MIDTERM #1 ECO23/PSY23 FALL 2013 UDAYAN ROY
NAME: ______
There are 40 multiple-choice questions below. Each correct answer is worth 1 point. For the questions that are accompanied by the phrase “Indicate all correct answers,” mark all answers you consider correct and do not mark the answers you consider incorrect. The sole short-answer question is a bonus question worth 2 points. The maximum score is 40 points. Please show your answers to the multiple-choice questions on this test and—using a No. 2 pencil—on the scantron. Write your name on both. Please do not look at anyone else’s answers and do not let anyone else see your answers. Please ask the instructor if you do not understand a question. You have 80 minutes. Good luck!
1. Experimental evidence from psychology shows that
a. People are usually rational (in the sense the word is used in standard economics)
b. People are usually rational in their economic behavior, but irrational in their social behavior
c. People are usually rational in their social behavior, but irrational in their economic behavior
d. The behavior of people tends to deviate from the behavior predicted by standard economics. But these deviations tend to vary randomly from person to person.
e. The behavior of people tends to deviate from the behavior predicted by standard economics. Moreover, these deviations from rationality tend to be similar across people.
2. Which of the following human characteristics are not assumed in standard economic theories? (Indicate all correct answers.)
a. Unbounded rationality
b. Unbounded willpower
c. Unbounded self interest
d. Unbounded ability to predict the future
3. Some economists agree that to err is human. Nevertheless, they also argue that the assumption of rationality in standard economics is reasonable, for the following reasons: (Indicate all correct answers.)
a. Competitive insurance markets punish unwise behavior and reward wise behavior. This reduces unwise behavior to minimal levels.
b. Darwinian evolution ensures that it will be difficult for stupid people to mate and, thereby, pass on their genes. Therefore, heritable stupidity will disappear.
c. Although people make mistakes, they learn from their mistakes.
d. The errors of people are random. Therefore, the errors people make cancel each other out.
4. With regard to the arguments made by the supporters of the rationality assumption in standard economics, behavioral economists point out that: (Indicate all correct answers.)
a. Businesses may encourage unwise behavior to earn profits
b. Darwinian evolutionary processes usually take a very long time to work
c. Important decisions are often made only a few times in the life of the average human being. Therefore, there is limited scope for learning from ones mistakes.
d. We tend to make mistakes that are similar. As a result, our mistakes do not cancel each other out
5. _____ economics relies on ______data to analyze the economy. Under the heavy influence of ____, _____ economics relies heavily on ______data.
a. Behavioral; real-world; psychology; standard (or traditional); experimental
b. Behavioral; real-world; neuroscience; standard; experimental
c. Standard; real-world; psychology; behavioral; experimental
d. Standard; experimental; psychology; behavioral; real-world
6. On the advantages and disadvantages of the use of experiments, which of the following is true? (Indicate all correct answers.)
a. A disadvantage of using experiments is that decisions made in a lab setting may be different from decisions made in the real world
b. Lab experiments often require people to choose among multiple options, all of which involve small amounts of money. Therefore, the choice may not be taken seriously and, as a result, the experiment may say very little about choices made in the real world
c. In an experimental setting, the experimental subjects often do what they think they are expected to do. This may make the experimental results inapplicable to the real world
d. Experimental subjects often happen to be students. In such cases, the experimental results may not represent the wider public.
7. In their book, Nudge, Richard Thaler and Cass Sunstein argue that policies need to be guided by
a. Libertarianism
b. Paternalism
c. Libertarian paternalism
d. The profit motive
8. According to libertarianism,
a. Individuals and businesses by and large make rational decisions. The government should take a hands-off attitude towards private enterprise and private choice
b. Human beings are vulnerable to predictable irrationality. Therefore, it is the government’s job to intervene to protect us from our own mistakes
c. Although individuals and businesses often make rational decisions, they also show predictably irrational behavior. Policy makers should guide or ‘nudge’ people to the choices that the people themselves would regard as desirable, and without restricting their freedom to act as they wish
d. The resources of a society should be shared equally
9. According to paternalism,
a. Individuals and businesses by and large make rational decisions. The government should take a hands-off attitude towards private enterprise and private choice
b. Human beings are vulnerable to predictable irrationality. Therefore, it is the government’s job to intervene to protect us from our own mistakes
c. Although individuals and businesses often make rational decisions, they also show predictably irrational behavior. Policy makers should guide or ‘nudge’ people to the choices that the people themselves would regard as desirable, and without restricting their freedom to act as they wish
d. The resources of a society should be shared equally
10. According to libertarian paternalism,
a. Individuals and businesses by and large make rational decisions. The government should take a hands-off attitude towards private enterprise and private choice
b. Human beings are vulnerable to predictable irrationality. Therefore, it is the government’s job to intervene to protect us from our own mistakes
c. Although individuals and businesses often make rational decisions, they also show predictably irrational behavior. Policy makers should guide or ‘nudge’ people to the choices that the people themselves would regard as desirable, and without restricting their freedom to act as they wish
d. The resources of a society should be shared equally
11. Anchoring is
a. The persistent willingness to expend effort or money to keep options open, even when the options themselves are of no value.
b. The tendency to underestimate our future desire for “hot state” choices when we are in a “cold state”
c. The tendency to underestimate our future willingness to give up immediate gratification for long term benefit.
d. A behavior that is initially enjoyable, but ultimately reduces the ability to experience enjoyment from other things so that total utility falls.
e. The tendency to put excessive weight on the importance of similar nearby items in estimating value
12. Anchoring or “anchoring and adjustment” refers to the concept that
a. people start with an implicitly suggested reference point and make adjustments to it to reach their estimate
b. you can influence the degree to which you are willing to trade immediate gratification for future outcomes
c. while some choice may be desirable, excessive choice can make decisions more difficult and less satisfying
d. your choices are significantly influenced by the choices of those around you
e. you are much more likely to choose tempting options when they are easily available
13. In an experiment discussed in class, people were asked to write down the last two digits of their social security numbers. They were then asked whether they would pay an amount in dollars equal to the number they had written down for a particular item (such as a box of chocolates, or a bottle of wine) that they were shown. Finally they were asked what maximum amount they would pay for the item. It turned out that ___.
a. People’s willingness to pay for an object had nothing to do with the last two digits of their social security numbers. This was consistent with the standard assumption in economics that people usually have a clear idea how much they like a particular commodity.
b. Those for whom the last two digits of their social security numbers were bigger numbers were typically willing to pay more (for any of the items in the experiment). This was consistent with the standard assumption in economics that people usually have a clear idea how much they like a particular commodity.
c. Those for whom the last two digits of their social security numbers were bigger numbers were typically willing to pay more. This outcome provided evidence of anchoring and was not consistent with the assumptions of standard economics.
d. Those for whom the last two digits of their social security numbers were bigger numbers were typically willing to pay less (for any of the items in the experiment). This outcome provided evidence of anchoring.
14. In the poetry reading experiment that was discussed in class, we saw that
a. Our willingness to pay for a commodity is not affected by anchoring effects when the commodity is sophisticated (as in the case of a poetry reading)
b. Our willingness to pay for a commodity is affected by anchoring effects when we are unsure of the quality of the commodity. When we get to experience the commodity, the anchoring effects go away
c. Our willingness to pay for a commodity may be affected by anchoring effects even after we get to experience the commodity
d. Our willingness to pay for a commodity is not affected by anchoring effects, irrespective of the sophistication of the commodity
15. In the experiment regarding subscriptions to The Economist that was discussed in class, we saw evidence implying that
a. If there is initially no decisive winner between options A and B, the introduction of a new option (A-) that is clearly (but slightly) inferior to option A, will persuade people that A is not merely superior to option A- but superior to option B as well. This is consistent with the assumptions of standard economics.
b. If there is initially no decisive winner between options A and B, the introduction of a new option (A-) that is clearly (but slightly) inferior to option A, will persuade people that A is not merely superior to option A- but superior to option B as well. This makes preference reversals possible and is not consistent with the assumptions of standard economics.
c. If there is initially no decisive winner between options A and B, the introduction of a new option (B-) that is clearly (but slightly) inferior to option B, will not break the tie between A and B. Our preferences are always independent of irrelevant alternatives.
d. If an item on a restaurant menu is never chosen by customers, it is necessarily sensible to remove that item from the menu.
16. In instances in which people have to make numerical estimates (“How many African countries are members of the United Nations?”) and their estimates are influenced by numerical anchors, statistical studies have found that for any given change in the numerical anchor, the estimate changes by _____ percent of the change in the anchor.
a. 25
b. 35
c. 45
d. 55
e. 65
17. In an experiment discussed in class, the experimental subjects were randomly assigned to two groups. All subjects were made to listen to a slightly annoying sound. Those in Group 1 (respectively, Group 2) were asked a yes-or-no question: “Would you listen to the same sound again if we paid you 10 cents (respectively, 90 cents)?” Then the subjects were asked for what payment would they listen to the sound again. Group 1 bid less than Group 2, indicating that anchoring had occurred. Shortly thereafter, in an attempt to reset the anchor, all subjects were asked “Would you listen to the same sound again if we paid you 50 cents?” and then asked, as before, for what payment would they listen to the sound again. Which of the following is true about this experiment?
a. An anchor, once set, is hard to wipe clean.
b. Any existing anchor can easily be replaced by a new anchor by simply repeating the process that created the initial anchor
c. If the process of placing an anchor into a person’s mind is repeated, confusion erupts, the existing anchor is forgotten, and thereafter it becomes impossible to create a new anchor in the person’s mind
d. All of the above are true
Group A / Group BPrice $ / Quantity % / Price $ / Quantity %
Lindt truffles / 0.15 / 73 / 0.14 / 31
Hersheys kisses / 0.01 / 27 / 0.00 / 69
18. (Indicate all correct answers.) The table above shows the results of an experiment in which participants could buy one chocolate each at the stated prices. There were two randomly chosen groups. Each was offered a different set of prices, as shown in the table. The prices and the percentage of participants who bought each type of chocolate are also shown in the table. The results show
a. Evidence of anchoring
b. Evidence of hyperbolic discounting
c. That people will opt for a free option even if it is inferior
d. When a price drops to zero, preference reversals are possible. This is not consistent with the assumptions of rational behavior in standard economics
19. In an experiment discussed in class, participants were offered a choice between (a) a $20 gift card at the price of $7 or (b) a $10 gift card for free. (Indicate all correct answers.)
a. The overwhelming favorite was (a). This is consistent with the assumptions of rational behavior in standard economics
b. The overwhelming favorite was (b), the obviously inferior option.
c. The two options were equally popular
d. The results confirmed the relevance of behavioral economics. We tend to choose a “free” option even when it is clearly inferior to other options
20. In an experiment that was done during Halloween, trick-or-treating children were each given three Hershey’s kisses. Then, one randomly chosen group (Group 1) was offered one trading opportunity (“Give up one Hershey’s kiss for half of a Snickers bar or give up two Hershey’s kisses for one Snickers bar”) and another randomly chosen group (Group 2) was offered another trading opportunity (“Take half of a Snickers bar for free or give up one Hershey’s kiss for one Snickers bar”). Which of the following is true?