Question 1

One of the important contributions of behavioral economics is the focus on how people make decisions involving

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The answer of One of the important contributions of behavioral...

Question 2

That most people would prefer to buy meat that is 80 percent lean rather than meat that is 20 percent fat is an illustration of the

Accepted Answer

The framing effect is the tendency for people to react differently to a particular choice depending on how it is presented. In this case, the choice of meat is framed as being 80% lean rather than 20% fat, which makes it more appealing to most people.

Question 3

Which of the following facts is not a basis for prospect theory in behavioral economics?

Accepted Answer

This fact is not a basis for prospect theory, as it does not align with the theory's claims. Prospect theory argues that people experience diminishing marginal utility for gains, meaning that the more gains a person experiences, the less each additional gain is valued.

Question 4

Which of the following questions best illustrates the "framing effects" studied by behavioral economists?

Accepted Answer

This question presents a framing effect by manipulating the way the choice is presented. The options are not objectively better or worse, but the way they are framed (in terms of individual gain vs. relative gain) can significantly impact the decision-making process.

Question 5

Prospect theory is based on behavioral economists' understanding of how people

Accepted Answer

Prospect theory deals with how individuals make decisions under uncertainty, and its basic premise is that people are more sensitive to potential losses than potential gains. Therefore, it focuses on how individuals react to good things (gains) and bad things (losses) when making choices.

Question 6

Prospect theory in behavioral economics predicts that as the price of flour increases, bakeries will try to avoid turning off their buyers by

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The answer of Prospect theory in behavioral economics predicts that...

Question 7

The "anchoring" phenomenon observed by behavioral economists refers to the fact that people's estimates of the value of things are affected by

Accepted Answer

The anchoring phenomenon refers to the tendency for people's estimates to be influenced or "anchored" by a piece of information that they were recently exposed to, even if that information is unrelated to the task at hand. This suggests that irrelevant data can have a strong impact on decision making.

Question 8

The tendency of people to overestimate the value of their possessions when, say, considering such value for insurance purposes is known in prospect theory as the

Accepted Answer

The tendency of people to overvalue their possessions is known as the endowment effect in Prospect theory. The anchoring effect refers to the tendency to rely too heavily on the first piece of information encountered. The status quo bias is the tendency to prefer things to remain the same rather than change. The confirmation bias refers to the tendency to seek information that confirms pre-existing beliefs.

Question 9

Fred just purchased an expensive new refrigerator and is considering purchasing the overpriced warranty.In making his decision on the warranty, Fred ignores better ways that his money could be spent, including paying off high-interest credit card debt.According to prospect theory, the process that leads Fred to ignore the debt and buy the overpriced warranty is

Accepted Answer

Mental accounting refers to the tendency of individuals to categorize and treat money differently depending on its source, intended use, or other psychological factors. In Fred's case, he is mentally separating his money into different "accounts" (e.g., money for appliances vs. money for debt repayment) and not considering the overall utility of his money, leading him to potentially make a financially suboptimal decision by purchasing the overpriced warranty instead of paying off high-interest credit card debt.

Question 10

One implication of the phenomenon described by economist Richard Easterlin as the "hedonic treadmill" is that

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The answer of One implication of the phenomenon described by...

Question 11

Prospect theory would suggest that

Accepted Answer

Prospect theory suggests that people tend to feel the pain of a loss more than the joy of a gain. Therefore, buyers would feel the "loss" due to an increase in price more strongly than the "gain" they'd feel if the price fell by an equal amount.

Question 12

High-end retailers spend a lot on architecture, displays, and packaging in order to take advantage of the

Accepted Answer

The framing effect refers to the phenomenon in which people's choices are affected by how options are presented to them. High-end retailers often use upscale architecture, displays, and packaging to create an image of luxury and exclusivity, thereby framing their products as high-quality and desirable to potential customers.

Question 13

Which of the following statements about the so-called "hedonic treadmill" is not true?

Accepted Answer

The statement that an increase in consumption level will give a permanent increase in happiness is not true. The hedonic treadmill refers to the phenomenon where individuals adapt to a new level of happiness resulting from a change in circumstances, and thus eventually return to their baseline level of happiness. Therefore, an increase in consumption level may initially lead to a temporary increase in happiness, but in the long run, individuals will adapt and return to their baseline level of happiness.

Question 14

Behavioral economists have not discovered which of the following things about people's reaction to losses?

Accepted Answer

Behavioral economists have found that people experience diminishing, not increasing, marginal disutility from losses, meaning the pain from losing each additional dollar decreases rather than increases.

Question 15

The following are major observations made by behavioral economists regarding human behavior, except

Accepted Answer

Behavioral economists do not believe that people intentionally act in irrational ways. Rather, they believe that people may behave irrationally due to cognitive biases or external factors that influence their decisions.

Question 16

Framing effects in prospect theory indicate that a given result, such as "an investment return of 10 percent,"

Accepted Answer

Framing effects in prospect theory indicate that a given result can be viewed as either a gain or a loss depending on the context, rather than being viewed as solely a gain or solely a loss. This means that the investor's perception of a 10 percent return may be influenced by how it is framed or presented to them. For example, if the investor previously expected a 20 percent return, they may view a 10 percent return as a loss. Alternatively, if the investor previously expected a 5 percent return, they may view a 10 percent return as a gain. Therefore, the framing of the return can impact the investor's perception of it.

Question 17

Credit card companies put a low "minimum required payment" on people's bills in the hope that people will send in low payments, thereby allowing the card companies to earn more interest.The companies are trying to exploit the

Accepted Answer

The anchoring effect is the cognitive bias where people rely too heavily on the first piece of information they receive when making decisions. In this case, the low minimum required payment serves as an anchor that sets a baseline for how much people feel they need to pay. As a result, they may be more likely to make low payments, allowing the credit card companies to earn more interest.

Question 18

The tendency of people to believe that something they own is more valuable than an identical item that they do not own is known in prospect theory as the

Accepted Answer

The endowment effect is the tendency of people to value something more highly simply because they own it, compared to an identical item that they do not own.

Question 19

Which of the following statements about behavioral economics is not true?

Accepted Answer

Behavioral economics does not assume that people are always rational, deliberate, and objective in their choices. In fact, it recognizes that people often make decisions that are influenced by cognitive biases and emotions.

Question 20

One major consequence of the framing effect is that

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Quiz 8: Behavioral Economics