Question 1

One explanation for the increase in product sales because of celebrity endorsements is that people seem to receive ________ from goods they believe are popular.

Accepted Answer

People may perceive goods endorsed by a celebrity as more popular and, therefore, of higher quality or better value, leading to an increased perception of utility or satisfaction from the product.

Question 2

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.
A) a only
B) a and b only
C) a and c only
D) a, b, and c

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 3

In the ultimatum game,allocators usually offer recipients at least a 40 percent share of the money,and recipients almost always reject offers of less than a 10 percent share.Which of the following does not explain why allocators offer recipients a relatively generous share and why recipients reject meager offers?

Accepted Answer

Option D is the only one that does not explain why allocators offer recipients a relatively generous share and why recipients reject meager offers. It suggests that recipients are solely motivated by financial benefit, which is not supported by the findings of the ultimatum game. The other options (A, B, and C) all suggest that people are influenced by social considerations, such as fairness and reputation, when making economic decisions.

Question 4

Which of the following is an experiment which tests whether fairness is important in consumer decision making?

Accepted Answer

The ultimatum game is an experiment used to test whether fairness is important in consumer decision making. In the game, one player proposes a division of a sum of money and the other player must either accept or reject the proposal. If the proposal is accepted, both players receive the money as divided, but if the proposal is rejected, neither player receives anything. The experiment tests whether the second player rejects unfair offers, indicating that fairness is important in their decision making.

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

The scenario described in the question relates to network externalities, which occur when the value of a product or service increases as more people use it. In this case, as the number of people using Microsoft Office increases, the value of the software increases for individual consumers, leading them to be more willing to purchase it.

Question 6

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

Accepted Answer

Network externalities occur when the value of a product or service increases as more people use it. Cat food is unlikely to have significant network externalities because the value of the product does not increase with the number of people using it. In contrast, cell phones, popular board games, and fax machines are all products that may have significant network externalities.

Question 7

Economists would refer to the increase in product sales because of celebrity endorsements as being the result of

Accepted Answer

The increase in product sales because of celebrity endorsements is related to social influence. Consumers may be more likely to purchase a product if a celebrity they admire is also associated with it. This is an example of how social factors can impact consumer behavior. Network externalities refer to the value a product or service provides based on the number of other people using it, the endowment effect refers to people valuing something more once they own it, and the ultimatum game is a behavioral economic experiment used to study decision making. None of these accurately describe the relationship between celebrity endorsements and product sales.

Question 8

The iPod is a product without any significant network externalities.

Accepted Answer

The iPod has significant network externalities as it is designed to work with the iTunes software, which in turn is connected to the iTunes Store. The more people use the iTunes Store, the more valuable the iPod becomes as a device that allows access to that content. This creates a positive feedback loop that enhances the value of both the iPod and the iTunes Store.

Question 9

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 answer of Many airlines have not reduced or eliminated...

Question 10

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

Accepted Answer

Social influence is likely to have the greatest impact on products that involve social experiences, such as dining at restaurants. People are more likely to rely on the opinions and recommendations of others when it comes to selecting restaurants, as it involves factors such as ambiance, service, and quality of food. In contrast, products like toothpaste, high-blood pressure medication, and school textbooks are less likely to be influenced by social influence as they are more functional in nature.

Question 11

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 observed that both allocators and recipients in the ultimatum game experiment tend to act as if fairness is important. This suggests that fairness has a significant role in social decision-making and economic behavior.

Question 12

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 consumers incur when they transition from one product to another, such as the time, effort, or money required to learn a new product or to migrate data. In the case of network externalities, consumers' decisions to adopt a particular product depend on the number of other users of that product. As a product becomes more established and widely used, the value of network externalities increases, making it harder for consumers to switch to a new product with better technology, as they would lose the benefits of the network effects. This creates a kind of lock-in effect that may protect the dominant product from competition.

Question 13

Economists have used ________ and ________ in experiments designed to determine whether consumers care about fairness when they make decisions.

Accepted Answer

The ultimatum game and the dictator game are two widely used experimental games in economics that help assess whether people care about fairness when they make decisions. In the ultimatum game, one player proposes a division of a sum of money, and the second player can accept or reject the offer. If the second player rejects the offer, then neither player receives anything. This game helps researchers understand how players value fairness and the distribution of resources. In the dictator game, a single player is given a sum of money and is asked to divide it with another player in any way they see fit. This game helps reveal how players balance their own self-interest with the desire to distribute resources fairly.

Question 14

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 15

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

This phenomenon is called path dependency. It refers to the tendency of a technology or a standard to persist even after newer and more efficient options become available, simply because the existing option is already established and changing to something new would be costly or difficult.

Question 16

A good is path dependent when

Accepted Answer

A good is path dependent when the first technology that was adopted has an advantage over a better technology that came later. This creates a path that is difficult to deviate from, making it path dependent.

Question 17

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 network externalities argue that consumers are rational and weigh the costs and benefits of switching to a product with superior technology. They believe that, in practice, the gains from using a superior product exceed the losses incurred from switching costs. Therefore, they argue that consumers are not locked into products with inferior technology due to network externalities.

Question 18

A significant downside to network externalities is that

Accepted Answer

Network externalities can create lock-in effects, where consumers and firms rely on a particular product or technology because of the benefits of being part of a larger network, even if there are superior alternatives available. This can result in large switching costs, where consumers or firms incur significant costs if they want to switch to a different product or technology. As a result, consumers may end up using products with inferior technologies, and firms may be reluctant to invest in new technologies because of the high costs of switching.

Question 19

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

The answer of Research by Daniel Kahneman,Jack Knetch,and Richard Thaler...

Question 20

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

Accepted Answer

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

Quiz 10: Consumer Choice and Behavioral Economics