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8-1
Chapter 08 Behavioral Economics Answer Key
Multiple Choice Questions
1. Which of the following best explains the difference between neoclassical economics and
behavioral economics?
2. Which of the following assumptions about human behavior is most likely to be accepted
by behavioral economists?
3. Behavioral economists believe that people
8-2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A. assess current and future options equally well.
B. do not care about fairness, especially if it impairs their ability to get what they want.
C. make errors in decision making because of problems such as bad information, but such
errors are random and generally not repeated by the same individual.
D.
often succumb to temptation.
AACSB: Knowledge Application
Acces s i bi lity: Keyboard Navigation
Blooms: Remember
Di ff i c u l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-01 Define behavioral economics and explain how it contrasts with
neoclassical economics.
Test Bank: I
To pic: Systematic Errors and the Origin of Behavioral Economics
4. Neoclassical economists generally believe which of the following about human
behavior?
5. Which of the following sets of personal characteristics best reflects what behavioral
economists assume about how people make decisions?
8-3
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
B. People are rational, adjust for errors, have stable preferences, and easily resist
temptation.
C. People care deeply about fairness, eagerly and accurately calculate ways to help others,
assess future and present options equally well, and resist temptations in their selflessness.
D.
People have preferences that depend on context, avoid and are bad at computation,
often give in to temptation, and are often selfless in their behavior.
AACSB: Knowledge Application
Acces s i bi lity: Keyboard Navigation
Blooms: Remember
Di ff i c u l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-01 Define behavioral economics and explain how it contrasts with
neoclassical economics.
Test Bank: I
To pic: Systematic Errors and the Origin of Behavioral Economics
6. Susie knows that too many sugary treats, while delicious when eaten, have long-term
adverse effects on weight and health. Based on this information, a behavioral economist
would expect Susie to
7. Susie knows that too many sugary treats, while delicious when eaten, have long-term
adverse effects on weight and health. Based on this information, a neoclassical economist
would expect Susie to
8-4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
decision about how many treats to eat.
B. eat more sugary treats than is optimal, as she likely gives more weight to present events
and outcomes than to ones in the future.
C. give away most of her sugary treats in an effort to resist temptation.
D. determine her fair share of the sugary treats available, and only eat those.
AACSB: Knowledge Application
Acces s i bi lity: Keyboard Navigation
Blooms: Remember
Di ff i c u l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-01 Define behavioral economics and explain how it contrasts with
neoclassical economics.
Test Bank: I
To pic: Systematic Errors and the Origin of Behavioral Economics
8. In the financial crisis that precipitated the 2007-2009 recession, people systematically
overestimated their prospects for financial gain. Which branch of economics would most
likely have expected to predict this?
9. Which of the following individuals received a Nobel Prize in economics for his work in
behavioral economics?
8-5
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Remember
Di ff i c u l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-01 Define behavioral economics and explain how it contrasts with
neoclassical economics.
Test Bank: I
To pic: Systematic Errors and the Origin of Behavioral Economics
10. Which of the following statements best reflects how a behavioral economist views
individual decision making?
11. Because neoclassical economists assume that people are rational decision makers, they
8-6
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: I
To pic: Systematic Errors and the Origin of Behavioral Economics
12. What do neoclassical economics and behavioral economics believe about giving
people options?
13. Neoclassical economics and behavioral economics
14. Which of the following supermarket strategies to increase sales would be most
consistent with a behavioral economics (versus neoclassical economics) approach?
15. Which of the following supermarket strategies to increase sales would be most
consistent with a neoclassical economics (versus behavioral economics) approach?
16. Why, according to behavioral economics, would supermarkets place gum, candy, and
other small convenience items near the cash registers?
8-8
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
consumers by having smaller items at the checkout stands.
D.
Many of these are small items that people will buy on an impulse.
AACSB: Knowledge Application
Acces s i bi lity: Keyboard Navigation
Blooms: Remember
Di ff i c u l t y : 02 Medium
Gradable: a u t o m a t i c
Learning Objective: 08-01 Define behavioral economics and explain how it contrasts with
neoclassical economics.
Test Bank: I
To pic: Systematic Errors and the Origin of Behavioral Economics
17. According to behavioral economics, placement of goods in retail stores is often
designed to accomplish which of the following?
18. Which of the following would represent a systematic error?
8-9
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Di ff i c u l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-01 Define behavioral economics and explain how it contrasts with
neoclassical economics.
Test Bank: I
To pic: Systematic Errors and the Origin of Behavioral Economics
19. Behavioral economists believe that the human brain is generally
20. According to behavioral economists, the human brain
21. According to behavioral economists, the human brain frequently employs heuristics
because
22. Heuristics
23. Those who believe that "there is no such thing as bad publicity" base this argument on
which of the following ideas from behavioral economics?
8-11
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
Acces s i bi lity: Keyboard Navigation
Blooms: Understand
Difficu l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-02 Discuss the evidence for the brain being modular,
computationally restricted, reliant on heuristics, and prone to various forms of cognitive
error.
Test Bank: I
To pic: Our Efficient, Error-Prone Brains
24. According to behavioral economics, advertising works because it
25. Which of the following is not an implication of hardwired heuristics?
8-12
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Difficu l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-02 Discuss the evidence for the brain being modular,
computationally restricted, reliant on heuristics, and prone to various forms of cognitive
error.
Test Bank: I
To pic: Our Efficient, Error-Prone Brains
26. Which of the following statements is most accurate about human brain modularity?
27. Augi carefully plans out an early morning exercise routine to lose weight and get fit.
When it's time to work out, however, Augi just "doesn't feel up to it" and decides to sleep
in. Behavioral economics would say that Augi
8-13
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Difficu l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-02 Discuss the evidence for the brain being modular,
computationally restricted, reliant on heuristics, and prone to various forms of cognitive
error.
Test Bank: I
To pic: Our Efficient, Error-Prone Brains
28. Behavioral economics recognizes that people use System 1 to make decisions more
often than they use System 2. Which of the following is an implication of that decision-
making process?
29. Which of the following is the best example of a System 2 decision and action?
8-14
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Difficu l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-02 Discuss the evidence for the brain being modular,
computationally restricted, reliant on heuristics, and prone to various forms of cognitive
error.
Test Bank: I
To pic: Our Efficient, Error-Prone Brains
30. According to behavioral economics, cognitive biases
31. What are the two categories of cognitive biases identified by behavioral economists?
8-15
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
To pic: Our Efficient, Error-Prone Brains
32. Dorothy likes to invest in gold as part of her overall financial investment portfolio, as
her gut tells her it will increase dramatically in value. Her favorite and generally only
source of investment advice is Wizard's Gold Hour on the OZ cable channel. As a result
of this advice, Dorothy's portfolio mix is suboptimal, as it is too heavily weighted in gold.
Behavioral economists would say that Dorothy suffers from
33. Which of the following cognitive biases refers to people's tendency to attribute their
successes to personal ability and effort, and failures to forces outside their control?
34. In anonymous surveys, on average people rate themselves as "above average" with
regard to characteristics such as intelligence, perceptiveness, and driving ability.
According to behavioral economics, this contradictory result would most likely be caused
by the
35. John's friend Rosika won a major lottery jackpot. Seeing this, John goes out and buys a
bunch of lottery tickets despite struggling financially and even though he knows that
millions don't win and that the odds of winning are infinitesimal. John's decision to buy
the lottery tickets under these circumstances would best be explained by the
36. Dan was certain that his upcoming economics test would be so easy that he could wait
to study until the night before and still do well on the exam. When he cracked open his
book and notes the night before the exam, he realized he should've started studying
8-17
earlier. According to behavioral economics, Dan's error was caused primarily by
37. Fatal automobile accidents occur much more frequently than do fatal airplane crashes,
yet airplane crashes receive a disproportionate amount of media coverage. As a result,
some people are overly fearful of flying in planes yet have no problem riding in cars.
Which of the following cognitive biases best explains this disconnect between these
people's fears and the statistical realities?
38. Whenever Josh goes to his favorite restaurant, he wants to buy tiramisu, his favorite
dessert. Despite the fact that he would enjoy the flavor of the tiramisu the same amount
every time, Josh only buys it when others are having dessert and never buys it if he
would be the only one having dessert. Behavioral economists would say that Josh's
decision is affected by
39. Specialty shops can charge and get customers to pay higher prices for identical goods
than they would pay in "big box" stores. Assuming that these differences are driven by
store appearance rather than differences in services provided, which of the following best
explains this phenomenon?
40. When people convince themselves that they "knew all along" what was going to
happen, when in fact their predictions were incorrect, they suffer from
C. framing bias.
D.
hindsight bias.
41. Because gun violence is portrayed frequently on television and in movies, people
mistakenly assign too high of a probability that they will fall victim to gun violence and too
low of a probability to more likely but less publicized events. This phenomenon
illustrates
42. A central focus of prospect theory is
8-20
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
Difficu l t y : 02 Medium
Gradable: automatic
Learning Objective: 08-03 Relate how prospect theory helps to explain many consumer
behaviors, including framing effects, mental accounting, anchoring, loss aversion, and the
endowment effect.
Test Bank: I
To pic: Prospect Theory
43. In developing prospect theory, which of the following did behavioral economists not
discover about people's reaction to goods and bads?
44. According to behavioral economics,
