Question 1

The fact that rubies are more expensive than milk reflects the fact that for most consumers

Accepted Answer

The price difference reflects the relative scarcity and demand; more milk is consumed than rubies, making rubies rarer and more expensive.

Question 2

We can explain the paradox of value as follows: The consumer surplus from water, which is cheap, is ________ than the consumer surplus from gold, which is expensive; the total utility from gold is ________ than the total utility from water; and the marginal utility per dollar spent on water ________ the marginal utility per dollar spent on gold.

Accepted Answer

The consumer surplus from water is greater than from gold because water is essential and consumed in larger quantities. The total utility from gold is less than from water because water is more essential. The marginal utility per dollar spent on water equals that of gold due to consumer equilibrium.

Question 3

Gene plays another hour of computer games rather than study for the hour even though he knows that the next day, when he takes his test, he will regret his decision. Gene is showing

Accepted Answer

Gene is demonstrating bounded willpower, which refers to the tendency to make choices that are not in one's long-term best interest due to a lack of self-control. Despite knowing he will regret not studying, he chooses to play games instead.

Question 4

Suppose that Richard has just told you that he would not pay more than $100 dollars for one of his favorite baseball cards. You offer to give him $110 dollars for his card and he refuses. What consumer choice theory or effect explains this result?

Accepted Answer

The endowment effect explains why Richard values his baseball card more than the market offer, as people tend to assign higher value to items they own.

Question 5

At Revolution Doughnuts in Fort Collins, Colorado, a cup of coffee or a doughnut is $1. Suppose Hannah loves going to Revolution Doughnuts. Currently, her marginal utility per dollar from doughnuts is 14 and her marginal utility per dollar from coffee is 10. Is Hannah maximizing her total utility?

Accepted Answer

Hannah should buy more doughnuts because the marginal utility per dollar from doughnuts (14) is higher than from coffee (10), indicating she gets more satisfaction per dollar spent on doughnuts.

Question 6

A behavioral economist will explain Tom's donation to charity by saying that Tom is displaying

Accepted Answer

Bounded self-interest refers to the idea that individuals are willing to sacrifice their own interests for the benefit of others, which can explain charitable donations.

Question 7

Neuroeconomists believe that one day measuring the amount of brain hormone called ________, which increases in response to pleasures and decreases in response to disappointments, will allow them to measure utility more accurately.

Accepted Answer

Dopamine is a brain hormone that is associated with pleasure and reward, and its levels increase in response to pleasurable experiences and decrease with disappointments, making it relevant for measuring utility in neuroeconomics.

Question 8

According to a behavioral economist, people who are unwilling to sell the last pound of rice they purchased for the same price that they paid for it are displaying

Accepted Answer

The endowment effect refers to the phenomenon where people ascribe more value to things merely because they own them, leading them to demand a higher price to sell an item than they would be willing to pay to buy it.

Question 9

Because we cannot observe or measure utility

Accepted Answer

The answer of Because we cannot observe or measure utility
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Question 10

Neuroeconomics is

Accepted Answer

Neuroeconomics is specifically focused on understanding the brain's activity and processes during economic decision-making, integrating neuroscience with economic theory.

Question 11

If you exhibit endowment effect, then you

Accepted Answer

The endowment effect is a cognitive bias where people ascribe more value to things merely because they own them, leading to a strong attachment to their possessions.

Question 12

If Sean thinks that the choice between going to Olive Garden or Red Lobster is simply too confusing, a behavioral economist will explain that Sean is showing

Accepted Answer

Bounded rationality refers to the idea that individuals are limited in their decision-making capabilities due to cognitive limitations, information availability, and time constraints, which can lead to confusion or difficulty in making choices.

Question 13

The cost of basics like milk, bread, potatoes and bananas has jumped in the past year, forcing families to nix luxuries, steer away from organic goods and buy more house brands. "I think it's affecting everybody," said Elize Joseph 48, a nursing attendant. "To spend $40 on groceries is nothing. It doesn't go a long way." When food prices increase, what will happen to Elize's total utility?

Accepted Answer

When food prices increase, Elize's total utility decreases because she can afford less of the goods she needs, reducing her overall satisfaction or utility from consumption.

Question 14

Rembrandt paintings are expensive and not as vital for life as milk, which is cheap. Marginal utility theory explains this paradox of value: The total utility from a Rembrandt painting is ________ than the total utility from milk, and the marginal utility from a Rembrandt painting is ________ than the marginal utility from milk.

Accepted Answer

The total utility from milk is larger because it is essential and consumed regularly, while the marginal utility from a Rembrandt painting is larger due to its rarity and uniqueness.

Question 15

Lucky buys hats for $20 but Lucky will NOT sell one of her hats for less than $35. Lucky is

Accepted Answer

The endowment effect is when people value something they own more than they would if they didn't own it, leading them to demand more to sell it than they would be willing to pay to buy it.

Question 16

According to a behavioral economists, people are assumed to have the following three impediments that prevent rational choice:

Accepted Answer

Behavioral economists identify three main impediments to rational choice: bounded rationality (limited cognitive processing), bounded self-interest (limited self-interest), and bounded willpower (limited self-control).

Question 17

Marginal utility theory shows us that water, which is very common, has a ________ marginal utility and a ________ total utility.

Accepted Answer

Marginal utility theory suggests that because water is abundant, its marginal utility is small, but since it is essential and used frequently, its total utility is large.

Question 18

At Revolution Doughnuts in Fort Collins, Colorado, a cup of coffee or a doughnut is $1. Suppose Hannah loves going to Revolution Doughnuts. She spends $5 a day at the shop on 3 doughnuts and 2 cups of coffee. Is Hannah maximizing her total utility?

Accepted Answer

To determine if Hannah is maximizing her total utility, we need to know her marginal utility per dollar spent on each good to see if she is equating the marginal utility per dollar across both goods.

Question 19

Neuroeconomic observations show that rational utility maximizing decisions generate activity in the part of a brain called ________, while irrational decisions driven by fear and anxiety activate ________.

Accepted Answer

The prefrontal cortex is associated with rational decision-making and utility maximization, while the hippocampus is linked to emotions such as fear and anxiety, influencing irrational decisions.

Question 20

The tendency of people to value something more highly when they own it is called the

Accepted Answer

The endowment effect is the tendency of people to value something more highly when they own it.

Quiz 8: Utility and Demand