Deck 4: Status Quo Bias and Default Options

Question 1

A default option is the option that is selected when the decision-maker is indifferent between choices.

Answer 1

False

Question 2

The rational model predicts that if an individual has complete preferences over a set of goods, then the fact that one of the goods is the default option should have no impact on his choices.

Answer 2

True

Question 3

In the experiment discussed on page 5 of Chapter 4 , the researchers could have suggested any number to the participants. For example, the researchers could have suggested the number given by the subjects' arrival to the experiment instead of the last two digits of the social security number.

Answer 3

False

Question 4

The policy implication of the default option bias is that policy-makers can set a desired choice as the default option. If the default option bias is present then this increases the likelihood that the government's choice is implemented.

Question 5

The default option bias implies that the default option is specified by an outsider, whereas the status quo bias does not have this implication.

Question 6

The status quo bias is necessarily inconsistent with the rational model.

Question 7

There are three bundles of goods: $x, y, z$ . A consumer has preferences such that $x \geqslant$ $y, y \geqslant z$ . If $x \sim z$ then the consumer's preferences cannot be described as transitive.

Question 8

A preference reversal is a violation of transitivity.

Question 9

If there is a violation of transitivity or completeness then a standard utility function cannot represent the individual's preferences.

Question 10

Standard utility maximization cannot be used to describe preference reversals.

Question 11

Consider two bundles $x$ and $y$ and a reference point $r$ . If $x \sim_{r} y$ then it must also be true that $x \sim r$ and $r \sim y$ .

Question 12

Diminishing Sensitivity implies that when there are two goods (i \& j) and when I expect less of good i, then to give up a set amount of good i, I need to be compensated with less j THAN when I am initially expecting more of good i.

Question 13

Consider the constant loss aversion utility function in 4.1. This function creates a kink in the value function whenever $\lambda_{i}>0$ .

Question 14

If the amount of utility I receive from a good is the same amount of utility I would lose if the good was taken away then I'm willing to pay the same amount to acquire the good as I would be to sell the good.

Question 15

The endowment effect is only an "anomaly" if utility is linear.

Question 16

The endowment effect can be explained by loss aversion.

Question 17

A difference in willingness to pay and willingness to accept mean there is an endowment effect.

Question 18

An individual must choose between 4 insurance policies, $x_{1}, x_{2}, x_{3}, x_{4}$ , where $x_{1}$ is the company's default option. The utility the individual receives from each option is ordered the following way: $u\left(x_{3}\right)>u\left(x_{1}\right) \geq u\left(x_{2}\right)>u\left(x_{4}\right)$ . Which option does the individual choose?

A) $x_{1}$
B) $x_{2}$
C) $x_{3}$
D) $x_{4}$

Question 19

A preference for the default option is called:

A) Indifference bias.
B) Default option bias.
C) Loss aversion.
D) Indecisive bias.

Question 20

Anne and Jim participated in an experiment about the willingness to pay for a set of head phones. Jim is suggested a price of $\$ 13$ and Anne is suggested a price of $\$ 22$ . The experimenters conclude that both Anne and Jim use the anchoring and adjustment heuristic to arrive at a final willingness to pay. What are possible values of their willingness to pay:

A) Anne: $\$ 15$ . Jim: $\$ 30$ .
B) Anne: $\$ 30$ . Jim: $\$ 30$ .
C) Anne: $\$ 13$ . Jim: $\$ 13$ .
D) Anne: \$25. Jim: \$15.

Question 21

The relationship between the default option bias and a reference point is best described by which of the following:

A) Once a default option is suggested, an individual that displays the default option bias compares other options to the default option. Thus, the default option becomes a reference point.
B) There is no relationship.
C) A default option is necessarily a reference point.
D) An individual that displays the default option bias changes his previous reference point when a default option is suggested.

Question 22

An individual whose preferences are given by the indifference curve in Figure 4.1 has preferences that violate which of the following assumptions found in the rational model:

A) Completeness only.
B) Completeness and transitivity.
C) Transitivity only.
D) Monotonicity.

Question 23

What is the difference between the status quo bias and the default option bias?

A) No difference.
B) The default option bias is a bias that occurs when there is a preference for a default option and a status quo bias is a bias that results from a preference for the currently chosen option.
C) The default option bias is a bias that occurs when there is a preference for a default option and a status quo bias is a bias for what other individuals have chosen.
D) The default option bias is a preference for failing to pay back loans, whereas a status quo bias is a bias that results from a preference for the currently chosen option.

Question 24

Strictly diminishing marginal pain from losses implies what about the slope of the value function in the domains of losses?

A) Concavity.
B) Linearity.
C) Convexity.
D) None of the above.

Question 25

Refer to Figure 4.3. Bundle $\mathrm{x}$ and $\mathrm{y}$ both have more of good $\mathrm{I}$ than reference points $\mathrm{r}$ and s. The curve $v_{s}$ traces out the difference curve when using reference point s. Let $\Delta_{1}$ be the amount of good $\mathrm{j}$ the individual must be given in order to be indifferent between bundle $\mathrm{y}$ and bundle $\mathrm{x}$ under reference point $\mathrm{s}$ . Let $\Delta_{2}$ be the amount of good $\mathrm{j}$ the individual must be given to give up the SAME amount of good i under reference point $r$ . Which of the following is true?

A) $\Delta_{1} \leq \Delta_{2}$
B) $\Delta_{1}=\Delta_{2}$
C) $\Delta_{1}<\Delta_{2}$
D) $\Delta_{1}>\Delta_{2}$

Question 26

Constant sensitivity implies all of the follow except:

A) Identical utility curves for all reference points.
B) Indifference between two consumption bundles with respect to one reference point implies indifference between these same consumption bundles with respect to any reference point.
C) No preference reversals can occur.
D) Constant marginal pain from losses.

Question 27

The endowment effect is:

A) The difference in willingness to pay and willingness to accept when there should not be a difference.
B) Always in violation of the rational model.
C) Describes the bias of individuals endowed with more money.
D) An increase in utility from more income.

Question 28

In 3 sentences describe the relationship between the default option and the "anchoring and adjustment" mechanism.

Question 29

A consumer faces three bundles of goods: $x, y, z$ . He has complete preferences. Using the preference relation notation " $>$ " describe his preferences. (Hint: There are several correct answers.)

Question 30

Consider two goods: $\mathrm{a}$ and $\mathrm{b}$ . Each consumption bundle contains some $a \geq 0$ and some $b \geq 0$ . Suppose there are two reference points: $r_{1}$ and $r_{2}$ , which contain $(3,5)$ and $(5,5)$ of $(a, b)$ , respectively. Consider two consumption bundles $x_{1}$ and $x_{2}$ which contain $(6,2)$ and $(3,8)$ , respectively. Further, suppose $x_{1} \sim_{r_{1}} x_{2}$ and the reference structure displays loss aversion, what MUST be true?

Question 31

Suzie has $\$ 50$ of income and a utility function given by $u=\sqrt{x_{1}}+\sqrt{x_{2}}$ . The price of good $2, p_{2}$ , is $\$ 2$ .
a. First suppose $x_{1}=0$ . How much of $x_{2}$ does Suzie have?
b. How much is Suzie willing to pay to acquire one unit of $x_{1}$ ?
c. Now suppose $x_{1}=1$ . How much is Suzie willing to sell her one unit of $x_{1}$ ?
d. George faces the same prices and has the same income as Suzie, but his utility function is given by
e. Repeat part a.
f. Repeat part b.
g. Repeat part c.
h. What feature of the utility function results in $p^{W T P} \neq p^{W T A}$ ?