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Page 1
1.
Economists' and psychologists' attempts to understand and explain why people make
decisions that appear to be irrational is the field of study called _____ economics
A)
international
B)
irrational
C)
rational
D)
behavioral
2.
The purpose of behavioral economics is to determine why:
A)
people maximize utility.
B)
firms maximize profit and minimize costs.
C)
people make decisions that appear to be irrational.
D)
markets usually behave in an efficient manner.
3.
When a decision maker chooses the option leading to the outcome that he or she most
prefers, he or she has made a _____ decision.
A)
irrational
B)
rational
C)
profit-maximizing
D)
loss-minimizing
4.
A rational economic decision:
A)
must always result in the largest economic payoff.
B)
usually results in the smallest economic payoff.
C)
may or may not result in the largest economic payoff.
D)
is concerned with efficiency but not with equity or fairness.
5.
The decision to tip a server is a(n):
A)
rational decision if the person leaving the tip is concerned about fairness.
B)
irrational economic decision because it reduces the economic payoff of the tipper.
C)
example of decision making using bounded rationality.
D)
example of behavior based on risk aversion.
6.
The decision to give a birthday present to a friend is:
A)
decision making using bounded rationality.
B)
behavior based on risk aversion.
C)
a rational decision if the person giving the gift is concerned about the recipient's
welfare.
D)
an irrational economic decision because it reduces the economic payoff of the
person giving the gift.
Page 2
7.
When a person makes a choice that is close to but not exactly the one that leads to the
best possible economic outcome, he or she is:
A)
making an irrational decision.
B)
usually ignoring opportunity costs.
C)
being overconfident.
D)
operating with bounded rationality.
8.
When a person makes a quick decision without taking the time to compare the
opportunity cost of all possible options, he or she is using:
A)
bounded rationality.
B)
risk aversion.
C)
loss aversion.
D)
the status quo.
9.
The “good enough” method of decision making is also called:
A)
utility-maximizing behavior.
B)
profit-maximizing behavior.
C)
bounded rationality.
D)
irrational decision making.
10.
Suppose Joan buys a new refrigerator to replace her old one that suddenly quit working.
If Joan buys the model on closeout sale and doesn't take time to do research on repair
records and energy efficiency of various other models, she is using:
A)
status quo decision making.
B)
bounded rationality.
C)
marginal analysis.
D)
risk aversion.
11.
Which statement is an example of bounded rationality?
A)
Ann proofreads her term paper six times.
B)
Mary feels that she has studied enough to make an A+ on her economics exam but
studies another two hours just to be sure.
C)
Tim studies only an hour on the morning of his economics exam because he is
satisfied just to make a passing grade.
D)
Terry does his economics homework twice to be sure that he has a thorough
understanding of the topic.
Page 3
12.
The willingness to sacrifice some economic payoff to avoid a potential loss is:
A)
irrational behavior.
B)
bounded rationality.
C)
the result of a concern about fairness.
D)
risk aversion.
13.
A person who is risk averse:
A)
always makes irrational decisions.
B)
always makes rational decisions.
C)
is willing to pay to avoid economic loss.
D)
enjoys taking risks.
14.
People are willing to buy insurance because of:
A)
risk aversion.
B)
the status quo.
C)
the miscalculation of opportunity costs.
D)
bounded rationality.
15.
If a decision maker chooses an option that leaves him or her worse off than choosing
another available option, he or she is:
A)
using bounded rationality.
B)
basing the decision on risk aversion.
C)
making an irrational decision.
D)
making a rational decision.
16.
A decision maker who is irrational:
A)
chooses an option that makes him or her worse off, rather than choosing another
available option.
B)
chooses the option that makes him or her better off, rather than choosing another
available option.
C)
allocates income to maximize his or her satisfaction from consuming goods and
services.
D)
seeks to maximize business profit.
17.
The habit of mentally assigning dollars to different accounts so that some dollars are
worth more than others is:
A)
status quo bias.
B)
bounded rationality.
C)
loss aversion.
D)
mental accounting.
Page 4
18.
If a person engages in mental accounting, he or she:
A)
is unwilling to recognize a loss and move on.
B)
values some dollars more than others.
C)
tends to avoid making decisions.
D)
tries to balance his or her bank account mentally, without writing anything down.
19.
A person who is oversensitive to loss and is unwilling to recognize the loss and move on
has:
A)
loss aversion.
B)
risk aversion.
C)
status quo bias.
D)
mental accounting.
20.
A person with loss aversion:
A)
has a hard time recognizing losing investments and moving on.
B)
is likely to maximize total revenue rather than profit.
C)
is unlikely to ignore sunk costs.
D)
is more likely to use a credit card than to pay cash.
21.
The tendency to avoid making a decision is:
A)
status quo bias.
B)
bounded rationality.
C)
loss aversion.
D)
mental accounting.
22.
Which type of behavior is a systematic mistake that leads to irrational decisions?
A)
risk aversion
B)
bounded rationality
C)
maximizing profit rather than minimizing costs
D)
overconfidence
23.
Which type of behavior is NOT a common mistake that leads to irrational decisions?
A)
mental accounting
B)
loss aversion
C)
risk aversion
D)
misperceptions about opportunity costs
Page 5
24.
Joshua is tired of school as well as his part-time job and decides on the spur of the
moment to take a weekend trip to Cabo San Lucas. He pays for it with his credit card,
rather than with money from his checking account. Which type of irrational behavior
does this BEST represent?
A)
status quo bias
B)
mental accounting
C)
loss aversion
D)
risk aversion
25.
Sally must submit a form to enroll in her company's flexible medical benefits program.
Although she has been employed over a year, she has yet to complete the form. Which
type of irrational behavior does this represent?
A)
status quo bias
B)
mental accounting
C)
loss aversion
D)
risk aversion
26.
If a star college quarterback turns down a multimillion-dollar offer from the NFL to
return for his senior year of college, he may be exhibiting:
A)
status quo bias.
B)
mental accounting.
C)
misperception of opportunity costs.
D)
risk aversion.
27.
Mary goes ahead and buys a new car because she expects to receive a 10% increase in
her salary next year. What type of behavior does this BEST represent?
A)
status quo bias
B)
overconfidence
C)
misperception of opportunity costs
D)
risk aversion
28.
Cindy just graduated from college and started working at a large accounting firm.
Although the firm will match her contributions to a retirement account, Cindy wants to
wait several years before participating since there are so many things she needs to buy
right now. What type of behavior does this represent?
A)
unrealistic expectations about the future
B)
loss aversion
C)
mental accounting
D)
risk aversion
Page 6
29.
Lucy bought some stock 10 years ago that has been priced at half of her purchase price
for the past 5 years. However, Lucy refuses to sell the stock, thinking that, if she waits
long enough, she will recover her investment. What type of behavior does this
represent?
A)
mental accounting
B)
bounded rationality
C)
risk aversion
D)
loss aversion
30.
Most economic models:
A)
assume that people behave irrationally.
B)
assume that people behave rationally.
C)
assume that people are reluctant to learn from their mistakes.
D)
are useless because they use too many simplifying assumptions.
