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.
b.
c.
d.
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.
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.
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.
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.
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.”
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.
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.
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.
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.
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.
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.
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.
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 most clearly illustrates 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.
29. Some studies show that even students who earned high grades in science classes accept 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.
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.
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.
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.
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.
39. According to behavioral economics, participants in a half-marathon are likely to have trained
a.
more than they planned and run faster than they anticipated.
b.
more than they planned but run slower than they anticipated.
c.
less than they planned and run slower than they anticipated.
d.
less than they planned but run faster than they anticipated.
40. According to behavioral economics, an employee will likely
a.
work harder if she is a satisficer and if she believes a coworker is overpaid.
b.
work harder if she is a satisficer, but work less hard if she believes a coworker is overpaid.
c.
work harder if she believes a coworker is overpaid, but work less hard if she is a satisficer.
d.
work less hard if she is a satisficer and if she believes a coworker is overpaid.
41. Which of the following is not an example of a systematic mistake that people make?
a.
When asked to predict how many movie stars he can list, Ed says 200 but when put to the test he can only
name 130.
b.
Susan watched a home improvement show in which a contractor installed a faulty deck which collapsed within
2 years of installation. She is now concerned about the safety of her own deck.
c.
Kate’s manager asks her to work additional hours for which she will be paid her usual hourly wage. Kate
weighs the value of her leisure time against the additional wages before responding to her manager.
d.
Bill has purchased Skillman tools for years and has recently noticed a decline in quality and durability of
Skillman tools. Still, when he needs a new drill, he purchases a Skillman brand drill.
42. Conventional economic theory suggests that in the ultimatum game, the player proposing a split of $50 will propose
that she get $49 and that the other player get $1. By the same reasoning, if the amount to be split is $1000, the player
proposing the split will propose that she gets
a.
$500 and that the other player gets $500.
b.
$998 and that the other player gets $2.
c.
$999 and that the other player gets $1.
d.
$1000 and that the other player gets nothing.
43. Ihaveathousandfriends Social Networking firm had a remarkably profitable year. As a result, its employees expect to
receive bonus checks. Which of the following insights into human behavior do the employees exhibit?
a.
People are overconfident.
b.
People care about fairness.
c.
People are reluctant to change their minds.
d.
People are inconsistent over time.
44. The results of the ultimatum game illustrate that
a.
people’s behavior is often driven by an innate sense of fairness.
b.
homo economicus is a good description of people’s behavior.
c.
self-interest brings out the most efficient economic outcome.
d.
people will always prefer a small gain to no gain.
45. Experiments show that when real people play the ultimatum game, starting with $100,
a.
Player A usually proposes giving Player B more than $50.
b.
Player B usually accepts Player A’s proposal if Player A proposes giving Player B $30 or $40.
c.
players show themselves to be rational wealth-maximizers.
d.
Player B will usually demand an even split.
46. Evidence suggests that, in the real world, people appear to care about fairness
a.
only when it coincides with their own self-interest.
b.
only when it coincides with their determination to be consistent over time.
c.
even when it does not coincide with their own self-interest.
d.
not at all.
47. Evidence from experiments in which real people play the ultimatum game supports the idea that people
a.
are rational wealth-maximizers.
b.
tend to be driven by fairness, without regard for their own self-interest.
c.
are driven by both fairness and self-interest.
d.
have trouble calculating their own levels of wealth.
48. Suppose that an economics professor selects two students, Audrey and Michael, to participate in a classroom
experiment. The professor gives Audrey twenty $1 bills. Audrey must pick an allocation of the twenty $1 bills to offer to
Michael. If Michael accepts the allocation, each student keeps his or her portion of the money. If Michael rejects the
allocation, the professor keeps the $20, and each student receives nothing. Audrey selects $19 for herself and $1 for
Michael. Based on the studies of human decision making, which of the following statements is correct?
a.
If Michael accepts the offer, he is behaving rationally.
b.
If Michael rejects the offer, he may value fairness more than $1.
c.
If Michael rejects the offer, Audrey made a bad choice by trying to keep $19 for herself.
d.
Any of the above could be correct.
49. Anthony and Addie are playing the ultimatum game, starting with $100. The coin flip results in Anthony being the one
to propose a division of the $100. Anthony proposes that he gets $99 and Addie gets $1. Which of the following
statements is correct?
a.
Because the 99-1 split isn’t fair, Anthony should not make this offer.
b.
Conventional economic theory predicts that Anthony will propose a 99-1 split, just as he did.
c.
Experimental evidence suggests that Addie will accept the 99-1 split because, even though it isn’t fair, it’s
better than nothing.
d.
Economic theory predicts that Anthony should choose a 60–40 split to maximize his payoff.
50. Bill and Bev are playing the ultimatum game, starting with $50. A coin flip results in Bev being the one to propose a
division of the $50. If Bev acts as economic theory assumes, she should propose that
a.
she gets $30 and Bill gets $20.
b.
she gets $25 and Bill gets $25.
c.
she gets $24 and Bill gets $26.
d.
she gets $49 and Bill gets $1.
51. Robert and Neal are playing the ultimatum game, starting with $100. Based on the coin toss, Robert is the player to
propose a division of the $100. If Robert acts as economic theory assumes and Neal acts as experimental evidence shows,
Neal will
a.
accept Robert’s proposal of keeping $99 and offering Neal $1.
b.
accept Robert’s proposal of keeping $60 and offering Neal $40.
c.
reject Robert’s proposal of keeping $99 and offering Neal $1.
d.
reject Robert’s proposal of keeping $60 and offering Neal $40.
52. The ultimatum game reveals that
a.
it does not make sense to try to maximize profits.
b.
people may have an innate sense of fairness that economic theory does not capture.
c.
offering someone a wildly unfair outcome is usually ok since people tend to make decisions using a
“something is better than nothing” philosophy.
d.
Both a and b.
53. If you are assigned the role of Player A in the Ultimatum game and you propose that player B gets $1 and you get $99
a.
you are behaving as a rational wealth-maximizer and player B is likely to accept your offer.
b.
you are behaving as a rational wealth-maximizer and player B is likely to reject your offer.
c.
you are not behaving as a rational wealth-maximizer and player B is likely to accept your offer.
d.
you are not behaving as a rational wealth-maximizer and player B is likely to reject your offer.
54. In a dictator game, player A must divide $100 between player A and player B. In this game, player B does not have
the opportunity to reject an offer — he or she goes home with whatever player A offers. Experiments have observed that
when player A splits the $100, he or she consistently offers over $10 to player B. Which of the following comments fits
best.
a.
Although player A is acting as economic theory usually assumes, he or she makes such offers because they
seem more fair.
b.
Although player A is acting as economic theory usually assumes, he or she makes such offers although they
are not fair.
c.
Although player A is not acting as economic theory usually assumes, he or she makes such offers because they
seem more fair.
d.
Although player A is not acting as economic theory usually assumes, he or she makes such offers because they
are not fair.
55. Advocates of a tax on soda and other sugary drinks argue that such a tax
a.
may encourage better nutrition.
b.
will protect our future selves from the long run negative effects of consuming these drinks.
c.
is needed because people tend to behave inconsistently over time.
d.
All of the above are correct.
56. Mankiw argues that a primary difference between taxing products like gasoline and taxing soda and other sugary
drinks is that
a.
consumption of gasoline causes negative externalities on society while consumption of soda affects the
consumer.
b.
the government can generate significant revenue from the gas tax but not from a soda tax.
c.
gasoline has inelastic demand but soda has elastic demand.
d.
Both a and c are correct.
57. Which of the following statements is correct?
a.
Based on studies of human decision making, most people are overconfident in their own abilities.
b.
Arrow’s impossibility theorem disproves the median voter theorem.
c.
Romantic gifts are an example of adverse selection.
d.
An efficiency wage encourages workers to shirk.
58. Which of the following statements is not correct?
a.
Based on studies of human decision making, most people value fairness.
b.
Based on studies of human decision making, some people’s preference are inconsistent over time.
c.
Government intervention is the best remedy for the problems caused by asymmetric information.
d.
Advertising can be an example of a company signaling the quality of its products.
59. Which of the following statements is not correct?
a.
The median voter theorem explains why politicians appeal to the middle of the voting distribution.
b.
Based on studies of human decision making, most people prefer to procrastinate, both in the immediate future
and in the distant future.
c.
Screening refers to an uninformed party trying to extract information from an informed party.
d.
Advertising can be an example of a company signaling the quality of its products.
60. Which of the following is best explained with behavioral economics rather than traditional economics?
a.
How people purchase apples from a grocery store.
b.
How people make tradeoffs between labor and leisure
c.
How firms choose prices to maximize profits
d.
How people tend to be overconfident in certain situations
61. Economists have found that entrepreneurs are likely to have subjective beliefs about the probability of entrepreneurial
success that are higher than the actual objective probabilities. These beliefs are most closely related to which of the
following behavior concepts?
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.
People are inconsistent over time.
62. If individuals behave irrationally in some circumstances, why do economists typically assume that they behave
rationally?
a.
The assumption of rationality allows economists to make powerful statements that apply the majority of the
time.
b.
The assumption of rationality was used before psychologists discovered ways in which individuals behave
irrationally.
c.
The assumption of rationality is used because economists do not understand principles of psychology.
d.
The assumption of rationality has yet to be refuted with scientific evidence.
63. In the context of an ultimatum game, the first player proposes a split of $100 to a second player. The second player
can either accept the split or both players receive $0. A rational second player will accept any offer
a.
greater than $0.
b.
equal to $50.
c.
greater than $50.
d.
that she thinks is fair.
64. In Homer’s Odyssey, Odysseus instructs his crew members to tie him to the mast of the ship so that he is not later
tempted by the Siren’s song. Which of the following irrational behaviors was he trying to avoid?
a.
People are overconfident.
b.
People behave in a time inconsistent manner.
c.
People give too much weight to a small number of vivid observations.
d.
People are reluctant to change their minds.