Question

1. Most economic models
2. 
a. incorporate the assumption of rational behavior on the part of economic actors. b. incorporate the notion that people are usually reluctant to change their minds. c. are meant to precisely duplicate reality.
d. assume that people often make sub-optimal choices. 

3. 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. 

4. The basic theory of consumer behavior is based on which of these assumptions?
   1. Consumers have clear preferences. 

   2. Consumers face budget constraints. 

   3. Consumers look for combinations of goods that maximize their utility based on information about preferences, income, and prices. 

   4. All of the above 

5. Suppose that after an increase in price, a consumer chooses not to purchase the good because she perceives that the price increase is fundamentally unfair. How does the traditional theory of consumer behavior treat this situation?
   1. 
a. By adjusting the budget line

   2. b. By shifting an indifference curve
   3. 
c. By modifying the equal marginal principle
   4. 
d. None of the above. The basic theory does not account for this type of situation. 

6. Herbert Simon suggested that people are not rational maximizers but satisficers, meaning that they choose a course of action that is

   1. a. personally satisfying, with a greater emphasis on personal consumption than on fairness.
   2. 
b. socially satisfying, with a greater emphasis on fairness than on personal consumption.
   3. c. good enough.

   4. d. risk averse. 

7. The suggestion that people are "satisficers" is similar to the view that people

   1. a. are wealth-maximizers.

   2. b. exhibit "bounded rationality."
   3. 
c. go to a lot of trouble to weigh costs and benefits before choosing a course of action.
   4. d. change their minds often. 

8. According to one survey, 76 percent of Americans said they were not saving enough for retirement. This example of inconsistency over time

   1. a. is rational behavior. 

   2. b. likely occurs because saving requires a sacrifice in the present for a reward in the distant future.
   3. c. likely occurs because Americans don’t care about retirement.

   4. d. definitely would not happen if Americans earned a greater return on their investments. 


8. 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.

9. Theendowmenteffectreferstothetendencyofindividualsto:

a. value an item more when they own it than when they do not.

b. value an item more when they do not own it.


c. value an item the same, whether they own it or not.

d. value an item more when the lose it.

10. 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.

1. Although player A is acting as economic theory usually assumes, he or she makes such offers because they seem more fair. 

2. Although player A is acting as economic theory usually assumes, he or she makes such offers although they are not fair. 

3. Although player A is not acting as economic theory usually assumes, he or she makes such offers because they seem more fair. 

4. Although player A is not acting as economic theory usually assumes, he or she makes such offers because they are not fair. 


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11. People resort to rules of thumb to make complex decisions, especially:
    1. if they have a good understanding of the factors involved. 

    2. when they have little experience with the issue at hand. 

    3. when the market system does not function freely. 

    4. when issues of fairness are involved. 

12. Valerie prefers A to B and she prefers B to C. If Valerie's preferences are transitive, then she prefers A to C.
    1. 
a. True
    2. b. False 

13. If A is preferred to B and C is preferred to D, then B must be preferred to C to satisfy transitivity.
    1. a. True 

    2. b. False 

14. Describe the ultimatum game. What outcome from this game would conventional economic theory predict? Do experiments confirm this prediction? Explain. 

15. A retail store offers a marketing program in which they suggest that consumers try the product for 30 days and, if they don’t like it, send it back. What behavioral economic concept is at issue here? Explain. 


Answer 1

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