Question 1

Which of the following best explains the difference between neoclassical economics and behavioral economics?

Accepted Answer

Neoclassical economics is based on the assumption that individuals make rational decisions to maximize their utility, while behavioral economics incorporates psychological insights into economic models, recognizing that people often make decisions that deviate from those predicted by traditional rational models, due to biases and heuristics.

Question 2

The many quirky decisions that people often make, which behavioral economics have found and analyzed, are so ingrained in the human psyche that there is nothing that policymakers can do about helping people make better choices for themselves.

Accepted Answer

Behavioral economics suggests that by understanding the psychological, social, and cognitive factors influencing decision-making, policymakers can design interventions, such as nudges, to help people make better choices for themselves.

Question 3

The idea of "nudging" people into certain choices is one major contribution of behavioral economics to policy making.

Accepted Answer

Behavioral economics introduces the concept of "nudging" as a way to influence people's decisions and behaviors in a predictable way without forbidding any options or significantly changing their economic incentives, thus contributing significantly to policy making by encouraging beneficial choices.

Question 4

Suppose Justine and Sarah are playing the dictator game. Justine is the dictator and has $150 to allocate. Based on repeated experiments of the dictator game, what amounts, on average, are Justine and Sarah most likely to receive?

Accepted Answer

Repeated experiments of the dictator game show that dictators often give away a portion of their allocation, but rarely everything or nothing. On average, allocations tend to be somewhat generous but still in favor of the dictator, making option B a realistic outcome.

Question 5

Huxley lost $100 in the stock market. According to behavioral economics research, how much of a gain would he have to experience to offset the feeling of loss and have no net change in utility?

Accepted Answer

According to behavioral economics, particularly the concept of loss aversion, people feel the pain of losing money more acutely than the pleasure of gaining the same amount. Research suggests that the pain of losing is psychologically about twice as powerful as the pleasure of gaining, meaning Huxley would need to gain approximately $250 to offset the feeling of losing $100.

Question 6

Self-control problems, say, among people on a diet, is caused by the cognitive bias known as time inconsistency.

Accepted Answer

Time inconsistency refers to the tendency of individuals to change their preferences over time, particularly in a way that their future self's preferences are inconsistent with their present self's preferences. This cognitive bias can lead to self-control problems, such as those experienced by people on a diet, where immediate gratifications are often prioritized over long-term goals.

Question 7

According to behavioral economics research, in which of the following cases would we expect a person to experience no net change in their utility?

Accepted Answer

The answer of According to behavioral economics research, in which...

Question 8

Suppose Ryan and Rita were randomly shown the numbers 25 and 67, respectively, and then asked to estimate the price of an item about which they have relatively limited knowledge. According to findings from behavioral economics, we would expect

Accepted Answer

This phenomenon is known as anchoring, where individuals rely too heavily on the first piece of information (the "anchor") when making decisions. Since Rita was shown a higher number (67) compared to Ryan (25), she is likely to estimate a higher price due to the anchoring effect.

Question 9

Tony ran a marathon in 3.6 hours; his performance last year on the same course was 3.3 hours. Stacey ran the same marathon in 3.6 hours; her previous time was 3.8 hours. According to behavioral economists, and based solely on the information given, we would expect

Accepted Answer

Tony's performance worsened compared to the previous year (from 3.3 to 3.6 hours), likely leading him to feel bad. Stacey improved her time (from 3.8 to 3.6 hours), which would likely make her feel good about her performance. Behavioral economics suggests that individuals' satisfaction is significantly influenced by comparisons to their past experiences.

Question 10

Rosa received a corgi pillow as a raffle prize; she would have been willing to pay $18 to buy it herself. Based on the endowment effect, we would expect Rosa to be willing to sell the pillow

Accepted Answer

The endowment effect suggests that once an individual owns an item, they value it more than they did before owning it. Therefore, Rosa would likely require an offer greater than $18 to part with the corgi pillow.

Question 11

Sellers' sense of fairness is always consistent with the notion of rational self-interest of neoclassical economics.

Accepted Answer

Sellers' sense of fairness often includes considerations beyond pure profit maximization, such as ethical concerns or maintaining long-term relationships with customers, which can diverge from the strict notion of rational self-interest emphasized in neoclassical economics.

Question 12

Sellers' sense of fairness in pricing can sometimes lead them to pricing decisions that do not maximize profits.

Accepted Answer

Sellers may prioritize fairness over profit maximization, leading them to set prices that are perceived as fair to consumers even if those prices are not the most profitable. This can be due to ethical considerations, long-term customer relationship strategies, or a desire to maintain a positive public image.

Question 13

Automatic payroll deductions help people to fight their time inconsistency problem with regards to saving.

Accepted Answer

Automatic payroll deductions directly transfer a portion of an individual's earnings to a savings account or investment plan before they receive their paycheck, making it easier to save consistently and reducing the temptation to spend the money instead. This helps in combating the time inconsistency problem, where people's preferences for saving versus spending can change over time, often leading to less saving than intended.

Question 14

Suppose Faith and Mickey are playing both dictator and ultimatum games. Faith is the dictator/proposer and has $400 to allocate. Based on repeated experiments of the dictator and ultimatum games, what payouts to Faith would be most consistent with the findings of behavioral economists?

Accepted Answer

Behavioral economists have found that proposers often give away some money in both games, but more in the ultimatum game to avoid rejection. Option D reflects a reasonable split based on these findings.

Question 15

Which of the following assumptions about human behavior is most likely to be accepted by behavioral economists?

Accepted Answer

Behavioral economists argue that human preferences are context-dependent and can change based on different situations, challenging the traditional economic assumption of stable and consistent preferences.

Question 16

Parker's shares of stock in ACME Corporation lost $10 in value, but his shares in XYZ, Inc. gained $18. According to behavioral economics research, how would Parker feel as a result of these changes?

Accepted Answer

Behavioral economics research, particularly the concept of loss aversion, suggests that people tend to feel the pain of losses more intensely than the pleasure of equivalent gains. Therefore, Parker would likely feel worse off despite the net gain.

Question 17

Riley has a new tennis racket for which she paid $75. Haley would like to buy the racket from Riley. Assuming Riley's decision is only influenced by the endowment effect, which of the following amounts would most likely represent how much Riley would have to receive to be willing to sell the racket?

Accepted Answer

The endowment effect is a psychological phenomenon where people ascribe more value to things merely because they own them. Therefore, Riley is likely to demand more than the $75 she paid for the tennis racket to be willing to sell it.

Question 18

Suppose Justine and Sarah are playing the ultimatum game. Justine is the proposer, has $30 to allocate, and Sarah can accept or reject the offer. Based on repeated experiments of the ultimatum game, what combination of payouts to Justine and Sarah is most likely to occur?

Accepted Answer

Repeated experiments of the ultimatum game show that proposers tend to offer a fair or nearly fair split, anticipating that offers perceived as unfair are likely to be rejected. Thus, a split of $16 for Justine and $14 for Sarah is most likely, as it is close to an even distribution and is likely to be accepted by Sarah.

Question 19

Suppose Faith and Mickey are playing both dictator and ultimatum games. Faith is the dictator/proposer and has $1,000 to allocate. Based on repeated experiments of the dictator and ultimatum games, what payouts to Mickey would be most consistent with the findings of behavioral economists?

Accepted Answer

Behavioral economists find that in dictator games, proposers often give a positive amount, though less than half, and in ultimatum games, proposers tend to offer more to avoid rejection, often close to half.

Question 20

Suppose Justine and Sarah are playing the dictator game. Justine is the dictator and has $120 to allocate. Based on repeated experiments of the dictator game, what is the least likely outcome for this game?

Accepted Answer

The least likely outcome is D) $0 for Justine and $120 for Sarah, as dictators typically keep some amount of money for themselves rather than giving everything away.

Quiz 8: Behavioral Economics