Question 1

A sunk cost is a cost that has already been paid and cannot be recovered.

Accepted Answer

A sunk cost is a cost that has already been paid and cannot be recovered. It should not be considered in making current or future decisions.

Question 2

A common mistake made by consumers is the failure to take into account the sunk costs of their actions.

Accepted Answer

Sunk costs refer to the costs that have already been incurred and cannot be recovered. These costs should not be considered when making decisions about future actions because they are irrelevant. However, consumers often make the mistake of considering sunk costs when making decisions, which can lead to irrational decision-making.

Question 3

One reason college students do not study enough to get high grades is that they are unrealistic about their future behavior.

Accepted Answer

Many college students believe they will have plenty of time to study in the future, but often do not take into account the demands of their future responsibilities and commitments. This leads to unrealistic expectations about their ability to study and achieve high grades.

Question 4

A common mistake made by consumers is the failure to take into account the monetary costs of their actions.

Accepted Answer

The answer of A common mistake made by consumers is...

Question 5

Why do many film processing companies have a policy of printing every picture on a roll of film or a memory card,even if the picture is very fuzzy and customers are allowed to ask for refunds on any pictures they do not like?

Accepted Answer

The answer of Why do many film processing companies have...

Question 6

Harvey Miller owns a baseball that was hit for a home run by Ted Williams.Harvey,a long-time Boston Red Sox fan,recently refused to sell his baseball for $75,000 even though he would not have paid someone more than $10,000 for the baseball if he did not already own it.Harvey explained his decision not to sell the baseball by noting that: "Ted Williams was my hero.This baseball has a great deal of sentimental value for me." Which of the following can explain Harvey's behavior?
A)the difference between implicit and explicit costs
B)the scarcity of home run baseballs hit by Ted Williams
C)the endowment effect
D)how social influences can affect consumption choices

Accepted Answer

The endowment effect refers to the tendency for people to value something more when they own it compared to when they don't. In this case, Harvey values the baseball at a much higher price than what he would have paid for it if he did not own it because of his sentimental attachment to it. He is unwilling to sell it even though he is offered a price that is much higher than what he paid for it because of the emotional connection he has with the baseball.

Question 7

Explain the endowment effect.

Accepted Answer

The answer of Explain the endowment effect....

Question 8

One possible reason as to why consumers respond to sales is that by displaying a "high" regular price and a "low" sale price,sales provide consumers with a reference point to interpret the prices being offered.

Accepted Answer

Sales often utilize a pricing strategy known as "reference pricing," which involves highlighting a discounted sale price next to a higher regular price to help consumers perceive the sale price as a better value. This creates a reference point that consumers can use to judge the value of the product being offered.

Question 9

Suppose you pre-ordered a non-refundable movie ticket to X-Men: Days of Future Past.On the day of the movie you decide that you would rather not go to the movie.According to economists,what is the rational thing to do?
A)Since the cost of the movie ticket is a sunk cost, it should not influence your decision.Your decision should be based solely on whether you want to see the movie or not.
B)You should not waste resources.Since you have paid for the ticket you should watch the movie.
C)Your should go to the movie to minimize your losses.
D)You should go to the movie to maximize your utility.

Accepted Answer

According to the concept of sunk costs, the money spent on the non-refundable movie ticket cannot be recovered and hence should not be a factor in the decision-making process. The decision to go to the movie should be based solely on whether the individual wants to watch the movie or not. Therefore, the rational thing to do would be to decide based on personal preference rather than the sunk cost.

Question 10

Health Clubs typically experience an increase in one-year memberships in January,but many new customers cancel their memberships before the end of the year.Which of the following is the best explanation for this behavior?
A)Some health club members suffer minor injuries that prevent them from working out.
B)Some people are overly optimistic about their future behavior.
C)Some people fail to treat their membership fees as sunk costs.
D)Some members receive utility from activities they believe are popular.

Accepted Answer

Many people make New Year's resolutions to exercise more and join a gym in January with the intention of improving their health and fitness. However, it is common for people to become demotivated or lose interest in their fitness goals as the year progresses. This is likely due to overestimating their ability to consistently commit to exercising, leading them to cancel their memberships before the end of the year.

Question 11

Under J.C.Penney's everyday low pricing policy,the everyday low prices
A)ended up being the highest prices ever charged by the company.
B)were always lower than the sale prices under the previous policy.
C)were not actually charged every day, but only once a month during half-off sales.
D)ended up being higher than the sale prices under the previous pricing policy.

Accepted Answer

According to the passage, "the everyday low prices... ended up being higher than the sale prices under the previous pricing policy."

Question 12

Behavioral economists examine choices that consumers make that are not economically rational.Economists generally assume that people are rational; that is,they weigh the benefits and costs of an action and choose an action only if the benefits outweigh the costs.Why do consumers not act rationally when the result is that they make themselves worse off?

Accepted Answer

The answer of Behavioral economists examine choices that consumers make...

Question 13

Molly received an autographed poster of David Hasselhoff for her 21st birthday.Her friend Helga offered her $50 for the poster,but Molly refused to sell the poster even though she knows she would never pay that much to replace it if it was ever damaged or destroyed.Explain this inconsistency in Molly's behavior.

Accepted Answer

The answer of Molly received an autographed poster of David...

Question 14

Wilbur Rickhiser,a financial advisor,recently told one of his clients: "The biggest mistake you can make is to hold onto a stock for too long in order to avoid a loss.Let's say you bought a stock for $50 per share but that six months later the price fell to $40 after a poor earnings report.Many of my clients in this situation will hold the stock,hoping the price will later rise above $50.In most cases like this the price does not rise and may even fall.You must know when to cut your losses." Which of the following is the best explanation for Rickhiser's advice?
A)People sometimes buy stocks because other people are buying them or they want to appear to be fashionable.
B)People sometimes make mistakes when they buy stocks because of the endowment effect.
C)People sometimes make mistakes when they buy stocks or when they buy goods and services: they ignore the monetary opportunity costs of their choices.
D)People often fail to ignore the sunk costs of their decisions.The cost of the stock bought at $50 per share is a sunk cost.

Accepted Answer

Rickhiser's advice is about recognizing the sunk cost fallacy, where people hold onto a losing investment because of the amount of money they have already put into it. He is advising his clients to cut their losses and sell the stock even if it means accepting a loss, rather than waiting for the stock price to rise to their original purchase price.

Question 15

A construction project in Congressman Foghorn's district is unfinished.Foghorn has asked that a new appropriations bill include funds to complete the project,despite a report by an independent agency that the project is a waste of taxpayer money.Foghorn's project is a bridge that crosses a river between two cities in his district.The press has criticized Foghorn and dubbed the project "a bridge too far" since another bridge,located closer to the same two cities Foghorn's bridge will connect,already exists and can accommodate all traffic between the two cities.Foghorn argues that if the bridge project is not completed,the $50 million already spent will have been wasted.Is Foghorn's argument economically rational? Explain your answer.

Accepted Answer

The answer of A construction project in Congressman Foghorn's district...

Question 16

Suppose Adam Einberg pays $100 for a ticket to a new Broadway play and $100 was the maximum price he was willing to pay.On the day of the performance of the play Adam refuses to sell the ticket for $150.How would behavioral economists explain Adam's refusal to sell his ticket?
A)Adam's tastes had changed from the time he bought the ticket to the time of the performance of the play.
B)When Adam bought the ticket he was being unrealistic about his future behavior.
C)The endowment effect explains Adam's actions.People like Adam seem to value things that they have more than the things they do not have.
D)Adam's income probably increased between the time he bought the ticket and the day of the play's performance.

Accepted Answer

The endowment effect explains Adam's actions.People like Adam seem to value things that they have more than the things they do not have. This means that Adam may have attached emotional value to the ticket simply because it was his, and was unwilling to sell it even for a profit.

Question 17

Assume that you had a ticket for a basketball playoff game that you bought for $50,the maximum price you were willing to pay.If a friend of yours offers to buy the ticket for $100 but you decide not to sell it,how can your decision be explained?
A)You expect to receive greater utility from attending the playoff game than you received from buying the ticket.
B)by the endowment effect
C)by the law of diminishing marginal utility
D)The income effect from the increase in the price of the ticket from $50 to $100 was greater than the substitution effect.

Accepted Answer

The answer of Assume that you had a ticket for...

Question 18

Arnold Kim began blogging about Apple products during his fourth year of medical school.Kim's website,MacRumors.com,became so successful that he decided to give up his medical career and work full time on his website,despite the nearly $200,000 he had invested in his education.In making his decision,the $200,000 he spent on his education
A)should be ignored since it represents a sunk cost.
B)should be considered since it is money he has spent and needs to recoup.
C)should be ignored only if Kim can earn more than $200,000 by running his website.
D)should be considered since it is money he could have used to invest in his website.

Accepted Answer

The $200,000 Kim spent on his education is a sunk cost, which means it is a cost that has already been incurred and cannot be recovered. It should be ignored in his decision-making process as it is not relevant to his current situation. Kim's decision to work on his website full time should be based on the potential future earnings and success of his website, rather than on the cost of his education.

Question 19

Behavioral economics is the study of situations in which people make rational choices.

Accepted Answer

Behavioral economics is the study of situations in which people make decisions that deviate from rationality, and how psychological, emotional and social factors influence those decisions.

Question 20

The endowment effect is the tendency of people to be unwilling to sell a good they already own even if they are offered a price greater than they would be willing to pay to buy the good if they did not already own it.

Accepted Answer

The statement correctly describes the endowment effect.

Quiz 7: Consumer Choice and Elasticity

A sunk cost is a cost that has already been paid and cannot be recovered.

A common mistake made by consumers is the failure to take into account the sunk costs of their actions.

One reason college students do not study enough to get high grades is that they are unrealistic about their future behavior.

A common mistake made by consumers is the failure to take into account the monetary costs of their actions.

Why do many film processing companies have a policy of printing every picture on a roll of film or a memory card,even if the picture is very fuzzy and customers are allowed to ask for refunds on any pictures they do not like?

Explain the endowment effect.

One possible reason as to why consumers respond to sales is that by displaying a "high" regular price and a "low" sale price,sales provide consumers with a reference point to interpret the prices being offered.

Suppose you pre-ordered a non-refundable movie ticket to X-Men: Days of Future Past.On the day of the movie you decide that you would rather not go to the movie.According to economists,what is the rational thing to do?

Health Clubs typically experience an increase in one-year memberships in January,but many new customers cancel their memberships before the end of the year.Which of the following is the best explanation for this behavior?

Under J.C.Penney's everyday low pricing policy,the everyday low prices

Suppose Adam Einberg pays $100 for a ticket to a new Broadway play and $100 was the maximum price he was willing to pay.On the day of the performance of the play Adam refuses to sell the ticket for $150.How would behavioral economists explain Adam's refusal to sell his ticket?

Assume that you had a ticket for a basketball playoff game that you bought for $50,the maximum price you were willing to pay.If a friend of yours offers to buy the ticket for $100 but you decide not to sell it,how can your decision be explained?

Behavioral economics is the study of situations in which people make rational choices.

The endowment effect is the tendency of people to be unwilling to sell a good they already own even if they are offered a price greater than they would be willing to pay to buy the good if they did not already own it.