Question

1. According to prospect theory, firms are more likely to shrink packages than raise prices because:

a. consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money.

b. they don’t understand that consumers recognize price increases easily, regardless of what form they take.

c. consumers associate smaller packages with higher quality luxury goods

d. consumers are generallt trying to downsize their purchases and lead simpler lives.

2. Last month Laura saw the value of her stock portofolio rise by $20,000. This month she saw the value of her portofolio decline by $20,000. According to behavioral economics:

a. the positive utility Laura received from seeing her portofolio value rise was equal to the disutility she felt when its value declined.

b. Laura should not invest in stocks unless the utility she receives from gains is at least as great as tge disutility she feels from the losses.

c. the positive utility Laura received from seeing her portofolio value rise was greater than the disutility she felt when its value declined.

d. the positive utility Laura received from seeing her portofolio value rise was less than the disutility she felt when its value declined.

Answer 1

1. Option A

• According to the prospect theory, the consumers prefer buying goods having less gain rather than buying a good that gives them higher gains with greater risk.
• This is because they feel the loss of a price increase more than the loss of buying a smaller package.
• This forces the firms to decrease the number of packages and raise their prices.

2. Option C

• When the value of portfolio, declines, consumer's disutility from it increases.
• Even when the positive utility received from the portfolio increases, the disutility felt by the consumers always exceeds the positive utility.
• Hence the positive utility, laura received from seeing her portfolio value rise was less than the disutility she felt when its value declined.