Question 1

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)

Accepted Answer

A limited warranty signals to the buyer that the seller is willing to stand behind the quality of the car for a certain amount of time, which can alleviate some of the buyer's concerns about purchasing a used car.

Question 2

What is herd mentality?

Accepted Answer

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Question 3

John's friend dies of a sudden heart attack. John rushes to his doctor for an expensive physical examination. This response demonstrates that people:

Accepted Answer

This response demonstrates the availability heuristic, where people give more weight to vivid and recent events, such as the unexpected death of a friend, rather than to statistics and probabilities. This can lead to overestimating the likelihood of similar events happening to oneself, and therefore seeking out costly medical examinations as a response.

Question 4

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

Accepted Answer

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Question 5

According to one survey most Europeans said they were not saving enough for retirement. This example of inconsistency over time

Accepted Answer

This inconsistency over time is likely due to the fact that saving for retirement requires a sacrifice in the present for a reward in the distant future. Many people struggle to prioritize long-term saving over immediate spending, leading to inconsistent saving behavior over time. Earning a greater return on investments may help incentivize saving, but it is not the only factor affecting saving behavior.

Question 6

Explain and provide examples of what is meant by "asymmetric information."

Accepted Answer

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Question 7

How have insights from the field of psychology influenced the thinking of economists in recent years?

Accepted Answer

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Question 8

Which is an example of people trying to make better choices for themselves?

Accepted Answer

All of the choices are examples of people trying to make better choices for themselves. Taking out a pension plan, controlling the diet, and going to the gym regularly are all proactive steps to ensure a better future.

Question 9

Provide three examples of screening.

Accepted Answer

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Question 10

How does the prospect theory work?

Accepted Answer

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Question 11

In the ultimatum game, what split would be rational for both the person proposing the split and the person who must accept or reject the split?

Accepted Answer

In the ultimatum game, a rational proposer would offer the smallest possible amount (e.g., 99/1) because the responder should accept any non-zero offer to maximize their own payoff, as receiving something is better than nothing.

Question 12

Which of the following statements is not correct?

Accepted Answer

While government intervention can be one remedy for problems caused by asymmetric information, it is not always the best solution. Other solutions may include market-based solutions or private regulation.

Question 13

A mother gives her teenage daughter two choices: spend 20 minutes cleaning her room now or spend 25 minutes cleaning her room tomorrow. The same mother gives her same daughter two additional choices: clean out the garage for 20 minutes next Tuesday or 25 minutes next Wednesday. What are her likely choices?

Accepted Answer

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Question 14

Which of the following is a response to people's inconsistent behaviour over time?

Accepted Answer

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Question 15

Identify and explain the two basic types of problems that arise when there is asymmetric information.

Accepted Answer

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Question 16

Which of the following help explain why firms pay bonuses to workers during particularly profitable years to prevent workers from becoming disgruntled? People:

Accepted Answer

People care about fairness, and may feel unfairly treated if a firm is highly profitable but they do not receive any additional compensation. Providing bonuses can help to maintain workers' morale and prevent them from becoming disgruntled.

Question 17

The ultimatum game reveals that

Accepted Answer

The ultimatum game shows that people often reject unfair offers, indicating that fairness plays a role in decision-making beyond pure profit maximization.

Question 18

William is preparing to study for the economics final exam. William is happy to get a second-class honours degree, even though he could likely earn a first-class honours degree if he would study harder. William is a

Accepted Answer

William is a satisficer, meaning he is content with achieving a satisfactory outcome instead of maximizing his potential.

Question 19

Explain how the ultimatum theory works and its likely results.

Accepted Answer

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Question 20

What is the purpose of signalling?

Accepted Answer

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Quiz 12: Information and Behavioural Economics