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159. Economic policy that appears to be ideal in an economics textbook may not be the final policy
that is approved by elected politicians because
a. sometimes a politician’s self interest may conflict with the national interest.
b. economics professors have a notoriously low voting rate.
c. only policies advocated by the President’s Council of Economic Advisors receive enough
national attention to interest politicians.
d. Economists cannot explain why politicians do not implement the ideas from their textbooks.
160. Economic theory assumes that voters, politicians, and other political participants are largely
motivated by
a. personal self-interest.
b. altruism.
c. a desire to promote the general welfare.
d. a desire to promote allocative economic efficiency.
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Multiple Choice – Section 03: Behavioral Economics
1. Economists use basic psychological insights in the field of study called
a. psychological economics.
b. transitional economics.
c. behavioral economics.
d. social economics.
2. Most economic models
a. incorporate the assumption of rational behavior on the part of economic actors.
b. incorporate the notion that people are usually reluctant to change their minds.
c. are meant to precisely duplicate reality.
d. assume that people often make sub-optimal choices.
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3. Behavioral economics
a. integrates psychological insights into economic models.
b. relies on the assumption that homo economicus describes economic decision-making.
c. assumes that economic agents have full information about the conditions surrounding their
decisions.
d. All of the above are correct.
4. When economists assume that people are rational, they assume that
a. consumers maximize profits.
b. firms maximize revenues.
c. consumers maximize utility.
d. firms maximize output.
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5. Conventional economic theory assumes that people
a. care a great deal about fairness.
b. are inconsistent over time in their decisionmaking.
c. are rational.
d. are satisficers.
6. Herbert Simon suggested that people are not rational maximizers but satisficers, meaning that they
choose a course of action that is
a. personally satisfying, with a greater emphasis on personal consumption than on fairness.
b. socially satisfying, with a greater emphasis on fairness than on personal consumption.
c. good enough.
d. risk averse.
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7. Herbert Simon, one of the first social scientists to combine the study of economics and psychology,
suggested that humans should be viewed as
a. rational maximizers.
b. satisficers.
c. independent thinkers.
d. signalers.
8. A “satisficer” is a person who
a. always chooses the best course of action.
b. often chooses the worst course of action.
c. makes decisions that are merely good enough.
d. studies both economics and psychology.
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9. A person who makes decisions that are “merely good enough” is called a(n)
a. optimizer.
b. rational person.
c. satisficer.
d. maxi–minimizer.
10. The suggestion that people are “satisficers” is similar to the view that people
a. are wealth-maximizers.
b. exhibit “bounded rationality.”
c. go to a lot of trouble to weigh costs and benefits before choosing a course of action.
d. change their minds often.
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11. Juanita is preparing to study for her economics final exam. She tells her friend that she will be
happy if she just gets a B, even though she could likely earn an A if she studied harder. Juanita is
what Herbert Simon would call a
a. rational maximizer.
b. satisficer.
c. homo economicus.
d. screener.
12. Which of the following is an example of satisficing behavior?
a. You continue studying for your economics exam until you believe you’ll get a score that’s good
enough.
b. You spend time looking over the lettuce at the grocery store in order to make sure you get the
best head of lettuce.
c. You clean your room to the point where you think it’s clean enough that further time can be
used for more productive purposes.
d. You carefully plan your day in order to get “the most out of life.”
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13. Which of the following students exhibits satisficing behavior?
a. Mick studies his economics notes every night so that he can be sure to earn a perfect score on
his exam.
b. Bill studies his economics notes for a few hours the night before the test because he will be
satisfied with a C on his exam.
c. Marguerite studies extensively as she will only be satisfied with a very high score.
d. None of these students exhibits satisficing behavior.
14. Studies of human decision-making show that
a. firms are less likely to maximize profits than consumers are to maximize utility.
b. firms are more likely to maximize profits than consumers are to maximize utility.
c. people are irrational more often than they are rational.
d. people are reluctant to change their minds.
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15. Based on the studies of human decision making, which of the following statements is correct?
a. Most people are not bothered by perceived unfairness as long as they receive some
compensation, even if the amount is very small.
b. Most people are very willing to change their minds.
c. Many people’s preferences are inconsistent over time.
d. All of the above are correct.
16. Studies of human decision–making have detected systematic mistakes that people make. Which of
the following have been detected?
a. people are overconfident
b. people give too much weight to a small number of vivid observations
c. people are reluctant to change their minds
d. All of the above are correct.
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17. Some of the systematic mistakes that people make include
a. being overconfident.
b. placing too much weight on events that are more vivid compared to those with greater
statistical probability.
c. being generally unwilling to change their minds.
d. All of the above are correct.
18. Studies of human decision making reveal several systematic mistakes people make. Which of the
following is not an example of one of these mistakes?
a. Tom tells everyone he’s sure he can run a 5K in twenty-five minutes, but then tries a couple of
times and takes over thirty minutes.
b. Kate hears a news report about five people dying from a tornado in Kansas and decides to
cancel her plans to visit her aunt there.
c. Randi is a strong proponent of raising the minimum wage. She reads a research report on the
effects of increasing the minimum wage and begins to doubt her previous thinking.
d. Jenny is shopping for a new car and has found that Hondota cars consistently get high quality
ratings. Her friend had trouble with her Hondota, so Jenny decides not to purchase a Hondota.
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19. Economic theory assumes people are always rational. Yet observation indicates that people do not
always behave rationally. Which of the following is not a systematic mistake people make in their
decisionmaking?
a. People often interpret information to fit beliefs already held.
b. People place too much emphasis in their decisionmaking on a few extreme situations of which
they are aware.
c. People tend to view current prices differently than they view future prices.
d. People are too sure of their own abilities.
20. Riley travels a great deal, and over the past several years he has read dozens of reviews of hotel
chains, all of which rave about the clean rooms and great service at Comeon Inns. Last month,
Riley checked into a room at a Comeon Inn for the first time, only to find the room filthy and the
service lousy. He decided the Comeon Inn chain is inferior to other hotel chains.
a. Riley was irrational to have believed the reviews that he had read.
b. Riley was rational to have changed his mind about Comeon Inns based on his one experience.
c. Riley is an example of someone who gives too much weight to a small number of vivid
observations.
d. Riley is an example of someone who is reluctant to change his mind.
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21. Your city newspaper publishes a “Best of” poll that lists its readers’ favorite restaurants. Mundo
Bar and Grill is ranked as the best casual restaurant. Your best friend had dinner at Mundo Bar
and Grill last week and commented that the food was mediocre and the service was slow. You
decide not to have dinner at Mundo Bar and Grill based on your friend’s experience. Your
decision illustrates that people
a. are reluctant to change their minds.
b. are overconfident.
c. give too much weight to a small number of vivid observations.
d. are satisficers.
22. A survey of 1,500 frequent restaurant patrons revealed that, Chang Cheng, a local Chinese
restaurant, offers high– quality food at low prices. Based on one dining experience, a restaurant
critic gave Chang Cheng a poor review, saying the food was not very good. As a result, you
decide not to dine at Chang Cheng. This decision is an example of which of the following
systematic mistakes that people make when making decisions?
a. People are overconfident.
b. People give too much weight to a small number of vivid observations.
c. People are reluctant to change their minds.
d. All of the above are correct.
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23. Sam needs to have his car serviced. There is an auto repair shop located nearby that does a lot of
business and has an online rating of 4 out of 5 stars. Sam takes his car to be serviced and thinks
the service person is grumpy and that his car is still not running as well as it could be. Sam then
makes a point of telling his friends not to use the repair shop. Sam’s actions illustrate which of the
following systematic mistakes that people make when making decisions?
a. People are overconfident.
b. People give too much weight to a small number of vivid observations.
c. People are reluctant to change their minds.
d. All of the above are correct.
24. Evidence from studies of workers‘ choices on whether to participate in 401(k) plans suggests that
the workers’ behavior appears to exhibit
a. indifference.
b. ignorance.
c. inertia.
d. indecision.
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25. Martha routinely has her prescriptions filled at her local SVC pharmacy. Each time that Martha
goes to pick up a prescription, there is some problem and Martha has to return to the pharmacy
later to get the prescription. Martha finds these return trips very annoying and time-consuming,
but continues to request that her doctor send her prescriptions to this pharmacy even though there
are several other options in her town. Which of the following is correct?
a. Economists would say that Martha is behaving rationally.
b. Martha’s behavior appears to exhibit inertia.
c. Martha’s behavior is inconsistent over time.
d. Martha gives too much weight to a small number of vivid observations.
26. People interpret evidence to confirm beliefs they already hold. This statement is an example of
which of the following systematic mistakes that people make?
a. people are overconfident
b. people give too much weight to a small number of vivid observations
c. people are reluctant to change their minds
d. All of the above are correct.
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27. People interpret evidence to confirm beliefs they already hold. This statement is an example of
which of the following systematic mistakes that people make?
a. people are overconfident
b. people give too much weight to a small number of vivid observations
c. people are reluctant to change their minds
d. All of the above are correct.
28. Don is convinced that it would be best if the U.S. was on a gold standard. He enthusiastically
reads any editorials or articles that confirm his view. He frequently dismisses editorials and
articles that argue against the gold standard because he presumes they are flawed or written by
“crackpots.” Don’s behavior is an example of which of the following systematic mistakes that
people make?
a. people are overconfident
b. people give too much weight to a small number of vivid observations
c. people are reluctant to change their minds
d. All of the above are correct.
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29. Some studies show the even students who earned high grades in science classes provide
disproven explanations for scientific phenomena. These disproven explanations had been acquired
prior to the science classes. These studies provide some support for which of the following
systematic mistakes that people make?
a. people are overconfident
b. people give too much weight to a small number of vivid observations
c. people are reluctant to change their minds
d. All of the above are correct.
30. Domingo is a contestant on a trivia quiz show. For every state capital he can correctly identify, he
will win $1,000. However, before identifying any capitals, he must decide how many he thinks he
can correctly identify. If he cannot identify as many as he has wagered, Domingo will not win
any money. Suppose Domingo says that he can correctly identify 42 state capitals for a potential
payoff of $42,000. According to studies of human decision-making, what is most likely to happen?
a. Domingo will be able to identify 42 state capitals and he will win $42,000.
b. Domingo will be able to identify fewer than 42 state capitals and will not win any money.
c. Domingo will not be able to identify any state capitals and will not win any money.
d. Domingo will choose to save all of the money he wins on the quiz show for his retirement.
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31. Suppose a group of people read an article on capital punishment. Prior to reading the article, 60%
of the members of the group were opposed to capital punishment, while 40% of the members of
the group were in favor of capital punishment. According to studies of human decision-making,
which of the following is likely?
a. After reading the article, all members of the group oppose capital punishment.
b. After reading the article, all members of the group are in favor of capital punishment.
c. After reading the article, 60% of the members of the group are opposed and 40% of the
members of the group are in favor of capital punishment.
d. The members of the group would elect a representative in favor of capital punishment.
32. Students of microeconomic principles often say they are going to study “tonight,” because the
only way to pass the exam is to study some every night. When “tonight” comes, some students
choose to do something else. Come exam day, these students do not do well on their exam. This
observation is an example of how people
a. are inconsistent over time.
b. are consistent over time.
c. are mainly interested in fairness.
d. are rational.
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33. Brittany decides to save $50 from each paycheck so that she can go on a Spring Break trip with
her college roommates. However, when she gets paid this week, she spends all of her money on
new clothes. Which of the following insights into human behavior does Brittany exhibit?
a. People are overconfident.
b. People care about fairness.
c. People are reluctant to change their minds.
d. People are inconsistent over time.
34. People tend to wait until deadlines get close to work on projects in part because they believe that
they can complete the projects in less time than it will actually take. Which findings from
behavioral economics is this observation consistent with?
a. People tend to be time inconsistent and people tend to be overconfident.
b. People tend to be time inconsistent but not that people tend to be overconfident.
c. People tend to be overconfident, but not that people tend to be time inconsistent.
d. Neither that people tend to be overconfident nor that people tend to be time inconsistent.
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35. Jane spends 85% of her income each year, even though she knows she should be saving 20% for
retirement. Jane’s behavior indicates that her behavior tends to be
a. irrational.
b. inconsistent over time.
c. satisficing rather than maximizing.
d. undefined.
36. According to one survey 76 percent of Americans said they were not saving enough for
retirement. This example of inconsistency over time
a. is rational behavior.
b. likely occurs because saving requires a sacrifice in the present for a reward in the distant
future.
c. likely occurs because Americans don’t care about retirement.
d. definitely would not happen if Americans earned a greater return on their investments.
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37. A mother gives her teenage daughter two choices: spend 20 minutes cleaning her room today or
spend 25 minutes cleaning her room tomorrow. The same mother gives her same daughter two
additional choices: clean out the garage for 20 minutes next Tuesday or 25 minutes next
Wednesday. According to economic theory,
a. if the daughter chooses to procrastinate, she is behaving irrationally.
b. the daughter will likely choose to clean out her room tomorrow but clean out the garage next
Tuesday.
c. the daughter will likely choose to clean out her room tomorrow and clean out the garage next
Wednesday.
d. if the daughter chooses to procrastinate, she is exhibiting satisficing behavior.
38. According to behavioral economics if people taking an exam were asked to guess the score they
would receive, it would be most likely that
a. significantly more people would score below what they guessed than above what they guessed.
b. significantly more people would score above what they guessed than below what they guessed.
c. about the same number of people would score more than they guessed as scored less than they
guessed.
d. people’s scores would be pretty close to what they guessed. Further, any of the above would be
equally likely.