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HOMEWORK 5 (CHAPTER 13) ECO61 FALL 2008 UDAYAN ROY

The maximum score is 20 points. Please show your answers on the answer sheet on the last page.

1. Behavioral economists

A. Rely primarily on data drawn from the real world

B. Rely primarily on experimental data

C. Avoid mathematical models of behavior, as they do not adequately describe real world actions

D. A and C

2. Advantages of experiments include

A. It is easier to determine whether people's choices are consistent with standard economic theory

B. It is often easier to establish causality

C. Researchers can double check their assumptions and conclusions by testing and debriefing subjects

D. All of the above

3. Disadvantages of experiments include

A. Decisions made in the laboratory differ from those made in the real world

B. Laboratory experiments introduce influences on decision making that are difficult to measure or control

C. Experimental subjects are typically not representative of the general population

D. All of the above

4. Departures from perfect rationality include

A. Incoherent choices

B. Bias towards the status quo

C. Anchoring

D. All of the above

5. Anchoring occurs when

A. Someone's choices are linked to prominent but obviously irrelevant information

B. Someone's choices are linked to prominent and relevant information

C. Someone's choices are made in the absence of relevant information

D. Someone's choices are based solely upon proven and relevant information

6. The endowment effect

A. Refers to the observation that people tend to value something more highly when they own it than when they don't

B. Refers to the observation that people tend to value something more highly when they don't own it than when they do

C. Refers to the fact that when confronted with many alternatives, people sometimes avoid making a choice and end up with the option that is assigned as a default

D. Refers to the observation that people do not have a strong attachment to the status quo

7. The default effect

A. Refers to the observation that people tend to value something more highly when they own it than when they don't

B. Refers to the observation that people tend to value something more highly when they don't own it than when they do

C. Refers to the fact that when confronted with many alternatives, people sometimes avoid making a choice and end up with the option that is assigned as a default

D. Refers to the observation that people do not have a strong attachment to the status quo

8. Narrow framing

A. Refers to the observation that people tend to value something more highly when they own it than when they don't

B. Refers to the observation that people tend to value something more highly when they don't own it than when they do

C. Is the psychological tendency to group related items into categories and, in making a choice, to consider other items in the same category while ignoring items in different categories

D. Refers to the observation that people must make choices in the presence of uncertainty

9. Suppose you conduct a study in which subjects are asked the following questions: 1. "Imagine that you have decided to go to a basketball game where the cost is $25 per ticket. As you enter the arena, you discover that you have lost your $25. Would you still pay $25 for a ticket?" 2. "Imagine that you have decided to go to a basketball game and you pay $25 for the ticket. As you are walking into the arena you realize that you have lost your ticket. Would you pay another $25 for another ticket?" You find that 90% of your subjects answered "Yes" to the second question, compared to the 50% that answered "Yes" to the first question. This is an example of

A. The default effect

B. The endowment effect

C. Narrow framing

D. Dynamic inconsistency

10. Behavioral economists view the standard economic theory of decisions involving time (which was discussed in chapter 10) as being too unrealistic because people

A. Have lapses in self-control

B. Make systematic errors in forecasting the future

C. Are reluctant to abandon projects after incurring substantial sunk costs, despite low probabilities of success

D. All of the above

11. A person is dynamically consistent if

A. His preferences over the alternatives available at some future date change as the date approaches or once it arrives

B. His preferences over the alternatives available at some future date do not change as the date approaches or once it arrives

C. He does not always want to follow through on his plans and intentions

D. Both A and C are correct

12. A person is dynamically inconsistent if

A. Lapses in self-control never occur

B. His preferences over the alternatives available at some future date do not change as the date approaches or once it arrives

C. He does not always follow through on his plans and intentions

D. All of the above

13. A dieter who prefers to eat small portions at his next meal, but chooses a large portion at mealtime when it arrives is

A. Dynamically consistent

B. Dynamically inconsistent

C. Exhibiting a present bias

D. Both B and C are correct

14. Pre-commitment is

A. A solution for dynamic inconsistency

B. A choice that removes future options

C. A way to avoid "bad" choices by restricting future options

D. All of the above

15. A person who is more willing to throw away a shirt that cost $20 than one that cost $200—even though he/she dislikes both shirts equally—is

A. Dynamically inconsistent

B. Dynamically consistent

C. Suffers from the sunk cost fallacy

D. Both B and C are correct

16. Projection bias

A. Is the tendency to evaluate future consequences based on tastes and needs at the moment of the decision making

B. Is the tendency to project current states of mind into the future

C. Can lead people to underestimate their adaptability

D. All of the above

17. The hot-hand fallacy

A. Is the belief that once an event has occurred several times in a row, it is less likely to repeat

B. Is the belief that once an event has occurred, it is less likely to repeat

C. Is the belief that once an event has occurred several times in a row, it is more likely to repeat

D. Is the belief that if an event has never occurred, it is more likely to occur

18. Gabby flips a fair coin and it comes up heads. Gabby suffers from the gambler's fallacy if

A. She thinks the coin will come up heads on the next flip because it came up heads on the previous flip

B. She is more willing to bet on the outcome of the next flip

C. She thinks the coin is less likely to come up heads because it came up heads on the previous flip

D. She thinks the coin is equally likely to come up heads or tails on the next flip

19. Lily wants to invest in the stock market. She notices that the share price for Great Flowers Inc. has been rising for weeks. She chooses to invest in Great Flowers Inc. because she assumes it will continue to rise purely because of the run it has been on. Lily suffers from

A. The hot-hand fallacy

B. The gambler's fallacy

C. A present bias

D. The sunk cost fallacy

20. Loss aversion, which is an important component of prospect theory, occurs when

A. The consumer's valuation of an outcome is less sensitive, per dollar, to small losses than to small gains

B. The consumer's valuation of an outcome is more sensitive, per dollar, to small losses than to small gains

C. The consumer's valuation of an outcome is less sensitive, per dollar, to large losses than to small gains

D. Both A and C are correct

21. The principle of diminishing sensitivity, which is an important component of prospect theory, holds that

A. The marginal impact of enlarging a change from the status quo declines with the size of the change

B. The marginal impact of enlarging a change from the status quo increases with the size of the change

C. The total impact of enlarging a change from the status quo declines with the size of the change

D. The total impact of enlarging a change from the status quo increases with the size of the change

22. Choices made by experimental subjects playing the ultimatum game suggest

A. That in social situations, emotions such as anger and indignation influence economic decisions

B. That in social situations, emotions such as anger and indignation do not influence economic situations

C. That individuals are influenced by social motives

D. Both A and C are correct

ANSWER SHEET HOMEWORK 5 (CHAPTER 13) ECO61 FALL 2008 UDAYAN ROY

NAME: ______________________________________

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