Question 1

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

Accepted Answer

Behavioral economics is actually the study of situations in which people make irrational or suboptimal choices, as it recognizes that humans are not always perfectly rational in their decision making.

Question 2

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 3

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

These results demonstrate the endowment effect, which is the tendency for people to value something they own more than they would if they did not own it. This explains why the Super Bowl ticket holders were not willing to sell their tickets for $3,000, despite the fact that they would not have paid that much for the tickets in the first place.

Question 4

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 new customers may join a health club in January with the intention of making exercise a regular habit, but may overestimate their commitment and ability to maintain this behavior throughout the year. As time passes, they may lose motivation or find it difficult to make time for exercise, leading them to cancel their membership.

Question 5

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 advises his client to not hold onto a stock for too long in order to avoid a loss. This is because people often fail to ignore the sunk costs of their decisions, and the cost of the stock bought at $50 per share is a sunk cost. Therefore, the best explanation for Rickhiser's advice is that people often fail to ignore sunk costs.

Question 6

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 may have unrealistic expectations about how much time and effort they will need to put into studying in order to achieve high grades. They may underestimate the amount of reading, studying, and preparation required for their courses, or may overestimate their own abilities and the amount of spare time they will have. As a result, they may not schedule enough time for studying or may procrastinate, leading to lower grades than they may have expected.

Question 7

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 $200,000 spent on education represents a sunk cost, meaning it is a cost that has already been incurred and cannot be recovered. Kim's decision should be based on the potential future earnings and success of his website, rather than focusing on a cost that cannot be changed.

Question 8

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

Harvey is exhibiting the endowment effect, which refers to the tendency for people to value something more highly simply because they own it. Despite the fact that Harvey would not have paid $75,000 for the baseball if he did not already own it, he is now valuing it more highly because he owns it and it has sentimental value to him.

Question 9

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

Accepted Answer

The answer of Which of the following is a common...

Question 10

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 results of the survey conducted by Alan Krueger demonstrate the endowment effect, where individuals value items they already possess (in this case, their Super Bowl tickets) higher than they would if they did not possess them. This is demonstrated by the fact that 94% of fans surveyed would not have paid $3,000 for a ticket (suggesting they do not value their ticket at that price), but 92% would not have sold their ticket for $3,000 (suggesting they value their ticket at or above that price).

Question 11

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?

Accepted Answer

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

Question 12

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

Accepted Answer

Sunk costs are the costs that have already been incurred and cannot be recovered. Consumers often neglect these costs and make decisions that ignore them, leading to suboptimal outcomes.

Question 13

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

Accepted Answer

According to the passage, the everyday low prices under J.C. Penney's new pricing policy ended up being higher than the sale prices under the previous policy.

Question 14

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 answer of Alan Krueger conducted a survey of fans...

Question 15

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

This is a well-established concept in behavioral economics and psychology. It is also referred to as "ownership bias."

Question 16

Suppose you pre-ordered a non-refundable movie ticket to X-Men: Apocalypse.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 have no influence on whether or not you go to the movie. Therefore, the rational thing to do is to base your decision solely on whether you want to see the movie or not. If you do not want to go, it is rational to stay home and not waste your time and energy.

Question 17

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

Accepted Answer

Sunk costs are past costs that have already been incurred and cannot be recovered. Therefore, they match the description given in the question. Choice A refers to a different type of cost, while choices B and C are not specific enough to match the given description.

Question 18

What is the endowment effect?

Accepted Answer

The endowment effect refers to the common psychological phenomenon where people assign more value to things merely because they own them. People tend to overvalue objects in their possession, and as a result, they may be unwilling to sell them even if offered a higher price than they would have paid to purchase the item in the first place.

Question 19

A sunk cost is

Accepted Answer

A sunk cost is a cost that has already been paid and cannot be recovered. It is not related to opportunity cost or the cost of capital. The highest valued alternative that must be given up to engage in an activity is the opportunity cost. A sunk cost is distinct from the opportunity cost.

Question 20

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 explains Adam's actions. People tend to value things that they already possess more than similar things that they do not own. Therefore, Adam was unwilling to sell his ticket even for a higher price than what he paid for because he had become attached to it after having bought it.

Quiz 10: Consumer Choice and Behavioral Economics