Question 1

Suppose you pre-ordered a non-refundable movie ticket to Avengers: Infinity War.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?

Accepted Answer

Since the cost of the ticket is a sunk cost, it should not affect your decision. Making rational decisions means making decisions based on future costs and benefits, not past costs that cannot be recovered. Therefore, the rational thing to do is to skip the movie if you no longer want to go.

Question 2

A sunk cost is

Accepted Answer

A sunk cost is a cost that has already been paid and cannot be recovered. It is not relevant to future decisions as it cannot be changed. It is important for decision-making to focus on future costs and benefits, not past ones.

Question 3

What is the endowment effect?

Accepted Answer

The endowment effect refers to the tendency for individuals to value an item they already own more than they would if they did not own it. This can lead to a reluctance to sell the item, even if the price being offered is higher than what they would be willing to pay to buy the item if they didn't already own it. Option B refers to sentimental attachment, which may contribute to the endowment effect but is not the same thing. Option C refers to a related bias called the "status quo bias" or "anchoring effect," but not the endowment effect. Option D is irrelevant to the endowment effect.

Question 4

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

Accepted Answer

According to the article, J.C. Penney's everyday low pricing policy actually resulted in higher prices than the sale prices under the previous policy.

Question 5

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 money or time that has already been spent and cannot be recovered. Consumers often do not consider these costs when making decisions, leading to inefficient use of resources.

Question 6

Costs that have already been incurred, and which cannot be recovered, are known as

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. Short-run fixed costs refer to costs that do not vary with a firm's level of output in the short run, implicit costs refer to opportunity costs associated with using resources owned by the firm, and unavoidable costs refer to costs that cannot be avoided even if a firm shuts down production.

Question 7

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?

Accepted Answer

The endowment effect refers to the tendency for people to value an object more highly simply because they own it. This seems to be the case for Harvey, who values the baseball much more than what he would have paid for it simply because of its sentimental value and his attachment to Ted Williams. It is not explained by the other options, as A) the implicit and explicit costs do not apply in this scenario, B) while scarcity may influence the value of an object, it is not the only explanation for Harvey's behavior, and D) social influences may be underlying factors, but they are not the main explanation for Harvey's behavior as outlined in the scenario.

Question 8

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?

Accepted Answer

The endowment effect, which behavioral economists have studied, explains Adam's behavior. The effect states that people tend to value things that they own or possess more than the things they don't have. Since Adam owns the ticket, he is likely to overvalue it and refuse to sell it for a price higher than what he paid for it.

Question 9

Alan Krueger conducted a survey of fans at the 2001 Super Bowl who purchased tickets to the game for $325 or $400.Krueger found that (a)94 percent of those surveyed would not have paid $3,000 for their tickets, and (b)92 percent of those surveyed would not have sold their tickets for $3,000.These results are an example of

Accepted Answer

Krueger's survey results show the tendency of people to be unwilling to sell a good they already own (Super Bowl tickets in this case) even if they are offered a price that is greater than the price they would be willing to pay if they did not already own it. This is known as the endowment effect.

Question 10

One reason that consumers and businesses might not act rationally is

Accepted Answer

Consumers and businesses may not always act rationally because they may not realize that their actions are inconsistent with their goals. This can be due to a lack of information, impulsive decision-making, or other factors that lead them to make choices that do not align with their long-term interests or values. As a result, they may end up making suboptimal decisions that can have negative consequences for themselves or others.

Question 11

Behavioral economics refers to the study of situations

Accepted Answer

Behavioral economics studies situations where consumers and firms do not appear to be making choices that are economically rational. This may include situations where people are influenced by their emotions, social norms, cognitive biases, or other factors that deviate from traditional economic assumptions.

Question 12

Which of the following is a common mistake made by consumers?

Accepted Answer

Consumers often make the mistake of being overly optimistic about their future behavior, such as underestimating future expenses or overestimating their ability to save or stick to a budget.

Question 13

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?

Accepted Answer

Rickhiser's advice is based on the concept of sunk costs, which are costs that have already been incurred and cannot be recovered. Holding onto a stock to avoid realizing a loss is a common mistake because the initial purchase price is a sunk cost and should not influence current investment decisions.

Question 14

The highest-valued alternative that must be given up to engage in an activity is the definition of

Accepted Answer

Opportunity cost is the highest-valued alternative that must be given up to engage in an activity. It represents the cost of foregone opportunities and is often used in economic decision-making to compare the benefits of different choices. Options A, B, and D are either incorrect or incomplete in their definitions of the concept.

Question 15

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?

Accepted Answer

Many people make New Year's resolutions to exercise more and join a gym as part of this goal. However, after a few weeks or months, they may lose motivation or find it difficult to maintain their new habit, leading them to cancel their memberships. This behavior is related to the tendency of some individuals to be overly optimistic about their future behavior, assuming that they will have more time, energy, or motivation to work out than they actually do.

Question 16

Alan Krueger conducted a survey of fans at the 2001 Super Bowl who purchased tickets to the game for $325 or $400.Krueger found that (a)94 percent of those surveyed would not have paid $3,000 for their tickets, and (b)92 percent of those surveyed would not have sold their tickets for $3,000.These results are evidence of

Accepted Answer

The survey results suggest that fans are not considering the nonmonetary opportunity costs, such as the potential profit from selling the ticket for $3,000, which indicates a failure to account for these costs.

Question 17

Alan Krueger conducted a survey of fans at the 2001 Super Bowl who purchased tickets to the game for $325 or $400.Krueger found that (a)94 percent of those surveyed would not have paid $3,000 for their tickets, and (b)92 percent of those surveyed would not have sold their tickets for $3,000.These results are an example of

Accepted Answer

The endowment effect occurs when people value a good or item more highly simply because they own it. In this case, fans who bought Super Bowl tickets at a lower price were not willing to sell them for a higher price. This behavior is an example of the endowment effect.

Question 18

Behavioral economics helps explain why customers ________ at J.C.Penney.

Accepted Answer

Behavioral economics suggests that customers are more likely to respond positively to the perception of getting a deal or a discount through sales and coupons, rather than a flat everyday low price. This is because customers value the sense of getting a bargain or deal more than simply paying a lower price overall. Therefore, the shift away from sales and coupons towards everyday low prices likely resulted in customers feeling like they were not getting a good deal, leading to their negative response towards J.C.Penney's new strategy.

Question 19

A new area of economics studies situations in which people appear to be making choices that do not appear to be economically rational.This area is called

Accepted Answer

Behavioral economics is the branch of economics that studies how psychological, social, and emotional factors influence the economic decisions made by individuals and institutions. It explores the situations in which people appear to be making choices that are not necessarily rational from an economic perspective, and tries to explain why this happens. This field of study has become increasingly popular in recent years, as economists have recognized the limitations of the traditional rational-agent model of economic behavior.

Question 20

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

Accepted Answer

The sunk cost of $200,000 represents a cost that has already been incurred and cannot be recovered. Therefore, it should not be a factor in the decision-making process of whether or not to continue pursuing a different career path.

Quiz 10: Consumer Choice and Behavioral Economics

Suppose you pre-ordered a non-refundable movie ticket to Avengers: Infinity War.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 sunk cost is

What is the endowment effect?

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

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

Costs that have already been incurred, and which cannot be recovered, are known as

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?

One reason that consumers and businesses might not act rationally is

Behavioral economics refers to the study of situations

Which of the following is a common mistake made by consumers?

The highest-valued alternative that must be given up to engage in an activity is the definition of

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?

Behavioral economics helps explain why customers ________ at J.C.Penney.

A new area of economics studies situations in which people appear to be making choices that do not appear to be economically rational.This area is called