Question 1

Carlos has been invited to go skiing for the afternoon with his friends. If a lift ticket will cost him $40, Carlos will likely:

Accepted Answer

A)  overvalue the benefit of skiing.
B)  undervalue the opportunity cost of his afternoon.
C)  find it difficult to place a value on what he might do instead of skiing.
D)  All of these are correct.E) A) and D)
F) B) and D)

Question 2

What are sunk costs?

Accepted Answer

A)  Costs that have been incurred and cannot be recovered
B)  Explicit costs that will incur large implicit costs to recoup or recover
C)  Costs that are upfront on a project and can be pulled out if the business goes under
D)  Costs incurred to recover lost expendituresE) All of the above
F) A) and B)

Question 3

Howie just bought a new digital camera to replace his old one, which works perfectly fine and would sell on eBay for $100. The fact that Howie would not pay $100 for the old camera, yet he continues to let it sit unused his closet, is explained by:

Accepted Answer

A)  the implicit cost of ownership bias.
B)  the explicit cost of ownership bias.
C)  the explicit cost of sales bias.
D)  ignoring sunk costs.E) A) and D)
F) B) and C)

Question 4

Paul wins a $500 watch in a sweepstakes and decides to keep it instead of selling it on eBay, even though he says he would have preferred to win $500 cash. Knowing Paul's preferences, how can we explain his decision to keep the watch?

Accepted Answer

A)  Paul has a cognitive bias, leading him to value the watch more than he would otherwise because he already owns it.
B)  Paul has a cognitive bias; he is ignoring the nonmonetary opportunity cost of already owning the watch.
C)  Paul feels as though he should keep the watch, because he ignores the implicit cost of owning it.
D)  All of these are correct.E) None of the above
F) B) and C) D

Question 5

After enjoying a delicious meal, Duane treats himself and orders a very expensive dessert. After one bite, Duane realizes he does not care for the dessert at all. However, he forces himself to eat the whole dessert while thinking about the money he just wasted on it. Duane's decision is an example of:

Accepted Answer

A)  irrational behavior.
B)  a cognitive bias, because he is focused on the money spent on the dessert.
C)  emphasizing a sunk cost instead of weighing marginal costs and benefits.
D)  All of these are exemplified by Duane's decision.E) All of the above
F) A) and B)

Question 6

Marissa walks into a convenience store to buy something to drink. As she stares into the cooler and considers her options, her opportunity cost of choosing a Gatorade is:

Accepted Answer

A)  the value she places on the drink she would choose if she didn't pick Gatorade.
B)  the cost of the drink she would choose if she didn't pick Gatorade.
C)  the value she places on all the other drinks she could choose instead of Gatorade.
D)  the cost of not having anything to drink.E) C) and D)
F) None of the above A

Question 7

When people forget that money is _____ they tend to make _____ decisions.

Accepted Answer

A)  fungible; liquid
B)  fungible; irrational
C)  liquid; irrational
D)  liquid; rationalE) A) and B)
F) A) and C)

Question 8

Behavioral economists have found that people often _____, which leads to irrational decisions.

Accepted Answer

A)  forget that money is fungible
B)  undervalue opportunity costs
C)  forget to ignore sunk costs
D)  All of these are correct.E) C) and D)
F) A) and C)

Question 9

Suppose Maisie wants to change her diet and chooses to eat only healthy foods. Deciding not to buy any junk food at the grocery store while shopping for the week is an example of:

Accepted Answer

A)  removing temptation in an effort to match present-oriented decisions more closely to future-oriented ones.
B)  how individuals may compensate for the time inconsistency of their actions.
C)  a tool an individual can use in order to take the actions the individual wants to take, but has a hard time taking.
D)  All of these are correct.E) All of the above
F) C) and D) D

Question 10

Putting money into mental categories can:

Accepted Answer

A)  cause people to take risks they wouldn't otherwise take.
B)  help people organize their expenditures.
C)  cause irrational behavior.
D)  All of these are correct.E) B) and C)
F) A) and D)

Question 11

Money is:

Accepted Answer

A)  the clearest example of something that is fungible.
B)  always recognized as fungible by individuals.
C)  more fungible in cash form versus as checking account balances.
D)  All of these are correct.E) None of the above
F) B) and C)

Question 12

Mateo has $2,000 in cash, which he's saving to spend on a trip over spring break.. However, during the holiday season he spends $400 of that cash on gifts to avoid using his credit card, thus avoiding interest charges. He gradually replaces the $400 over the next two months. An economist would say this behavior is:

Accepted Answer

A)  rational.
B)  irrational.
C)  utility minimizing.
D)  not observable.E) A) and B)
F) All of the above

Question 13

Sandy is a big Star Wars fan and buys a $20 ticket a week in advance to the premiere of the new movie. After arriving at the theater, she realizes she forgot the ticket at home and doesn't have time to go back and get it. Sandy can afford to buy another ticket for $20, but she decides not to because seeing the movie isn't worth $40 to her. This is an example of:

Accepted Answer

A)  rational behavior, because she values the movie less than $40.
B)  irrational behavior, because she really values the movie more than $40.
C)  irrational behavior, because the initial $20 is a sunk cost.
D)  rational behavior, because she is using the experience as a commitment device against forgetting tickets at home in the future.E) A) and D)
F) A) and C)

Question 14

Harry's employer offers a "Holiday Account," which means $50 a month is taken out of Harry's paycheck and deposited into this account throughout the year. In December, Harry can take the money out of the account to spend during the holiday season. This type of account:
I. ignores the fungibility of money.
II. will always help employees to make the best financial decisions.
III. is irrational.

Accepted Answer

A)  II only
B)  I and II only
C)  I and III only
D)  I, II, and IIIE) A) and C)
F) All of the above

Question 15

In economics, we observe that people consistently make irrational decisions in certain situations and choose to do something even if the:

Accepted Answer

A)  benefits outweigh the opportunity costs.
B)  opportunity costs outweigh the benefits.
C)  benefits outweigh the sunk costs.
D)  sunk costs outweigh the opportunity costs.E) A) and C)
F) B) and C)

Question 16

Economists believe that people who sit through events that they don't enjoy likely do so because:

Accepted Answer

A)  they do not ignore the sunk cost involved.
B)  they undervalue the opportunity cost of their time.
C)  they don't accurately consider what else they could be doing with their time.
D)  All of these are correct.E) B) and C)
F) B) and D)

Question 17

Luke and his friend Simon won tickets to see a popular musician's concert. Even though neither Luke nor Simon is familiar with the artist's music, they go to the concert anyway. Twenty minutes into the concert, both Luke and Simon decide they hate the music and the screaming fans. Luke wants to leave even though the concert is scheduled to continue for another hour. However, Simon argues that they should stay to get the full value of the tickets. Which of the following statements is true?

Accepted Answer

A)  Simon's argument is currently irrational, but it would be considered rational if they had paid money for the tickets.
B)  Luke would change his mind about leaving if they had paid money for the tickets.
C)  It is rational for Luke and Simon to leave the concert early.
D)  All of these are true.E) None of the above
F) A) and B)

Question 18

The field of economics that draws on insights from psychology to expand models of individual decision making is called:

Accepted Answer

A)  psychological economics.
B)  behavioral economics.
C)  emotional economics.
D)  decision optimization economics.E) A) and B)
F) A) and C)

Question 19

In order to prompt children to eat the food they're served, mothers have relied for decades on the argument that "there are starving children in Africa." Assuming the presence of hungry children on another continent does not affect the utility you derive from the food on your plate, if you choose to force down food based on this argument you are:

Accepted Answer

A)  acting rationally.
B)  putting the needs of starving children over your own wants.
C)  acting irrationally.
D)  doing your part in the fight against world hunger.E) A) and B)
F) A) and C)

Question 20

Eva knows her GPA would greatly improve if she could break her habit of playing video games every evening. An example of a commitment device Eva could use would be to:

Accepted Answer

A)  allow herself one hour of gaming for every half-hour of studying she does each day.
B)  exercise before studying in order to be refreshed.
C)  loan her friend her gaming console on days she needs to study.
D)  All of these are commitment devices Eva could use.E) C) and D)
F) All of the above

Exam 8: Behavioral Economics: a Closer Look at Decision Making

Carlos has been invited to go skiing for the afternoon with his friends. If a lift ticket will cost him $40, Carlos will likely:

Correct Answer
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What are sunk costs?

Correct Answer
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Howie just bought a new digital camera to replace his old one, which works perfectly fine and would sell on eBay for $100. The fact that Howie would not pay $100 for the old camera, yet he continues to let it sit unused his closet, is explained by:

Correct Answer
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Paul wins a $500 watch in a sweepstakes and decides to keep it instead of selling it on eBay, even though he says he would have preferred to win $500 cash. Knowing Paul's preferences, how can we explain his decision to keep the watch?

Correct Answer
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D

Correct Answer
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Marissa walks into a convenience store to buy something to drink. As she stares into the cooler and considers her options, her opportunity cost of choosing a Gatorade is:

Correct Answer
verified
A

When people forget that money is _ they tend to make _ decisions.

Correct Answer
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Behavioral economists have found that people often _____, which leads to irrational decisions.

Correct Answer
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Suppose Maisie wants to change her diet and chooses to eat only healthy foods. Deciding not to buy any junk food at the grocery store while shopping for the week is an example of:

Correct Answer
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D

Putting money into mental categories can:

Correct Answer
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Money is:

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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In economics, we observe that people consistently make irrational decisions in certain situations and choose to do something even if the:

Correct Answer
verified

Economists believe that people who sit through events that they don't enjoy likely do so because:

Correct Answer
verified

Correct Answer
verified

The field of economics that draws on insights from psychology to expand models of individual decision making is called:

Correct Answer
verified

Correct Answer
verified

Eva knows her GPA would greatly improve if she could break her habit of playing video games every evening. An example of a commitment device Eva could use would be to:

Correct Answer
verified

Exam 8: Behavioral Economics: a Closer Look at Decision Making

Carlos has been invited to go skiing for the afternoon with his friends. If a lift ticket will cost him $40, Carlos will likely:

Correct AnswerverifiedShow Answer

What are sunk costs?

Correct AnswerverifiedShow Answer

Howie just bought a new digital camera to replace his old one, which works perfectly fine and would sell on eBay for $100. The fact that Howie would not pay $100 for the old camera, yet he continues to let it sit unused his closet, is explained by:

Correct AnswerverifiedShow Answer

Paul wins a $500 watch in a sweepstakes and decides to keep it instead of selling it on eBay, even though he says he would have preferred to win $500 cash. Knowing Paul's preferences, how can we explain his decision to keep the watch?

Correct AnswerverifiedD

Correct AnswerverifiedShow Answer

Marissa walks into a convenience store to buy something to drink. As she stares into the cooler and considers her options, her opportunity cost of choosing a Gatorade is:

Correct AnswerverifiedA

When people forget that money is _____ they tend to make _____ decisions.

Correct AnswerverifiedShow Answer

Behavioral economists have found that people often _____, which leads to irrational decisions.

Correct AnswerverifiedShow Answer

Suppose Maisie wants to change her diet and chooses to eat only healthy foods. Deciding not to buy any junk food at the grocery store while shopping for the week is an example of:

Correct AnswerverifiedD

Putting money into mental categories can:

Correct AnswerverifiedShow Answer

Money is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In economics, we observe that people consistently make irrational decisions in certain situations and choose to do something even if the:

Correct AnswerverifiedShow Answer

Economists believe that people who sit through events that they don't enjoy likely do so because:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The field of economics that draws on insights from psychology to expand models of individual decision making is called:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Eva knows her GPA would greatly improve if she could break her habit of playing video games every evening. An example of a commitment device Eva could use would be to:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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D

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A

When people forget that money is _ they tend to make _ decisions.

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D

Correct Answer
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