20) In an experiment that employed the dictator game, economists at Cornell University gave
student “allocators” the option of dividing $20 in only two ways (a) $18 for themselves and $2 to
another student, or (b) $10 for themselves and $10 to another student. What was one result from
this experiment?
A) Most allocators chose to give themselves $18 and $2 to the other students.
B) Most of the students who were not allocators did not like having someone else make decisions
for them.
C) A majority of the female allocators chose option (a); a majority of the male allocators chose
option (b).
D) Most of the allocators apparently valued acting fairly.
21) Economists have used the ultimatum game and the dictator game in experiments designed to
determine
A) whether consumers care about fairness when they make decisions.
B) whether consumers believe it is fair for producers to raise the price of a product for which
there is excess demand.
C) whether consumers understand the difference between implicit costs and explicit costs.
D) whether consumers understand the rule of equal marginal utility per dollar spent.
22) Many people leave their servers tips in restaurants, even when they are not likely to visit the
restaurant again. This is evidence that
A) people would rather pay for good service at an inexpensive restaurant than pay higher prices
and receive poor service at an expensive restaurant.
B) people enjoy eating at restaurants more than eating at home.
C) people treat others fairly even if doing so makes them worse off financially.
D) there has been an improvement in the service people receive in restaurants over time, partly
because the restaurant industry has become more competitive.
23) In their surveys of consumers, Daniel Kaheman, Jack Knetsch and Richard Thaler found that
A) most people considered it unfair for firms to raise their prices because of an increase in their
costs, but fair to raise their prices after an increase in demand.
B) most people considered any increase in price to be unfair as it led to an increase in profits.
C) most people believed that low income people were hurt most by increases in prices.
D) most people considered an increase in price by firms following an increase in their costs to be
fair but believed it was unfair for firms to raise their prices because of an increase in demand.
24) In a survey of consumers, Daniel Kaheman, Jack Knetsch and Richard Thaler asked their
opinion of a hardware store’s decision to
A) go out of business because a larger hardware store opened in the same city; 82 percent of
those surveyed believed it was unfair for the larger store to compete with the smaller store.
B) raise the price of snow shovels the day following a snowstorm; 82 percent of those surveyed
believed this was unfair.
C) sell tickets to sporting and cultural events at prices higher than prices paid at the ticket
windows for the same events; 82 percent of those surveyed believed this was unfair.
D) remain in business even though the store was not making an economic profit; 82 percent of
those surveyed believed it would be unfair for the store to go out of business if there no other
hardware stores in the same area.
25) The ultimatum game and the dictator game are used in economic experiments to test whether
fairness is an important influence on consumer decision-making.
26) Results of the ultimatum game indicate that most people value fairness enough that they will
refuse to participate in a transaction they consider unfair, even if they are worse off financially as
a result.
27) A network externality causes firms to sacrifice profits in the short run in order to satisfy their
customers and increase their long-run profits.
28) Explain the concept of network externalities.
29) Studies on consumer behavior have found that most people value fairness enough that they
will refuse to participate in transactions they consider unfair, even if they are worse off as a
result. How does this affect a firm’s decision to raise prices in the event of a temporary increase
in demand?
30) Economists have noted that businesses of a certain type tend to congregate geographically,
attracting workers with skills in those fields. This, in turn, lures more firms seeking employees
with those skills. Some examples include commercial banking, software development, and the
automobile industry. What mechanism is at work here? Briefly explain how the mechanism
works to the advantage of employers and employees.
10.4 Behavioral Economics: Do People Make Their Choices Rationally?
1) A new area of economics studies situations in which people appear to be making choices that
do not appear to be economically rational. This area is called
A) behavioral economics.
B) irrational economics.
C) social economics.
D) new wave economics.
2) Behavioral economics refers to the study of situations
A) where consumers and firms appear to make choices that are appropriate to reach their goals.
B) where consumers and firms appear to value fairness when they make choices.
C) where consumers and firms disobey the laws of demand and supply.
D) where consumers and firms do not appear to be making choices that are economically
rational.
3) One reason that consumers and businesses might not act rationally is
A) it is difficult to obtain enough information about the elasticities of demand and supply.
B) they may not realize their actions are inconsistent with their goals.
C) consumer tastes change constantly.
D) they do not always value fairness when they make choices.
4) The highest-valued alternative that must be given up to engage in an activity is the definition
of
A) utility.
B) implicit cost.
C) opportunity cost.
D) economic sacrifice.
5) Which of the following is a common mistake made by consumers?
A) taking into account the implicit costs of an activity
B) ignoring sunk costs
C) being overly optimistic about their future behavior
D) being overly pessimistic about their future behavior
6) 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
A) the high value fans place on watching the Super Bowl in person, rather than on television.
B) the failure of consumers to take into account nonmonetary opportunity costs.
C) the failure of consumers to ignore sunk costs.
D) consumers being overly optimistic about their future behavior.
7) 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
A) the tendency of people to be unwilling to sell a good they already own even if they are
offered a price that is greater than the price they would be willing to pay if they did not already
own it.
B) the tendency for consumers to account for monetary costs but to ignore sunk costs.
C) consumers placing a high value on a product because it makes them appear to be fashionable.
D) the law of demand.
8) 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
A) rational consumer behavior.
B) the endowment effect.
C) the fallacy of composition.
D) the failure to ignore sunk costs.
9) What is the endowment effect?
A) the tendency of people to be unwilling to sell something they already own even if they are
offered a price that is greater than what they would be willing to pay to buy the good if they did
not already own it
B) the tendency of people to be unwilling to sell something they already own because of its
sentimental value
C) the tendency of people to overstate the value of a good they already own even though similar
items can be purchased at a lower price
D) the sum total of assets that a person has acquired over the years
10) Costs that have already been incurred, and which cannot be recovered, are known as
A) short-run fixed costs.
B) implicit costs.
C) unavoidable costs.
D) sunk costs.
11) A sunk cost is
A) another term that means opportunity cost.
B) a term used to describe the cost of capital that the owners of a firm sink into their business.
C) the highest valued alternative that must be given up to engage in an activity.
D) a cost that has already been paid and cannot be recovered.
12) Suppose you pre-ordered a non-refundable movie ticket to The Dark Knight Rises. 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?
A) Since the cost of the movie ticket is a sunk cost, it should not influence your decision. Your
decision should be based solely on whether you want to see the movie or not.
B) You should not waste resources. Since you have paid for the ticket you should watch the
movie.
C) Your should go to the movie to minimize your losses.
D) You should go to the movie to maximize your utility.
13) 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?
A) the difference between implicit and explicit costs
B) the scarcity of home run baseballs hit by Ted Williams
C) the endowment effect
D) how social influences can affect consumption choices
14) 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
A) should be ignored since it represents a sunk cost.
B) should be considered since it is money he has spent and needs to recoup.
C) should be ignored only if Kim can earn more than $200,000 by running his website.
D) should be considered since it is money he could have used to invest in his website.
15) 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?
A) Some health club members suffer minor injuries that prevent them from working out.
B) Some people are overly optimistic about their future behavior.
C) Some people fail to treat their membership fees as sunk costs.
D) Some members receive utility from activities they believe are popular.
16) Studies have shown that students who earn high grades in college will have earned much
more over a 40 year period than students who receive low grades. Despite this, surveys show that
many students fail to study enough hours outside of the classroom to earn high grades. Which of
the following is the best explanation for this?
A) Some students can earn high grades by studying fewer hours than other students.
B) The surveys used to make this observation were based on a non-random sample of students.
C) Because of new technology developed in the 1990s, students can make more efficient use of
their study time today than students who attended college before the 1990s.
D) Students overvalue the utility they receive from activities other than studying.
17) Which of the following is an example of consumers being unrealistic about their future
behavior?
A) People forgo saving for retirement because they plan to save in the future when they expect to
earn higher salaries.
B) College students who can afford to attend a private university attend a public university in
order to spend less on tuition.
C) Parents contribute to a tuition fund for their children soon after they are born.
D) A college student works part-time to earn income to pay for a used car even though she is a
full-time student.
18) 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?
A) People sometimes buy stocks because other people are buying them or they want to appear to
be fashionable.
B) People sometimes make mistakes when they buy stocks because of the endowment effect.
C) People sometimes make mistakes when they buy stocks or when they buy goods and services:
they ignore the monetary opportunity costs of their choices.
D) People often fail to ignore the sunk costs of their decisions. The cost of the stock bought at
$50 per share is a sunk cost.
19) 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?
A) Adam’s tastes had changed from the time he bought the ticket to the time of the performance
of the play.
B) When Adam bought the ticket he was being unrealistic about his future behavior.
C) The endowment effect explains Adam’s actions. People like Adam seem to value things that
they have more than the things they do not have.
D) Adam’s income probably increased between the time he bought the ticket and the day of the
play’s performance.
20) 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?
A) You expect to receive greater utility from attending the playoff game than you received from
buying the ticket.
B) by the endowment effect
C) by the law of diminishing marginal utility
D) The income effect from the increase in the price of the ticket from $50 to $100 was greater
than the substitution effect.
21) Celebrity endorsements of products, such as Snoop Dogg’s tweets about the Toyota Sienna
minivan, are intended to cause the demand curve for the product to ________, which allows the
product’s manufacturer to ________.
A) shift to the right; lower its production costs and increase output.
B) shift to the left; lower its production costs and increase output.
C) shift to the right; sell more of the product at every price.
D) shift to the left; sell more of the product at every price.
22) A common mistake made by consumers is the failure to take into account the monetary costs
of their actions.