the use of products that have technology inferior to other, similar products. These economists believe that

Accepted Answer

Economists who do not believe in the lock-in effect of network externalities argue that consumers are not always rational but are forward-looking and weigh the benefits and costs of switching. They believe that in practice, the gains from using a superior technology (such as better features, better performance, or lower price) exceed the losses consumers incur from switching costs (such as learning costs, search costs, or compatibility costs). Therefore, consumers will eventually switch to the better technology without being locked in. This argument is supported by evidence from many markets where consumers have switched from inferior technologies to better ones over time.

Question 20

A good is path dependent when

Accepted Answer

Path dependence is present when the outcome of a situation depends on the events or decisions that occurred in the past, rather than being determined solely by current conditions. In this case, a good is path dependent when the first technology or method that is adopted has an advantage over better or more efficient technologies that came later. This can make it difficult to switch to a new technology because it would require significant investment in time and money to overcome the existing advantage of the older technology.

Quiz 10: Consumer Choice and Behavioral Economics