Question 1

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 firms to raise prices when there is an increase in costs, such as fuel prices, which allows companies to include a fuel surcharge without significant backlash.

Question 2

Describe the demand curve for a Giffen good.

Accepted Answer

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Question 3

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 concept of network externalities states that the value of a product or service increases as more people use it. In the case of Microsoft Office, the more people who use it, the more useful it becomes due to compatibility, file sharing, and collaboration benefits. This increases a consumer's willingness to buy the product.

Question 4

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. The logic behind this is that if people see a celebrity using a particular product, they may be more likely to buy it because they aspire to be like that celebrity. This is known as the "halo effect" of celebrity endorsement.

Question 5

A network externality occurs when

Accepted Answer

A network externality occurs when the usefulness of a good is affected by how many others use the good. This can create a positive feedback loop where increased usage of the good leads to further increases in its usefulness and desirability, making it more valuable to its users. This is commonly seen in network industries such as social media platforms, where the more users a platform has, the more valuable it becomes to each individual user.

Question 6

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

Accepted Answer

In the case of a good whose consumption takes place publicly, a consumer's decision to buy that good depends on both the characteristics of the product (such as quality, features, etc.) and on how many other people are buying the good (their behavior, preferences, social norms, etc.). For example, if a particular fashion item becomes popular among a certain group of people, more people may become interested in buying it as well, regardless of its actual quality or utility. Therefore, the optimal choice depends on both factors.

Question 7

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

Accepted Answer

Restaurants are a product where social influence is likely to have the greatest impact as people often seek recommendations and opinions from friends and family before choosing a restaurant to dine at. Social media platforms like Yelp and Instagram also heavily influence people's dining choices.

Question 8

A significant downside to network externalities is that

Accepted Answer

Network externalities can create a situation where consumers are locked into using a particular product or technology due to the high costs of switching to an alternative. This means that even if a superior technology or product emerges, consumers may continue to use an inferior one simply because of the network effects in place. This can be a significant downside for both consumers and firms, as it may limit competition and innovation in the market.

Question 9

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

Accepted Answer

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Question 10

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 common feature displayed by these items is that their consumption takes place publicly. Eating in a restaurant, attending a sports game, and wearing designer jeans are all activities that are typically done in public where others can observe and potentially judge the consumption choices of the individual.

Question 11

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 factors listed can potentially influence the choices consumers make. Culture and customs can affect the preferences and expectations of consumers, while religion can influence their beliefs and values. Prices and income can affect the affordability and willingness of consumers to purchase certain products or services. Therefore, all of these factors must be considered in understanding and predicting consumer behavior.

Question 12

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

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Question 13

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

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Question 14

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, which refers to the tendency for something to continue in a certain direction due to historical precedent or initial conditions, even if there may be more efficient or effective alternatives available. In the case of the QWERTY letter layout, it became entrenched due to its widespread use and acceptance, even though other, more efficient layouts have since been developed.

Question 15

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

Accepted Answer

Cat food is not a product with significant network externalities. Network externalities exist when the value of a product increases as more people use it, such as in the case of cell phones, popular board games, and fax machines. However, the demand for cat food is not affected by how many other people are using it.

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 means that the path that was initially taken influences the development and use of a good, rather than there being a clear and objective choice of the best option.

Question 17

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

Accepted Answer

This statement does not demonstrate how social effects influence consumer choice as it describes a mandatory purchase for educational purposes, rather than a consumer choice influenced by social factors. The other statements all discuss how social effects can impact consumer behavior.

Question 18

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 are the costs that a consumer incurs when switching from one product or service to another. In the case of established products, network externalities may create switching costs that make consumers reluctant to buy a new product with better technology. This is because the new product may not be compatible with the existing network or platform, which could result in the consumer losing access to the network they are already a part of. As a result, consumers may be hesitant to switch to the new product, even if it has better technology.

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 believe that consumers are not always rational and may choose to stick with an inferior product due to the cost and inconvenience of switching to a superior product. However, if the gains from switching to a superior technology outweigh the losses incurred from switching costs, consumers are more likely to switch. Therefore, network externalities do not always prevent consumers from choosing a superior product.

Question 20

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

Both option a and option b provide possible explanations why the restaurant does not simply raise prices high enough to eliminate the lines. Option c, on the other hand, does not provide a plausible explanation as it suggests that raising prices would lower profits but it does not consider the possibility that the restaurant may still be making a profit despite the long lines. Therefore, the best choice is B.

Quiz 10: Consumer Choice and Behavioral Economics