Economics Chapter 17 2 Reese and Rebecca are playing an ultimatum game where Reese is given $100 and asked to propose a way of splitting it with Rebecca

e. the player who proposes the split is fully rational and wishes to maximize his or her own

playoff, whereas the player who chooses to accept or reject the split is irrational and wishes to

maximize the other player’s payoff.

83. Which general observation can be inferred from the observation of real people playing the

ultimatum game?

a. People care about looks. d. People care about fairness.

b. People care about body image. e. People care about respect.

c. People care about voice tone.

84. Reese and Rebecca are playing an ultimatum game where Reese is given $100 and asked to

propose a way of splitting it with Rebecca. When Rebecca learns Reese’s proposal, she chooses

whether to accept or reject the split. If Rebecca accepts the split, both players receive the money

according to Reese’s split proposal. If Rebecca rejects the split, both players receive nothing. This

game will be played only once, so Reese does not have to worry about reciprocity when making

his choice.

Suppose that Reese proposes a split such that Reese will receive $99.99 and Rebecca will

receive $0.01. Traditional economic theory predicts that Rebecca will

a. accept the $0.01 because she values receiving $0.01 more than receiving nothing.

b. accept the $0.01 because she wishes to punish Reese for proposing such an unfair split.

c. reject the $0.01 because she wishes to punish Reese for proposing such an unfair split.

d. reject the $0.01 and also will reject a split such that Reese receives $50.00 and Rebecca

receives $50.00.

e. sometimes accept the $0.01 and sometimes reject the $0.01, depending on her mood at the

time.

85. Suppose that Derek proposes a split such that Derek will receive $489.99 and Heriberto will

receive $10.01. Traditional economic theory predicts that Heriberto will

a. accept the $10.01 because he values receiving $10.01 more than receiving nothing.

b. accept the $10.01 because he wishes to punish Derek for proposing such an unfair split.

c. reject the $10.01 because he wishes to punish Derek for proposing such an unfair split.

d. reject the $10.01 and also will reject a split such that Derek receives $250 and Heriberto

receives $250.

e. sometimes accept the $10.01 and sometimes reject the $10.01, depending on his mood at the

time.

86. According to traditional economic theory, which presumes both players are fully rational and wish

to maximize their incomes, Derek should maximize his gains by offering Heriberto ________ and

keeping ________ for himself.

a. $250.00; $250.00 d. $499.99; $0.01

b. $450.00; $50.00 e. $0.01; $499.99

c. $50.00; $450.00

87. Peggy and Marcy are playing an ultimatum game where Peggy is given $500 and asked to propose

a way of splitting it with Marcy. When Marcy learns Peggy’s proposal, Marcy chooses whether to

accept or reject the split. If Marcy accepts the split, both players receive the money according to

Peggy’s split proposal. If Marcy rejects the split, both players receive nothing. This game will be

played only once, so Peggy does not have to worry about reciprocity when making her choice.

Which of the following split proposals would Marcy be most likely to accept if she and Peggy

were playing the game in an experimental session and both players adhered to bounded

rationalism?

a. Peggy receives $449.99 and Marcy receives $50.01.

b. Peggy receives $499.99 and Marcy receives $0.01.

c. Peggy receives $400.00 and Marcy receives $100.00.

d. Peggy receives $350.00 and Marcy receives $150.00.

e. Peggy receives $250.00 and Marcy receives $250.00.

88. The standard economic model predicts that Yolanda will offer Danika ________ slice(s) and

Danika ________ accept the offer.

a. one; will d. four; will not

b. one; will not e. seven; will

c. four; will

89. Assume the game is played in an experimental session and both players follow bounded

rationality. If Yolanda offers Danika ________ slice(s), Danika will be more likely to accept the

offer than if Yolanda were to offer ________ slice(s).

a. one; two d. four; one

b. two; three e. one; four

c. one; three

90. The fairest split proposal Yolanda can offer would be if Yolanda receives ________ slice(s) and

Danika receives ________ slice(s).

a. three; five d. seven; one

b. one; seven e. four; four

c. two; five

91. Assume that Aaron and Jane are two experimental subjects who follow bounded rationality. If

Aaron chooses to make an unfair proposal, the likely outcome of the game will be that Jane will

________ and Aaron will receive a payoff of ________.

a. accept; $999 d. reject; $500

b. accept; $1 e. reject; $0

c. accept; $0

92. If Aaron chooses to make a fair proposal, the likely outcome of the game will be that Jane will

________ and Aaron will receive a payoff of ________.

a. reject; $999 d. reject; $500

b. reject; $500 e. reject; $0

c. accept; $500

93. If Aaron could be 100 percent certain that Jane was rational, did not care about fairness, and

always made decisions to maximize her payoff regardless of the situation she might find herself in,

Aaron would likely offer a(n) ________ proposal and ultimately receive a payoff of ________.

a. unfair; $500 d. fair; $500

b. unfair; $999 e. fair; $0

c. unfair; $0

94. Assume that Aaron and Jane are two experimental subjects who practice bounded rationality. If

Aaron were to offer an unfair proposal, he would likely receive a payoff of ________, but if he

were to offer a fair proposal, he would likely receive a payoff of ________.

a. $0; $0 d. $500; $0

b. $0; $999 e. $0; $500

c. $999; $0

95. If Aaron were to offer an unfair proposal, experimental results show that Jane would likely punish

him by making herself ________ off by ________ and rejecting his offer.

a. worse; $1 d. worse; $500

b. better; $1 e. worse; $1,000

c. worse; $999

96. Proponents of fairness would likely believe that

a. the poor should pay higher tax rates on their personal income than the rich do, a tax structure

known as regressive taxation.

b. the rich should pay higher tax rates on their personal income than the poor do, a tax structure

known as progressive taxation.

c. the poor should pay higher entrance fees to national parks whenever an entrance fee applies.

d. a bigger, less equal economic pie is more favorable than a smaller, more equal economic pie.

e. if the poor can receive free baby formula and diapers from the government, then the rich

should also be able to receive free baby formula and diapers from the government.

97. The standard economic model of consumer choice assumes that people are ________.

a. risk averse d. fairness averse

b. risk loving e. fairness loving

c. risk neutral

98. People who are risk averse

a. prefer a sure thing over a gamble with a higher expected value.

b. choose the outcome with the highest expected value.

c. choose the outcome with the lowest expected value.

d. prefer gambles with lower expected values but potentially higher winnings over a sure thing.

e. do not partake in any risky activities.

99. People who are risk neutral

a. prefer a sure thing over a gamble with a higher expected value.

b. choose the outcome with the highest expected value.

c. choose the outcome with the lowest expected value.

d. prefer gambles with lower expected values but potentially higher winnings over a sure thing.

e. do not partake in any risky activities.

100. People who are risk takers

a. prefer a sure thing over a gamble with a higher expected value.

b. choose the outcome with the highest expected value.

c. choose the outcome with the lowest expected value.

d. prefer gambles with lower expected values but potentially higher winnings over a sure thing.

e. do not partake in any risky activities.

101. A person who is ________ is likely to pay more for insurance to protect against financial loss than

a person who is ________.

a. afflicted by the hot-hand fallacy; afflicted by the gambler’s fallacy

b. a risk taker; risk averse

c. a risk taker; risk neutral

d. risk averse; a risk taker

e. risk neutral; risk averse

102. Economists generally assume that people make ________ decisions that ________ be modeled.

a. predictable, repeatable; cannot d. unpredictable, repeatable; cannot

b. predictable, repeatable; can e. predictable, unrepeatable; cannot

c. unpredictable, repeatable; can

103. Ivett decides that she is not willing to play this game because a loss of $50 to Desiree will cause

her to lose more utility than she should gain if she won $50 from Desiree. Ivett would be

considered ________, but if she was ________, she would be willing to play the game.

a. risk loving; risk averse d. risk loving; risk neutral

b. risk neutral; risk averse e. risk neutral; risk loving

c. risk averse; risk neutral

104. For each player, the expected value of this game is

a. $0. d. $100.

b. $25. e. $200.

c. $50.

105. For Desiree, the expected value of this game is

a. −$15. d. $35.

b. −$35. e. $70.

c. $15.

106. Which of the following is the formula that Desiree would use to compute the expected value (EV )

of the game from her perspective?

a. EV = 0.5  ($20) + 0.5  ($50) d. EV = 0.5  (

−

$70) + 0.5  ($50)

b. EV = 0.5  (

−

$20) + 0.5  ($50) e. EV = 0.5  ($70) + 0.5  ($50)

c. EV = 0.5  ($20) + 0.5  (

−

$50)

107. Which of the following is the formula that Ivett would use to compute the expected value (EV ) of

the game from her perspective?

a. EV = 0.5  ($20) + 0.5  ($50) d. EV = 0.5  (

−

$70) + 0.5  ($50)

b. EV = 0.5  (

−

$20) + 0.5  ($50) e. EV = 0.5  ($70) + 0.5  ($50)

c. EV = 0.5  ($20) + 0.5  (

−

$50)

108. For Ivett to be willing to play this game, Ivett would need to be ________. For Desiree to be

willing to play this game, Desiree would need to be ________.

a. risk averse; risk averse d. a risk taker; risk neutral

b. risk averse; risk neutral e. a risk taker; risk averse

c. risk neutral; a risk taker

109. For Ivett, the expected value of this game is

a. $0. d. $70.

b. $15. e. $140.

c. $35.

110. Suppose that, in an experimental setting, 100 students are asked to choose between Gamble A and

Gamble B, where:

Gamble A: The student will receive $5,100 with a 70 percent probability and $200 with a

30 percent probability.

Gamble B: The student will receive $5,100 with a 50 percent probability, $200 with a 25

percent probability, and $0 (nothing) with a 25 percent probability.

What is the expected value (EV) of Gamble B?

a. EV = 0.7  ($5,100) + 0.3  ($200)

b. EV = 0.5  ($5,100) + 0.25  ($100) + 0.25  ($25)

c. EV = 0.5  ($5,100) + 0.25  ($200) + 0.25  ($25)

d. EV = 0.5  ($5,100) + 0.25  ($200) + 0.25  ($0)

e. EV = 0.5  ($2,600) + 0.25  ($2,600) + 0.25  ($0)

111. According to the standard economic model (expected utility theory), a student who is risk neutral

would choose Gambles ________ because they both have higher expected values than ________,

respectively.

a. A and D; B and C d. B and D; A and C

b. A and C; B and D e. B and C; A and D

c. B and C; A and D

112. According to the standard economic model (expected utility theory), a student who is risk averse

would choose

a. Gambles A and D because they both give the student a higher probability of winning

something rather than nothing when compared to B and C, respectively.

b. Gambles A and C because they both have higher expected values than B and D, respectively.

c. Gambles B and C because they both have higher expected values than A and D, respectively.

d. Gambles B and D because they both have higher expected values than A and C, respectively.

e. Gambles B and C because they both have higher expected values than A and D, respectively.

113. If Student 1 chose Gambles A and C, Student 2 chose Gambles A and D, and Student 3 chose

Gambles B and C, which choices exhibited preference reversal?

a. All students exhibited preference reversal.

b. Students 1 and 2 exhibited preference reversal, but Student 3 did not.

c. Students 1 and 3 exhibited preference reversal, but Student 2 did not.

d. Student 1 exhibited preference reversal, but Students 2 and 3 did not.

e. None of the students exhibited preference reversal.

114. A student who is risk neutral would choose Gamble B, which has an expected value of ________,

over Gamble A, which has an expected value of ________.

a. $1.39 million; $1 million d. $1 million; $0.89 million

b. $1 million; $1.42 million e. $1.10 million; $1 million

c. $0.89 million; $1 million

115. A student who is risk neutral would choose Gamble C, which has an expected value of ________,

over Gamble D, which has an expected value of ________.

a. $0.5 million; $1 million d. $1 million; $0.11 million

b. $0.5 million; $0.11 million e. $5 million; $1 million

c. $0.11 million; $1 million

116. Which of the following shows the correct formula for the expected value (EV) of Gamble A?

a. EV = 0.7  ($50) + 0.3  ($100) d. EV = 0.5  ($50) + 0.5  ($100)

b. EV = 0.5  ($50) + 0.3  ($100) e. EV = 0.1  ($50) + 0.2  ($100)

c. EV = 0.7  ($50) + 0.5  ($100)

117. What is the expected value of Gamble A?

a. $0 d. $45

b. $100 e. $65

c. $50

118. Which of the following formulas shows the correct formula for the expected value (EV) of Gamble

B?

a. EV = 0.5  ($50) + 0.25  ($25)

b. EV = 0.5  ($50) + 0.25  ($100) + 0.25  ($250)

c. EV = 0.5  ($50) + 0.5  ($200)

d. EV = 0.5  ($50) + 0.25  ($200)

e. EV = 0.25  ($50) + 0.25  ($200)

119. What is the expected value of Gamble B?

a. $0 d. $500

b. $75 e. $25

c. $50

120. How much money would a risk-neutral student be willing to pay to play this game?

a. $85 d. $500

b. $75 e. $225

c. $150

121. Suppose that, in an experimental setting, 100 students are asked to choose between Gamble A and

Gamble B, where:

Gamble A: The student will receive $5 million with a 100 percent probability.

Gamble B: The student will receive $5 million with a 50 percent probability, $10 million

with a 25 percent probability, and $0 million (nothing) with a 25 percent

probability.

A risk-neutral student is

a. likely to choose Gamble A because it has a higher expected value.

b. likely to choose Gamble B because it has a higher expected value.

c. likely to choose Gamble A because the student will win something (as opposed to nothing)

with a higher probability.

d. likely to choose Gamble B because the student will win something (as opposed to nothing)

with a higher probability.

e. indifferent toward both Gambles A and B because they have the same expected value.

122. A risk-neutral student is

a. likely to choose Gamble A because it has a higher expected value.

b. likely to choose Gamble B because it has a higher expected value.

c. likely to choose Gamble A because the student will win something (as opposed to nothing)

with a higher probability.

d. likely to choose Gamble B because the student will win something (as opposed to nothing)

with a higher probability.

e. indifferent toward Gambles A and B because they have the same expected value.

123. What is the expected value of Gamble B?

a. $5 million d. $10 million

b. $5.01 million e. $0 million

c. $5.05 million

124. What is the expected value of Gamble A?

a. $5 million d. $10 million

b. $5.01 million e. $0 million

c. $5.05 million

125. ________, as articulated by Daniel Kahneman and Amos Tversky, suggests that individuals place

more emphasis on gains than losses.

a. Prospect theory

b. Superior theory

c. Austrian business-cycle theory

d. The theory of comparative advantage

e. Insurance theory

126. ________ implies that people evaluate the risks that lead to gains separately from the risks that

lead to losses.

a. The standard economic model

b. Austrian business-cycle theory

c. The theory of comparative advantage

d. Insurance theory

e. Prospect theory

127. A risk-neutral consumer

a. will always refuse a fair gamble.

b. will always accept a fair gamble.

c. avoids all risk.

d. is indifferent between acceptance and refusal of a fair gamble.

e. ensures that any higher risk is offset by lower risk.

128. A rational, risk-averse person will

a. sometimes refuse a fair gamble.

b. always accept a fair gamble.

c. consider all gambles unfair.

d. always refuse a fair gamble.

e. randomly refuse or accept a fair gamble.

129. Willow, a risk-neutral person, is presented the following gamble: heads, she wins $2; tails, she

loses $1. Willow should

a. take the gamble but buy insurance.

b. be indifferent to take or not take the gamble.

c. take the gamble.

d. not take the gamble.

e. randomly take or not take the gamble.

130. Emilie is presented the following gamble: one door has $100 behind it, another has $20 behind it,

and another has $0 behind it. What is the expected value of this gamble?

a. $120

b. $40

c. $20

d. $60

e. Answer requires more information.

131. A school raffle sells 1,000 tickets at $1 each for a $350 bookstore credit. If Ramona buys one

ticket, what is her expected value of the gain for this gamble?

a. –$0.65 d. –$0.001

b. –$0.20 e. $0.35

c. –$350

132. A school raffle sells 1,000 tickets at $1 each for a $350 bookstore credit. If Ramona buys one

ticket, what is her net expected value for this gamble?

a. –$0.65 d. –$0.001

b. –$0.20 e. $0.35

c. –$350

133. If someone wears his or her favorite clothes first, then he or she is most likely to have a ________

time preference.

a. positive d. increasing

b. neutral e. decreasing

c. negative

134. If Ronnie calculates that $150 in the future is worth $100 today, then he is showing a ________

time preference.

a. positive d. increasing

b. neutral e. decreasing

c. negative

135. Differences in time preferences depend on

a. social or cultural preferences.

b. uncertainty regarding the future.

c. the time at which preferences are established.

d. differences in expected future outcomes.

e. differences in likelihood of preference reversals.

136. According to prospect theory, people

a. separate small gains from large losses.

b. separate small losses from large losses.

c. separate small gains from large gains.

d. don’t separate losses from gains.

e. separate all losses from all gains.

137. A fully rational choice would require

a. consumers to be risk-neutral.

b. choices to be independent of relevant alternatives.

c. consumers to be risk-averse.

d. choices to be independent of irrelevant alternatives.

e. consumers to not consider recent outcomes.

138. Economists make the general assumption that people

a. can be both rational and irrational, but the model must account for either.

b. are irrational, although modeling such irrationalities is nearly impossible.