Question 1

Differences in time preferences depend on
A) social or cultural preferences.
B) uncertainty regarding the future.
C) the time at which preferences are established.
D) differences in expected future outcomes.
E) differences in likelihood of preference reversals.

Accepted Answer

Social or cultural preferences can influence how individuals value present versus future rewards, affecting their time preferences.

Question 2

A rational,risk-averse person will
A) sometimes refuse a fair gamble.
B) always accept a fair gamble.
C) consider all gambles unfair.
D) always refuse a fair gamble.
E) randomly refuse or accept a fair gamble.

Accepted Answer

The answer of A rational,risk-averse person will
A) sometimes refuse a...

Question 3

Maria gets two tickets to the opera as a tip bonus from a restaurant customer.She has never been to an opera,nor would she ever pay the $130 price for these tickets.She goes to this opera rather than getting $130 online for selling the tickets.Maria's behavior is
A) irrational,since Maria would not buy such tickets but gives up $130 by not selling the tickets.
B) rational,since Maria believes she should see the opera.
C) irrational,since Maria can't put a value on the tickets.
D) rational,since Maria can now see an opera without paying.
E) neither rational nor irrational,since Maria didn't buy anything.

Accepted Answer

The answer of Maria gets two tickets to the opera...

Question 4

According to prospect theory,people
A) separate small gains from large losses.
B) separate small losses from large losses.
C) separate small gains from large gains.
D) don't separate losses from gains.
E) separate all losses from all gains.

Accepted Answer

Prospect theory suggests that individuals separate small gains from large losses when making decisions. This means that individuals are more sensitive to losses than gains and are more likely to take risks in order to avoid large losses, even if it means sacrificing potential gains. Small gains, on the other hand, are typically viewed as less valuable and may not be pursued as aggressively.

Question 5

Victor complains that he never has enough time to do his homework.He brags that he has won 96 percent of 4,000 games of FreeCell this semester.Which of the following economic concepts of behavior is applicable?
A) rational
B) irrational
C) bounded rational
D) limited reasoning
E) preference reversal

Accepted Answer

Victor's behavior of spending time playing 4,000 games of FreeCell, despite not having enough time for his homework, is irrational as it goes against his self-interest of performing well in school.

Question 6

An important source of human behavior bias in decision-making comes from
A) resistance to change.
B) price.
C) temptation.
D) limited reasoning.
E) randomness.

Accepted Answer

The answer of An important source of human behavior bias...

Question 7

If someone wears his or her favorite clothes first,then he or she is most likely to have a ________ time preference.
A) positive
B) neutral
C) negative
D) increasing
E) decreasing

Accepted Answer

A positive time preference means that an individual places a higher value on immediate gratification rather than waiting for a future reward. Wearing one's favorite clothes first indicates a desire for immediate enjoyment, which aligns with a positive time preference.

Question 8

If Ronnie calculates that $150 in the future is worth $100 today,then he is showing a ________ time preference.
A) positive
B) neutral
C) negative
D) increasing
E) decreasing

Accepted Answer

Ronnie's calculation indicates a positive time preference, meaning he values present consumption more than future consumption, as shown by the fact that he considers $150 in the future to be equivalent to $100 today.

Question 9

Behavioral economics
A) is the least controversial field of economics.
B) involves people separating small losses from large losses.
C) uses the results of psychology experiments to apply to models of individual decision-making.
D) uses the result of sociology observations to apply to models of individual decision-making.
E) is the most controversial field of economics.

Accepted Answer

Behavioral economics uses insights from psychology experiments to understand and model individual decision-making. This can include exploring how cognitive biases and heuristics influence people's choices, as well as how emotions and social norms play a role in economic behavior.

Question 10

The field of economics that draws on insights from psychology to expand models of individual decision-making is ________ economics.
A) psychology
B) behavioral
C) personality trait
D) activity-based
E) decision-making optimization

Accepted Answer

Behavioral economics draws on insights from psychology to expand models of individual decision-making, focusing on how individuals deviate from rational decision-making in predictable ways due to cognitive biases and social influences.

Question 11

A school raffle sells 1,000 tickets at $1 each for a $350 bookstore credit.If Ramona buys one ticket,what is her net expected value for this gamble?
A) -$0.65
B) -$0.20
C) -$350
D) -$0.001
E) $0.35

Accepted Answer

The expected value is calculated by multiplying the value of each outcome by its probability and then summing these products. If Ramona buys one ticket, the probability of winning is 1/1000, and the probability of losing is 999/1000. If she wins, her net gain is $349 ($350 prize minus the $1 ticket cost). If she loses, her net loss is $1 (the cost of the ticket). Thus, the expected value (EV) is: EV = (1/1000)*$349 + (999/1000)*(-$1) = $0.349 - $0.999 = -$0.65.

Question 12

A choice that does not follow the assumption of rational behavior is
A) telling people you want to lose weight,but ordering dessert after a meal.
B) paying more to use a credit card than you would if you used cash.
C) refusing to leave a movie that brings no pleasure.
D) complaining about lack of time while you play solitaire.
E) All of the above behaviors do not follow the assumption of rational behavior.

Accepted Answer

All the listed behaviors do not follow the assumption of rational behavior. In option A, the person's actions are inconsistent with their stated goal. In option B, the person is paying more for a transaction, which does not make sense rationally. In option C, the person is continuing to do an unpleasant activity, which is not rational. In option D, the person is complaining about a lack of time while engaging in a leisure activity. Therefore, all the choices are irrational.

Question 13

A fully rational choice would require
A) consumers to be risk-neutral.
B) choices to be independent of relevant alternatives.
C) consumers to be risk-averse.
D) choices to be independent of irrelevant alternatives.
E) consumers to not consider recent outcomes.

Accepted Answer

A fully rational choice would require choices to be independent of irrelevant alternatives, meaning that the addition or removal of an option that is not being considered should not influence the decision between the remaining options. This is one of the assumptions of the rational choice theory.

Question 14

Marcus gets a new cell phone for graduation.He abandons his old phone in a drawer forever,even though he could sell it on Craigslist for $50.Marcus's behavior is
A) irrational,because he wouldn't pay $50 for his old phone today,and still gives it up.
B) rational,because he wouldn't pay $50 for his old phone today,and still gives it up.
C) irrational,because the value of his new phone is $300 and should be compared to the $50 value of the old phone.
D) rational,because the value of his new phone is $300 and should be compared to the $50 value of the old phone.
E) neither rational nor irrational,since Marcus didn't buy the new phone.

Accepted Answer

Marcus's behavior is considered irrational because he is giving up the opportunity to gain $50 by selling his old phone, which indicates he values the convenience or other factors over the monetary gain. This is irrational from a purely economic standpoint, where maximizing value or utility is often considered the rational choice.

Question 15

People notice that when they shop online,they see a box checked that tells them to uncheck the box if they don't want to receive news of new products.This checked box is an example of a
A) priming effect.
B) framing effect.
C) intertemporal decision bias.
D) status quo bias.
E) preference reversal.

Accepted Answer

The checked box is an example of the status quo bias, which is the tendency of individuals to stick to the current default or pre-existing option. In this case, the default option is to receive news of new products, and individuals have to actively uncheck the box if they do not want to receive such news. The option to receive news of new products is the status quo, and people tend to be influenced by it.

Question 16

In human behavioral economics,a choice to do an activity means
A) choosing not to do the next best activity.
B) choosing not to do a more desirable activity.
C) evaluating that activity versus an alternative group of activities.
D) that activity should be put at the top of a "to-do" list.
E) that activity must have an observable characteristic to be valid in a behavioral sense.

Accepted Answer

When making a choice to do an activity, it means choosing not to do the next best activity. This is based on the idea of opportunity cost in economics, where the cost of choosing one option is the opportunity forgone to choose the next best option. Therefore, choosing one activity means giving up the opportunity to do something else.

Question 17

A school raffle sells 1,000 tickets at $1 each for a $350 bookstore credit.If Ramona buys one ticket,what is her expected value of the gain for this gamble?
A) -$0.65
B) -$0.20
C) -$350
D) -$0.001
E) $0.35

Accepted Answer

The answer of A school raffle sells 1,000 tickets at...

Question 18

Economists make the general assumption that people
A) can be both rational and irrational,but the model must account for either.
B) are irrational,although modeling such irrationalities is nearly impossible.
C) are rational,but the assumption rarely fits reality.
D) are irrational,although general correlations exist in behavioral patterns.
E) are rational,but their behavior doesn't always follow this assumption.

Accepted Answer

Economists generally assume that people are rational, but recognize that this may not always hold true in reality. Therefore, while the assumption is usually made, economists also acknowledge that people may behave irrationally in certain situations.

Question 19

Willow,a risk-neutral person,is presented the following gamble: heads,she wins $2; tails,she loses $1.Willow should
A) take the gamble but buy insurance.
B) be indifferent to take or not take the gamble.
C) take the gamble.
D) not take the gamble.
E) randomly take or not take the gamble.

Accepted Answer

Willow should take the gamble since she is risk-neutral, which means she is indifferent between a certain payoff and a gamble with the same expected value. In this case, the expected value of the gamble is:
(0.5 x $2) + (0.5 x -$1) = $0.5
Since the expected value is positive, Willow should take the gamble. There is no need for insurance since the maximum loss is $1, which is less than the potential gain of $2.

Question 20

Emilie is presented the following gamble: one door has $100 behind it,another has $20 behind it,and another has $0 behind it.What is the expected value of this gamble?
A) $120
B) $40
C) $20
D) $60
E) Answer requires more information.

Accepted Answer

The expected value of the gamble is the sum of each outcome multiplied by its probability. Assuming each door has an equal chance of being chosen, the probability of getting $100 is 1/3, the probability of getting $20 is 1/3, and the probability of getting $0 is 1/3.

Expected value = (1/3)($100) + (1/3)($20) + (1/3)($0) = $40

Therefore, the best choice would be to choose the door with the $40 expected value.

Quiz 17: Behavioral Economics and Risk Taking

Differences in time preferences depend on

A rational,risk-averse person will

Maria gets two tickets to the opera as a tip bonus from a restaurant customer.She has never been to an opera,nor would she ever pay the $130 price for these tickets.She goes to this opera rather than getting $130 online for selling the tickets.Maria's behavior is

According to prospect theory,people

Victor complains that he never has enough time to do his homework.He brags that he has won 96 percent of 4,000 games of FreeCell this semester.Which of the following economic concepts of behavior is applicable?

An important source of human behavior bias in decision-making comes from

If someone wears his or her favorite clothes first,then he or she is most likely to have a ________ time preference.

If Ronnie calculates that $150 in the future is worth $100 today,then he is showing a ________ time preference.

Behavioral economics

The field of economics that draws on insights from psychology to expand models of individual decision-making is ________ economics.

A school raffle sells 1,000 tickets at $1 each for a $350 bookstore credit.If Ramona buys one ticket,what is her net expected value for this gamble?

A choice that does not follow the assumption of rational behavior is

A fully rational choice would require

Marcus gets a new cell phone for graduation.He abandons his old phone in a drawer forever,even though he could sell it on Craigslist for $50.Marcus's behavior is

People notice that when they shop online,they see a box checked that tells them to uncheck the box if they don't want to receive news of new products.This checked box is an example of a

In human behavioral economics,a choice to do an activity means

A school raffle sells 1,000 tickets at $1 each for a $350 bookstore credit.If Ramona buys one ticket,what is her expected value of the gain for this gamble?

Economists make the general assumption that people

Willow,a risk-neutral person,is presented the following gamble: heads,she wins $2; tails,she loses $1.Willow should

Emilie is presented the following gamble: one door has $100 behind it,another has $20 behind it,and another has $0 behind it.What is the expected value of this gamble?