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8-21
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: I
Topic: Prospect Theory
45. Last month Laura saw the value of her stock portfolio rise by $20,000. This month she
saw the value of her portfolio decline by $20,000. According to behavioral economics,
46. According to prospect theory, what strategy will firms typically employ with regard to
pricing and packaging of their goods, when faced with rising production costs?
8-22
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
behaviors, including framing effects, mental accounting, anchoring, loss aversion, and the
endowment effect.
Test Bank: I
Topic: Prospect Theory
47. According to prospect theory, firms are more likely to shrink packages than raise prices
because
48. According to the concept of framing effects,
8-23
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: Prospect Theory
49. Suppose that Dairy Barn Foods produces a regular sour cream with 10 grams of fat per
serving and a "low fat" sour cream with only 5 grams of fat per serving (assume that this is
still considered a lot of fat to consume per serving). According to prospect theory, how
should Dairy Barn promote its "low fat" sour cream?
50. Josh will receive a salary of $300,000 next year. According to prospect theory,
51. Why do credit card companies typically require small minimum payment amounts on
their customers' monthly credit card statements?
52. Anchoring
53. Because of "mental accounting,"
54. The process by which people isolate purchases and fail to consider all consumption
options simultaneously is known as
55. Alex was willing to pay $50 for the new World Cup soccer ball. When he received it
as a gift, he was willing to sell it, but for no less than $80. According to behavioral
economists,
8-26
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D. Alex's behavior is irrational because his frame has changed.
56. According to the "endowment effect,"
57. According to prospect theory, people tend to favor default options. This is known as
the
8-27
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Difficult y : 02 Medium
Grada b l e : automa t ic
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
Topic: Prospect Theory
58. When Lucian starts his new job, he is given the option to contribute to his retirement
fund, which the company will match up to 5 percent of his base salary. Lucian knows he
can afford to contribute to his retirement fund; he only needs to file a form to activate the
contributions and matching. According to prospect theory, if Lucian is typical in his
behavior, we would expect him to
59. Internationally, participation differences in organ donation programs are mostly
attributed to
8-28
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Grada b l e : automa t ic
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
Topic: Prospect Theory
60. Thea committed a traffic violation that resulted in an accident. She learns first that the
violation will result in a $500 fine; she then learns that she will have to pay another $500
for damage caused in the accident. According to prospect theory,
61. In the face of rising costs, some firms reduce the quality of the goods they produce
rather than maintain quality and increase prices. How would behavioral economics explain
this strategy?
8-29
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Accessi b i l ity: Keyboard Navigation
Blooms: Understand
Difficult y : 02 Medium
Grada b l e : automa t ic
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
Topic: Prospect Theory
62. Bucky and Satchel are offered identical jobs, each paying $80,000 per year. According
to behavioral economics,
63. Credit card companies require low minimum payments that impose significant interest
costs on consumers choosing to pay the minimum. Recent legislation has required credit
card companies to show on customer billing statements how much interest would be paid
and how long it would take to repay the current balance if only the minimum is paid.
Behavioral economists would expect this legislation to
64. Junior collects baseball cards. He owns one Felix Hernandez card that sells in most
shops for $15. He is interested in buying a different Felix card that also sells for $15.
According to behavioral economics,
65. According to behavioral economists, people's preferences toward a particular outcome
8-31
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Accessi b i l ity: Keyboard Navigation
Blooms: Understand
Difficult y : 02 Medium
Grada b l e : automa t ic
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
Topic: Prospect Theory
66. For economists, "myopia" refers to
67. According to behavioral economists, someone suffering from myopia is most likely to
8-32
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: Myopia and Time Inconsistency
68. Which of the following individuals least likely suffers from myopia?
69. "Time inconsistency" refers to the
70. Eric tries to eat more healthfully by eliminating cookies, donuts, and similar snacks
from his diet. Every day at work, however, coworkers bring in these treats and Eric
succumbs to temptation. Which of the following concepts would behavioral economists
use to explain Eric's self-control problem?
8-33
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
B. availability heuristic
C. self-serving bias
D. system 2 processes dominating decision making
71. According to behavioral economists, self-control problems
72. A company has designed an alarm clock that "runs and hides" after going off, forcing
the person to get up and find the alarm clock if he or she wants to shut off the alarm.
According to behavioral economists,
8-34
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Accessi b i l ity: Keyboard Navigation
Blooms: Understand
Difficult y : 02 Medium
Grada b l e : automa t ic
Learning Objective: 08-04 Describe how time inconsistency and myopia cause people to
make suboptimal long-run decisions.
Test Bank: I
Topic: Myopia and Time Inconsistency
73. According to behavioral economists, precommitments
74. Salary smoothing, automatic payroll deductions, and early withdrawal penalties are all
examples of
8-35
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: Myopia and Time Inconsistency
75. Adam and Brittany both recently started new jobs. Both have determined that they
should save 10 percent of their monthly income toward retirement. Adam's employer has
no program established for payroll deduction, but he could easily set up automatic
withdrawals to go into a retirement fund. Brittany's employer automatically directs 8
percent of the paycheck into a retirement fund, but the employee can change the percentage
deducted. Behavioral economists would expect
76. Which of the following is the best example of a precommitment used to overcome time
inconsistency?
8-36
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: Myopia and Time Inconsistency
77. Which of the following statements best reflects behavioral economists' views on self-
interest versus the interests of others?
78. Fairness, according to behavioral economics,
79. According to behavioral economists, giving to charity
8-37
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A.
contradicts the view that people are narrowly self-interested.
B. appears unselfish but in fact is driven by self-interest.
C. results from an ability to accurately calculate benefits and costs.
D. is done solely to receive the utility from public recognition.
80. Al regularly pays the full amount of taxes due, even though he could easily hide some
of his income and reduce his tax burden, with no risk of getting caught. According to
behavioral economics,
81. Balin purchases fair trade cocoa out of concern for workers' rights and environmental
sustainability. He could purchase cocoa of equal quality at a lower price. Behavioral
economists would consider Balin's purchase
82. Natural disasters often cause shortages of critical supplies. What outcomes would
neoclassical and behavioral economics typically predict from these events?
83. The dictator game
8-39
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
Accessi b i l ity: Keyboard Navigation
Blooms: Remember
Di f f i c u l t y : 01 Easy
Grada b l e : a u t o mat i c
Learning Objective: 08-05 Define fairness and give examples of how it affects behavior in
the economy and in the dictator and ultimatum games.
Test Bank: I
Topic: Fairness and Self-Interest
84. Carlos and Darla are playing the dictator game. Carlos is assigned the role of dictator
and given $20 to split between the two of them. Based on previous experiments with this
game, if Carlos is a typical player, behavioral economists would expect
85. Carlos and Darla are playing the dictator game. Carlos is assigned the role of dictator
and given $20 to split between the two of them. Based on previous experiments with this
game by behavioral economists, which is the least likely outcome?
8-40
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
the economy and in the dictator and ultimatum games.
Test Bank: I
Topic: Fairness and Self-Interest
86. Carlos and Darla are representative individuals playing the dictator game. Carlos is
assigned the role of dictator and given $20 to split between the two of them. Based on
previous experiments with this game by behavioral economists, about a third of the time
we would expect
A
. Carlos to keep all of the money for himself.
87. The results of running the dictator game experiments thousands of times have revealed
to behavioral economists that
88. Which of the following is a key difference between the dictator game and the
ultimatum game?
