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Exam 17: Behavioral Economics and Risk Taking

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Question 21

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At the beginning of a semester,a group of five students (Marcus,Gerard,Penelope,Zendaya,and Duane) are asked to order a snack that the teacher will deliver to the students free of charge before the first class of the tenth week of the semester.The three choices are an apple,a banana,or a Snickers candy bar.The teacher collects the orders and finds that two students have ordered an apple,two students have ordered a banana,and one student has ordered a Snickers candy bar.The four students who ordered either an apple or a banana cite health consciousness as the reason for their choice. Immediately before the orders are scheduled to be delivered,the teacher informs the students that they can switch their choice and order something else from the original menu if they wish,or they can receive what they originally ordered.Which of the following scenarios is the best example of inconsistent intertemporal decision-making?

A) Marcus originally ordered an apple and did not change his choice when prompted.
B) Gerard ordered a banana and switched to an apple when prompted.
C) Penelope ordered an apple and switched to a banana when prompted.
D) Zendaya ordered a banana and switched to a Snickers candy bar when prompted.
E) Duane ordered a Snickers candy bar and did not change his choice when prompted.

F) B) and E)
G) B) and C)

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Question 22

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Consider the following scenario when answering the following questions: Derek and Heriberto are playing an ultimatum game where Derek is given $500 and asked to propose a way of splitting it with Heriberto. When Heriberto learns Derek’s proposal, Heriberto chooses whether to accept or reject the split. If Heriberto accepts the split, both players receive the money according to Derek’s split proposal. If Heriberto rejects the split, both players receive nothing. This game will be played only once, so Derek does not have to worry about reciprocity when making his choice. -According to traditional economic theory,which presumes both players are fully rational and wish to maximize their incomes,Derek should maximize his gains by offering Heriberto ________ and keeping ________ for himself.

A) $250.00; $250.00
B) $450.00; $50.00
C) $50.00; $450.00
D) $499.99; $0.01
E) $0.01; $499.99

F) A) and D)
G) A) and B)

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Question 23

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We would describe a person's choices as time inconsistent when people

In 2000,researchers Brigitte Madrian and Dennis Shea analyzed the 401(k)savings behavior of employees in a large U.S.corporation before and after an interesting change in the company 401(k)plan. Before the plan change,employees were automatically enrolled as participants in the company 401(k)plan upon being hired and were required to complete paperwork if they wanted to opt in.After the plan change,new employees were automatically enrolled in the 401(k)plan and were required to complete paperwork if they wanted to opt out.The amount of time and effort required to either opt in or opt out was approximately equal.None of the economic features of the plan changed. The researchers found that 401(k)participation is significantly higher under automatic enrollment.Describe how framing effects can be used to explain the significantly higher participation under automatic enrollment.

Most state lotteries

________ is the field of economics that studies how experimental psychology influences the decision-making process.

________,as articulated by Daniel Kahneman and Amos Tversky,suggests that individuals place more emphasis on gains than losses.

Mario knows that,over the long run,it is in his best interest to save at least 10 percent of his paycheck for retirement.However,each time he receives his weekly paycheck of $1,000,he ends up spending it all and not depositing any to a retirement account.Mario has resolved to contact his employer's Human Resources Department to set up a 401(k) work-sponsored retirement account where the 10 percent would be deducted automatically from his paycheck before it is issued to him each week.It is apparent from this information that Mario realized

Jocelyn and Rhonda are playing an ultimatum game where Jocelyn is given $100 and asked to propose a way of splitting it with Rhonda.When Rhonda learns Jocelyn's proposal,Rhonda chooses whether to accept or reject the split.If Rhonda accepts the split,both players receive the money according to Jocelyn's split proposal.If Rhonda rejects the split,both players receive nothing.This game will be played only once,so Rhonda does not have to worry about reciprocity when making her choice.Traditional economic theory presumes that

A relatively new area in the field of economics called ________ economics studies people who appear to make choices that do not seem rational in an economic sense.

A person from a moderately humble background works hard to make a successful life.Another person from a moderately humble background barely works at all,seeking state welfare compensation,maintaining: "There are more important things in life than work." Bethany,an economist voted in as a potential policy maker,must make a decision on "fairness." How would she evaluate this situation?

Regina and Brenda are considering playing a game called Matching Twenties.In this game,Regina and Brenda will each place a $20 bill on the table.Both players will then toss a fair coin.If both Regina and Brenda toss heads or both Regina and Brenda toss tails,Regina wins the $40 on the table.If one woman tosses heads and the other tosses tails,Brenda wins the $40 on the table. Regina decides that she is not willing to play this game because a loss of $20 to Brenda would cause her to lose more utility than she would gain if she won $20 from Brenda.Which concept best explains Regina's choice not to play the game?

________ implies that people evaluate the risks that lead to gains separately from the risks that lead to losses.

A risk-neutral consumer

Consider the following scenario when answering the following questions: Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where: Gamble A: The student will receive $50 with a 70 percent probability and $100 with a 30 percent probability. Gamble B: The student will receive $50 with a 50 percent probability, $200 with a 25 percent probability, and $0 (nothing) with a 25 percent probability. -What is the expected value of Gamble A?

Consider the following decision tree and information when answering the following questions: The decision tree depicts two players (Jane and Aaron) playing an ultimatum game where Aaron is given $1,000 and asked to propose a way of splitting it with Jane. When Jane learns Aaron’s proposal, Jane chooses whether to accept or reject the split. If Jane accepts the split, both players receive the money according to Aaron’s split proposal. If Jane rejects the split, both players receive nothing. This game will be played only once, so Aaron does not have to worry about reciprocity when making his choice. There are four sets of payoffs at the terminal nodes of the decision tree. In each node, the dollar amount to the left of the comma represents Aaron’s payoff, and the dollar amount to the right of the comma represents Jane’s payoff. -If Aaron were to offer an unfair proposal,experimental results show that Jane would likely punish him by making herself ________ off by ________ and rejecting his offer.

Suppose 5,000 students were split into two groups of 2,500.Both groups were first presented with an image of a new high-end pair of shoes produced by UGG,a footwear company. The first group was given the following statement and then asked the following question: "The normal retail price of these shoes is $200.Would you be willing to pay $125 for them?" The second group was given the following statement and then asked the following question: "The normal retail price of these shoes is $450.Would you be willing to pay $125 for them?" Suppose that 13 percent of the students in the first group answered yes and that 63 percent of the students in the second group answered yes.It is likely that more students in the second group were willing to pay $125 for the pair of shoes because they were told the normal price was much higher.This is an example of a ________ effect in decision-making.

Consider the following scenario when answering the following questions: Ivett and Desiree are considering playing a game called Twenties versus Fifties. In this game, Ivett will place a $20 bill on the table, and Desiree will place a $50 bill on the table. Both players will then toss a fair coin. If both Ivett and Desiree toss heads or if they both toss tails, Ivett wins the $70 on the table. If one woman tosses heads and the other tosses tails, Desiree wins the $70 on the table. -For Desiree,the expected value of this game is

________ applies when a person places more value on avoiding losses than attempting to realize gains.

The hypothetical species Homo economicus is acutely aware of opportunities in the environment and