Chapter 8 Behavioral Economics 201

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Which of the following best explains the difference between neoclassical economics and behavioral economics?
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Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors.
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Which of the following supermarket strategies to increase sales would be most consistent with a behavioral economics (versus neoclassical economics) approach?
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Positioning frequently purchased items at the back of the store.
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According to behavioral economics, cognitive biases:
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are misunderstandings or misperceptions that cause systematic error.
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Dan was certain that his upcoming economics test would be so easy that he could wait to study until the night before and still do well on the exam. When he cracked open his book and notes the night before the exam, he realized he should’ve started studying earlier. According to behavioral economics, Dan’s error was caused primarily by:
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a planning fallacy.
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According to prospect theory, what strategy will firms typically employ with regard to pricing and packaging of their goods, when faced with rising production costs?
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Firms will reduce package sizes but keep prices the same, thus increasing the per unit price of the good.
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According to prospect theory, firms are more likely to shrink packages than raise prices because:
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consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money.
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Josh will receive a salary of $300,000 next year. According to prospect theory:
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Josh’s satisfaction with that salary depends on how much he made in the past.
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Why do credit card companies typically require small minimum payment amounts on their customers’ monthly credit card statements?
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Credit card companies want to increase profits by promoting slower repayment, and actual customer payments will be anchored by the smaller payment requirements.
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Anchoring:
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can influence decision making with irrelevant information.
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Alex was willing to pay $50 for the new World Cup soccer ball. When he received it as a gift, he was willing to sell it, but for no less than $80. According to behavioral economists:
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Alex’s behavior is consistent with the endowment effect.
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Credit card companies require low minimum payments that impose significant interest costs on consumers choosing to pay the minimum. Recent legislation has required credit card companies to show on customer billing statements how much interest would be paid and how long it would take to repay the current balance if only the minimum is paid. Behavioral economists would expect this legislation to:
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have little effect, as anchoring would keep many people paying the minimum.
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According to behavioral economists, someone suffering from myopia is most likely to:
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spend too much on present consumption and not save enough for the future.
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According to behavioral economists, precommitments:
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help people overcome their self-control problems caused by time inconsistency.
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Salary smoothing, automatic payroll deductions, and early withdrawal penalties are all examples of:
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precommitments.
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Edgar and Felicity are players in an ultimatum game for $100, where Felicity is the proposer and Edgar is the responder. Suppose that Felicity proposes that she receive $95, while Edgar receives only $5. How would behavioral economists expect Edgar to respond?
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Even though Edgar would be better off having $5 versus nothing, Edgar will likely see the offer as unfair and reject it.

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