c. are rational, but the assumption rarely fits reality.
d. are irrational, although general correlations exist in behavioral patterns.
e. are rational, but their behavior doesn’t always follow this assumption.
139. Behavioral economics
a. is the least controversial field of economics.
b. involves people separating small losses from large losses.
c. uses the results of psychology experiments to apply to models of individual decision-making.
d. uses the result of sociology observations to apply to models of individual decision-making.
e. is the most controversial field of economics.
140. The field of economics that draws on insights from psychology to expand models of individual
decision-making is ________ economics.
a. psychology d. activity-based
b. behavioral e. decision-making optimization
c. personality trait
141. In human behavioral economics, a choice to do an activity means
a. choosing not to do the next best activity.
b. choosing not to do a more desirable activity.
c. evaluating that activity versus an alternative group of activities.
d. that activity should be put at the top of a “to–do” list.
e. that activity must have an observable characteristic to be valid in a behavioral sense.
142. Maria gets two tickets to the opera as a tip bonus from a restaurant customer. She has never been to
an opera, nor would she ever pay the $130 price for these tickets. She goes to this opera rather than
getting $130 online for selling the tickets. Maria’s behavior is
a. irrational, since Maria would not buy such tickets but gives up $130 by not selling the tickets.
b. rational, since Maria believes she should see the opera.
c. irrational, since Maria can’t put a value on the tickets.
d. rational, since Maria can now see an opera without paying.
e. neither rational nor irrational, since Maria didn’t buy anything.
143. Marcus gets a new cell phone for graduation. He abandons his old phone in a drawer forever, even
though he could sell it on Craigslist for $50. Marcus’s behavior is
a. irrational, because he wouldn’t pay $50 for his old phone today, and still gives it up.
b. rational, because he wouldn’t pay $50 for his old phone today, and still gives it up.
c. irrational, because the value of his new phone is $300 and should be compared to the $50
value of the old phone.
d. rational, because the value of his new phone is $300 and should be compared to the $50 value
of the old phone.
e. neither rational nor irrational, since Marcus didn’t buy the new phone.
144. A choice that does not follow the assumption of rational behavior is
a. telling people you want to lose weight, but ordering dessert after a meal.
b. paying more to use a credit card than you would if you used cash.
c. refusing to leave a movie that brings no pleasure.
d. complaining about lack of time while you play solitaire.
e. All of the above behaviors do not follow the assumption of rational behavior.
145. Victor complains that he never has enough time to do his homework. He brags that he has won 96
percent of 4,000 games of FreeCell this semester. Which of the following economic concepts of
behavior is applicable?
a. rational d. limited reasoning
b. irrational e. preference reversal
c. bounded rational
146. People notice that when they shop online, they see a box checked that tells them to uncheck the
box if they don’t want to receive news of new products. This checked box is an example of a
a. priming effect. d. status quo bias.
b. framing effect. e. preference reversal.
c. intertemporal decision bias.
147. An important source of human behavior bias in decision-making comes from
a. resistance to change. d. limited reasoning.
b. price. e. randomness.
c. temptation.
148. Ana keeps delaying to act on her resolution to work out at the recreation center. Her preference is
a. a result of status quo bias.
b. a result of priming effects.
c. a result of framing effects.
d. more consistent since the decision is made in the present rather than the future.
e. time inconsistent.
149. People’s choices for the present time frame are usually ________ with their choices for the future
because the future choices are ________.
a. inconsistent; a result of status quo bias
b. consistent; a result of priming effects
c. inconsistent; a result of framing effects
d. inconsistent; more distant in time
e. consistent; more likely to have more information
150. We would describe a person’s choices as time inconsistent when people
a. can’t make choices in the present that determine their choices in the future.
b. can’t predict how current choices will affect future choices.
c. change their minds just because “that was then, this is now.”
d. regret a decision they made, so they won’t make the same decision again.
e. try to figure out how they will decide in the future, and that decision influences today’s
decision.
151. Economists who study behavior mostly conclude that people ________ well-being, but sometimes
________.
a. try to maximize their; make mistakes
b. try to maximize their; maximize the effect of bad choices
c. try to achieve some; change their minds just because “that was then, this is now”
d. don’t worry too much about their; get lucky with a good decision
e. believe they maximize their; don’t worry too much about it
SHORT ANSWER
1. What are the three ways that bounded rationality, or limited reasoning, can be explained?
2. The television game show Let’s Make a Deal provides a well-known example of the difficulties in
assessing probabilities accurately. At the end of the show, the host, Monty Hall, asks the contestant
to choose one of three curtains. Behind each curtain is one of three possible prizes: a car, a nice but
less expensive item, or a worthless joke item. Suppose that Celine picks curtain 1. The host, who
knows what is behind the curtains, opens a different one, say, curtain 3, which has a pen filled with
bunny rabbits—the joke prize. The host then offers Celine the opportunity to switch her choice to
curtain 2. If Celine would prefer the car over any other prize, should she switch? Does her
probability of winning the car change if she switches to curtain 2?
3. Corey and Trevor are playing a coin-tossing game where each player, in turn, tosses a fair coin 10
times consecutively. The winner of the game is the player who tosses the most consecutive tails.
Corey decides to go first and tosses tails five times in a row. Explain how the gambler’s fallacy can
affect Corey’s assessment of the probability that he will toss tails on his sixth toss.
4. Kyrie and Stan are playing a coin-tossing game where each player, in turn, tosses a fair coin 10
times consecutively. The winner of the game is the player who tosses the most consecutive tails.
Kyrie decides to go first and tosses tails five times in a row. Explain how the hot-hand fallacy can
affect Kyrie’s assessment of the probability that he will toss tails on his sixth toss.
5. In 2000, researchers Brigitte Madrian and Dennis Shea analyzed the 401(k) savings behavior of
employees in a large U.S. corporation before and after an interesting change in the company
401(k) plan.
Before the plan change, employees were automatically enrolled as participants in the company
401(k) plan upon being hired and were required to complete paperwork if they wanted to opt in.
After the plan change, new employees were automatically enrolled in the 401(k) plan and were
required to complete paperwork if they wanted to opt out. The amount of time and effort required
to either opt in or opt out was approximately equal. None of the economic features of the plan
changed.
The researchers found that 401(k) participation is significantly higher under automatic
enrollment. Describe how framing effects can be used to explain the significantly higher
participation under automatic enrollment.
6. Cilus and Roseanne are playing an ultimatum game where Cilus is given $50 and asked to propose
a way of splitting it with Roseanne. When Roseanne learns Cilus’s proposal, she chooses whether
to accept or reject the split. If Roseanne accepts the split, both players receive the money according
to Cilus’s split proposal. If Roseanne rejects the split, both players receive nothing. This game will
be played only once, so Cilus does not have to worry about reciprocity when making his choice.
Assume that split proposals can be made only in increments of $1.
According to traditional economic theory, which presumes that both players are fully rational
and wish to maximize their incomes, what is the outcome of the game? Why is this outcome not
observed very often in experimental settings?
7. Two players (Kendell and Tatsuya) are playing an ultimatum game where Tatsuya is given $7,000
and asked to propose a way of splitting it with Kendell. When Kendell learns Tatsuya’s proposal,
Kendell chooses whether to accept or reject the split. If Kendell accepts the split, both players
receive the money according to Tatsuya’s split proposal. If Kendell rejects the split, both players
receive nothing. This game will be played only once, so Tatsuya does not have to worry about
reciprocity when making his choice.
Tatsuya is deciding whether to offer a fair or an unfair proposal. The fair proposal is a 50/50
split of the $7,000 and an unfair split is a split such that Tatsuya receives $6,999 and Kendell
receives $1. Draw the decision tree for this game. Make sure to label the decision node correctly.
8. Suppose that, in an experimental setting, 100 students are presented with two situations involving
risk and return. The students are first asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $1 million with a 100 percent probability.
Gamble B: The student will receive $1 million with an 89 percent probability, $5 million
with a 10 percent probability, and $0 million (nothing) with a 1 percent
probability.
Explain the process of finding the expected values of Gambles A and B. Which option would a
risk-neutral student choose? Why?
9. Describe three characteristics of status quo bias.
10. Describe the attributes of intertemporal decision-making and three examples of mistakes in
intertemporal decision-making.
11. Explain how temptation affects intertemporal decision-making. Incorporate risk aversion in your
answer.
12. Two friends, Thelma and Dorian, decide to eat lunch together. Both of them eat until they are
satisfied, but both have food remaining on their plates. Thelma continues, finishing her plate, while
Dorian leaves his unfinished plate to be taken by the wait staff. Explain if and how Thelma and
Dorian individually acted rationally. Assume that the food has no further value, that is, no “doggie
bag.”
13. Cedric and Jean-Marie are at their home team pro ice hockey game. Their home team star, Pierre,
made two goals in the first period of the three-period game. He sat in the penalty box for much of
the second period, due to temperamental, overaggressive play. The coach is debating whether to
put Pierre back into the game as a forward (usually the leaders in scoring), or as a defenseman (to
limit further aggressive behavior). Since Pierre has scored two goals, the crowd cheers for him to
be put in as a forward. How should the coach play it?
14. A bank sends out a notice that as a result of a customer survey, the long-standing policy of the
bank will change from “one monthly fee” to cover the usual customer banking activities, to a “fee
for service,” so that each individual service is charged a separate fee. The bank claims that the
average amount of fees per customer will decrease. Many customers (almost all who didn’t
complete the survey) now complain in favor of the “one monthly fee” by saying “that’s the way
we’ve always had it.” What behavioral economics concept would describe the complaining
customers’ behavior?
15. If prospect theory is correct, then would one expect household budgeting to have cost-reducing
results (lower spending) to family expenditures, cost-increasing results (higher spending), or no
results at all? Explain in terms of prospect theory.
16. According to the traditional model of risk behavior, if one suffered an unexpected loss of $100 on
the same day that he or she received an unexpected gift of $100, how would that person react?
17. Summarize the main point of prospect theory.
18. According to prospect theory, would people tend to value one gain of $1,000 more or less than
four gains of $250?
19. Suppose Xavier has tickets to the Super Bowl, but is terribly ill with a noncontagious infection.
How would a decision maker perform his economic calculation on whether to attend the game,
based on the traditional model of risk behavior?
20. Give some examples of how rationality is bounded in economic decision-making.
21. You turn on the television news to see the effects of a social disaster, and hear:
a. one commentator (channel BCA) report, “Experts say that 200 people will be saved,” and
another commentator (channel ACB) report, “Experts say that there is a 1/3 probability that 600
will be saved, and a 2/3 probability that no one will be saved.”
Which commentator’s (BCA or ACB) views would be preferred? Why?
b. one commentator (channel XYZ) report, “Experts say that 400 people will die,” and another
commentator (channel ZYX) report, “Experts say that there is a 1/3 probability that no one will
die, and a 2/3 probability that 600 people will die.”
Which commentator’s (XYZ or ZYX) views would be preferred? Why?
22. Wallace says that he likes asters (flowers) as well as pansies (flowers). He is shown a picture of a
spider forming a web in a group of asters. Next, he is shown a bee retrieving pollen from a second
group of pansies. Which group of flowers are most people going to say that they like, asters or
pansies? Why, according to which behavioral effect?
23. Distinguish between the three types of risk tolerance.
24. How would we characterize “fairness”? Try to stay in an economic framework.
25. A person from a moderately humble background works hard to make a successful life. Another
person from a moderately humble background barely works at all, seeking state welfare
compensation, maintaining: “There are more important things in life than work.” Bethany, an
economist voted in as a potential policy maker, must make a decision on “fairness.” How would
she evaluate this situation?
