Question 1

A network externality occurs when
A)there is production cost savings from being networked with suppliers.
B)there is production cost savings from being networked with buyers.
C)the usefulness of a good is affected by how many others use the good.
D)the usefulness of a good is affected by celebrities who use the good.

Accepted Answer

A network externality occurs when the usefulness of a good is affected by how many others use the good. It is a positive effect where the value of a product or service increases as more people use it. This can lead to a feedback loop, where increasing usage leads to more usefulness, which then leads to even more usage.

Question 2

A Giffen good could be either a normal good or an inferior good.

Accepted Answer

A Giffen good is always considered an inferior good because its demand increases as the price increases, which contradicts the typical law of demand. This phenomenon occurs because the income effect of a price increase for an inferior good can outweigh the substitution effect, leading to higher consumption as the good becomes more expensive.

Question 3

For a demand curve to be upward sloping, the good would have to be an inferior good, and
A)the income effect would have to be larger than the substitution effect.
B)the income effect would have to be smaller than the substitution effect.
C)the income effect would have to be equal to the substitution effect.
D)the income effect and the substitution effect would have to be nonexistent.

Accepted Answer

An upward sloping demand curve is contrary to the typical law of demand, which says that as the price of a good increases, the quantity demanded decreases. However, if the good is an inferior good (i.e. a good for which demand decreases as income increases), then an increase in price could actually lead to an increase in quantity demanded because the income effect would be larger than the substitution effect. The income effect is the change in the quantity demanded due to a change in income, while the substitution effect is the change in quantity demanded due to a change in the relative price of the good. Therefore, for an upward sloping demand curve to make sense, the income effect would have to dominate over the substitution effect.

Question 4

The income effect of a price increase for a Giffen good outweighs the substitution effect.

Accepted Answer

Giffen goods are those for which demand increases as the price increases. Therefore, when the price of a Giffen good increases, the quantity demanded also increases. This means that the income effect (where the increase in price reduces the consumer's real income, leading to a decrease in quantity demanded) is stronger than the substitution effect (where consumers switch to a cheaper substitute when the price of a good increases).

Question 5

The demand curve for an inferior good can never be downward sloping.

Accepted Answer

The demand curve for an inferior good is generally upward sloping at first, as income decreases, but eventually becomes downward sloping as the good becomes too inexpensive and consumers switch to superior alternatives.

Question 6

Consider a good whose consumption takes place publicly.Your decision to buy that good depends
A)both on the characteristics of the product and on how many other people are buying the good.
B)only on the characteristics of the good.
C)only on how many other people buy the good.
D)only on the price of the good.

Accepted Answer

Consumption of a publicly consumed good involves the presence of a positive externality. This means that the consumption of the good by one person benefits others. Hence, the decision to buy the good depends not only on the characteristics of the good but also on how many other people are buying the good. For example, if more people are buying a certain brand of electric car, that brand will have more charging stations, making it more convenient for you to charge your own electric car of the same brand. Therefore, the best choice is option A.

Question 7

Which of the following does not explain why consumers buy products that many other consumers are already buying?
A)Technology
B)The satisfaction people derive by being viewed as 'fashionable'
C)Cost-effective way to gather information about a product
D)Differences in tastes and preferences

Accepted Answer

Differences in tastes and preferences do not explain the phenomenon of consumers buying products because many others are buying them. This choice points to individual choices rather than the influence of others' decisions, which is contrary to the context of the question that focuses on social or economic reasons for following popular buying trends.

Question 8

What must be true in terms of the income effect, the substitution effect, and the type of good for the good's demand curve to be upward sloping?
__________________________________________________________________________________________________________________________________________________________________________________________

Accepted Answer

The answer of What must be true in terms of...

Question 9

The demand curve for a luxury good is upward sloping.

Accepted Answer

The demand curve for a luxury good, like most goods, is downward sloping, indicating that as the price decreases, the quantity demanded increases.

Question 10

The demand for a Giffen good slopes upward.

Accepted Answer

A Giffen good is a type of inferior good for which the quantity demanded increases as the price increases, which is contrary to the law of demand.

Question 11

Describe the demand curve for a Giffen good.
__________________________________________________________________________________________________________________________________________________________________________________________

Accepted Answer

The answer of Describe the demand curve for a Giffen...

Question 12

The only Giffen goods that have been identified so far in the real world are luxury goods.

Accepted Answer

While it is true that luxury goods have been cited as potential candidates for Giffen behavior, there is currently no concrete evidence of any Giffen goods in the real world.

Question 13

What is a significant downside to network externalities?
A)There may be large switching costs to consumers for changing products so that consumers end up using products with inferior technologies.
B)Firms may network with unethical suppliers or distributors.
C)The costs of hiring celebrity endorsements may be very high.
D)There may be large switching costs to firms changing technologies.

Accepted Answer

Network externalities create a situation where consumers become locked-in to using products that have already achieved widespread adoption, even if there are superior technologies available. This creates a disadvantage for new entrants or innovators who need to overcome the high switching costs associated with changing products. Ultimately, this could lead to market concentration, limiting competition and potential innovation.

Question 14

Each price-quantity combination on a consumer's demand curve shows the utility-maximising quantity at the given price.

Accepted Answer

This is true as the demand curve represents the willingness and ability of a consumer to purchase a certain quantity at different price levels while maximizing their utility.

Question 15

What did economists Robert Jensen and Nolan Miller determine must be true for a good to be a Giffen good, where the income effect is larger than its substitution effect?
__________________________________________________________________________________________________________________________________________________________________________________________

Accepted Answer

The answer of What did economists Robert Jensen and Nolan...

Question 16

The income effect results in consumers increasing the quantity of normal goods demanded when the price falls.

Accepted Answer

The income effect refers to the change in quantity demanded of a good due to a change in the consumer's purchasing power as a result of a price change. With a price decrease, the consumer's purchasing power increases, leading to an increase in demand for normal goods.

Question 17

Why do firms pay famous individuals to endorse their products?
A)Apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product.
B)The firms are irrational and are wasting advertising expenditures.
C)Famous people obviously know what are the best goods and services.
D)Famous people only consume high quality products.

Accepted Answer

When famous individuals endorse a product, it can create a perception that the product is of higher quality or status, and can influence consumer behavior based on the association with the celebrity. This is due in part to the fact that consumers often aspire to the lifestyles and behaviors of the famous individuals they admire, and may believe that using the same products will make them more like the celebrity they admire. This can help to increase demand and sales for the endorsed product, making it a worthwhile investment for the firm.

Question 18

Identify the one statement that does not demonstrate how social effects influence consumer choice.
A)Students in an Economics class are required to purchase a textbook assigned by the professor.
B)There is utility gained from consuming goods or services that others are consuming.
C)Some products that people consume are determined by the social popularity of the products.
D)Companies such as Zappos.com and Netflix invite their consumers to write reviews about their experience with their products which are then posted on the Internet for others to see.

Accepted Answer

Choice A does not demonstrate how social effects influence consumer choice. It simply states a requirement for a class. The other choices all involve social influences on consumer behavior.

Question 19

What is a Giffen good?
__________________________________________________________________________________________________________________________________________________________________________________________

Accepted Answer

The answer of What is a Giffen good?
__________________________________________________________________________________________________________________________________________________________________________________________...

Question 20

Once a product becomes established, network externalities may create ________ costs that make consumers reluctant to buy a new product with better technology.
A)external
B)implicit
C)switching
D)marginal

Accepted Answer

Switching costs refer to the costs that a consumer incurs when switching from one product to another. In the case of an established product with network externalities, consumers may be hesitant to switch to a new product with better technology because they may incur costs such as time, effort, and money to learn how to use the new product and to replace complementary products that are compatible only with the established product. Thus, switching costs can create barriers to entry for new competitors and help the established product to maintain its market dominance.

Quiz 6: Consumer Choice and Behavioural Economics

A network externality occurs when

A Giffen good could be either a normal good or an inferior good.

For a demand curve to be upward sloping, the good would have to be an inferior good, and

The income effect of a price increase for a Giffen good outweighs the substitution effect.

The demand curve for an inferior good can never be downward sloping.

Consider a good whose consumption takes place publicly.Your decision to buy that good depends

Which of the following does not explain why consumers buy products that many other consumers are already buying?

The demand curve for a luxury good is upward sloping.

The demand for a Giffen good slopes upward.

Describe the demand curve for a Giffen good. __________________________________________________________________________________________________________________________________________________________________________________________

The only Giffen goods that have been identified so far in the real world are luxury goods.

What is a significant downside to network externalities?

Each price-quantity combination on a consumer's demand curve shows the utility-maximising quantity at the given price.

The income effect results in consumers increasing the quantity of normal goods demanded when the price falls.

Why do firms pay famous individuals to endorse their products?

Identify the one statement that does not demonstrate how social effects influence consumer choice.

What is a Giffen good? __________________________________________________________________________________________________________________________________________________________________________________________

Once a product becomes established, network externalities may create ________ costs that make consumers reluctant to buy a new product with better technology.