Microeconomics Exam 2 Study Guide

According to the representative heuristic, people's belief about the likelihood that something belongs to a given category _______ the extent to which it shares characteristics with the stereotypical members of that category.

increases with

If people care about relative consumption rather than absolute consumption, then:

individuals' decisions need not lead to socially optimal outcomes.

The _______ accommodates a much broader range of observed behavior than traditional economic models, but has been criticized because virtually any bizarre behavior can be explained by assuming people have a sufficiently strong taste for it.

present aim standard of rationality

According to the availability heuristic, the more easily we can recall examples of an event:

the more likely we judge the event to be.

If a Proposer and a Responder are asked to split $100 in the ultimatum bargaining game, standard economic theory would predict that the Proposer should offer the Responder:

the smallest dollar amount possible.

A prisoner's dilemma illustrates situations in which:

there is a conflict between the narrow self-interest of individuals and the broader interests of a group.

The _______ is a game in which the first player has the power to confront the second player with a take-it-or-leave-it offer.

ultimatum bargaining game

According to the adaptive rationality standard, one reason people might rationally choose to have preferences that are not narrowly self-interested is that:

doing so could help them solve commitment problems.

In traditional economic models, the narrowly self-interested, well-informed, highly disciplined and cognitively formidable decision maker is often referred to as:

homo economicus.

In traditional economic models, which of the following does NOT describe homo economicus:

impulsive

Corey is having difficulty deciding between two dishwashers, A and B. As shown in the accompanying diagram, A makes more noise than B, but is cheaper. Ideally, Corey would like a dishwasher that is both quiet and inexpensive. If Corey behaves like most decision-makers, then the addition of option C would:

increase his likelihood of picking A.

A game in which the first player has the power to confront the second player with a take-it-or-leave-it offer is the:

ultimatum bargaining game.

In laboratory experiments, the behavior of players in the ultimatum game suggests that people:

value fairness.

Because every policy change generates winners and losers, loss aversion generates:

status quo bias.

The general resistance to change, often stemming from loss aversion, is known as:

status quo bias.

The Weber-Fechner law is the relationship according to which the perceived change in any stimulus:

varies according to the size of the change measured as a proportion of the original stimulus.

Widespread behavioral evidence suggests that people:

weigh losses more heavily than gains.

Suppose Firm A and Firm B are considering whether to invest in a new production technology. For each firm, the payoff to investing (given in thousands of dollars per day) depends upon whether the other firm invests, as shown in the payoff matrix below. Which fo the following statements is correct?

"Invest" is a dominated strategy for Firm A.

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. An industry spy comes to firm B and claims to know what firm A has decided. Given that each firm already knows the payoff matrix, how much would this information be worth to firm B?

$0

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. Invest/invest 20 for both Invest/not 70 for A 5 for B Not/invest 5 for A 70 for B Not/not 50 Both

$0 Not worth squat.

Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. If Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price, then what will be Mega's economic profit?

$100

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. If both players choose their dominated strategy they will each earn ______, and if both players choose their dominant strategy they will each earn______.

$1000; $900

The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. If Column Cafe publishes coupons and Row Restaurant does not, then Row Restaurant will earn ______, and Column Cafe will earn ______.

$10; $200

Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 while Acme continues to comply with the collusive agreement, then Mega's economic profit will be ______.

$150

Refer to the figure below. In the matrix above: Jess Left Cory right A/A both 5 A/B 0 for Jess -5 For Cory B/A 10 for Jess 0 for Cory B/B -5 for Jess 10 for Cory

Neither Cory nor Jess has a dominant strategy

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. To Mexico, the payoff to cheating is either:

$80 Million or $110 Million

Refer to the figure below. In this game, how many dominant strategies does Player B have?. Up/left 5 for A 30 for B up right 10 for A 12 for B down left -2 for A 10 for B 8 for A 15 for B

0

Refer to the figure below. In this game, how many dominant strategies does Player A have? Up/left 5 for A 30 for B Up/right 10 A 12B Down/Left -2A 10B Down/Right 8A 15B

1

Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. If one store is located at A and the other store is located at C:

200 people will shop at the store A, and 100 people will shop at store C

Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. If before Tracy chose, Amy could make a credible commitment to choose either the top or bottom branch when her turn came, then we would expect Tracy to get a payoff of ______ and Amy to get a payoff of ______.

300; 200

What is the Nash equilibrium of this game? Player A Vs. Player B Up left 5 for A 30 for B Up right 10 for A 12 for B Down left -2 for A 10 for B Down Right 8 for A 15 for B

A chooses Up, B chooses Left

The table below shows how the payoffs to two political candidates depend on whether the candidates run a positive or negative campaign. The payoffs are given in terms of the percentage change in the number of votes received. Running a negative campaign is ______ for the ______ candidate.

A dominant strategy; democratic

Refer to the figure below. Player B can infer that Player A will: Up/L 5 for A 30 for B UP/R 10A 12B Down/Left -2A 10B Down/Right 8 for A 15 for B

Always choose up

_______ is an estimation technique that begins with an initial approximation, which is then modified in accordance with additional information.

Anchoring and adjustment

Suppose two companies, Macrosoft and Apricot, are considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). Which of the following statements is correct?

Apricot does not have a dominant strategy

Suppose two companies, Macrosoft and Apricot, are considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). Suppose Apricot makes its decision first, and then Macrosoft makes its decision after seeing Apricot's choice. What will be the equilibrium outcome of this game?

Apricot will develop a touch-screen t-shirt, and Macrosoft will not.

Before it became illegal, cigarette manufacturers once relied heavily on TV advertising. According to the textbook, when the government banned TV advertising, the cigarette manufacturers:

Benefited because the decision about whether to advertise on TV was a prisoner's dilemma

Psychological incentives

Can serve as commitment devices

Emotions like guilt and sympathy

Can solve commitment problems

Something that changes incentives so as to make otherwise empty threats or promises credible is called a:

Commitment device

Commitment devices are necessary when:

Following through on a threat or promise is not in a player's best interest

P-TV and QRS-TV are trying to decide whether to air a sitcom or a reality show in a given time slot. Viewers like both sitcoms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. P-TV will air a sitcom:

Never. Honestly it is probably for the best.

P-TV and QRS-TV are trying to decide whether to air a sitcom or a reality show in a given time slot. Viewers like both sitcoms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. Suppose QRS-TV enters into an agreement with P-TV that gives QRS-TV the exclusive right to air a reality show during this time slot. QRS-TV would be willing to pay P-TV _______ in order to persuade P-TV to enter into this agreement.

No more than $10 million

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. If Player 2 could make a credible commitment to choose either Up or Down when his or her turn came, then what would Player 2 do?

Player 2 would commit to choosing Down

_______ is the general resistance to change, often stemming from loss aversion.

Status quo bias

Suppose Chelsea reads two news articles about future house prices. The first article predicts that house prices will fall next month, and the second predicts that house prices will rise next month. Valerie reads the same two articles, but she first reads the one that predicts that house prices will rise, and then reads the one that predicts that house prices will fall. If Chelsea and Valerie know very little about future house prices, and each uses anchoring and adjustment to form her assessment, then, all else equal, which of them is more likely to think that house prices will rise next month?

Valerie

According to the availability heuristic, which of the following will make Katie more likely believe that she will win a lot of money if she buys a lottery ticket?

Watching a news report about someone winning 2 million dollars playing the lottery

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. Is this game a prisoner's dilemma

Yes, because if both firms played their dominated strategy, they each would earn a higher payoff than when they both play their dominant strategy.

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. Suppose Player 1 and Player 2 enter into a binding agreement in which Player 1 agrees to pay Player 2 a fixed amount of money to get Player 2 to play Up when it is Player 2's turn. How much will Player 1 have to pay Player 2 to get Player 2 to play Up?

at least $20

The rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory is the:

availability heuristic.

Suppose Michael is willing to drive across town to save 40 percent on a sweatshirt with a list price of $80. If Michael is rational, this implies that he should

be willing to drive across town to save 10 percent on a guitar with a list price of $320.

Suppose Alyssa is willing to drive across town to save 50 percent on a soccer ball with a list price of $40. If Alyssa is rational, this implies that she should:

be willing to drive across town to save 5 percent on a bike with a list price of $400.

Suppose you would have to pay Troy at least $12 to get him to part with his new water bottle. Loss aversion implies that if Troy had not yet purchased the water bottle, he would:

be willing to pay less than $12 to buy it.

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. In the Nash equilibrium of this game:

both Mexico and OPEC cheat on the agreement.

Consider the accompanying payoff matrix. When Row Resorts and Column Cruises both play their dominant strategy:

both firms do worse than if they had both played their dominated strategy.

P-TV and QRS-TV are trying to decide whether to air a sitcom or a reality show in a given time slot. Viewers like both sitcoms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. In the equilibrium of this game:

both stations will air reality shows.

The present aim standard of rationality accommodates a much _______ range of observed behavior than traditional economic models, but has been criticized because the model is too _______.

broader; flexible

The fact that people sometimes regret having made a decision with perfectly predictable consequences:

cannot be explained by traditional economic models.

Traditional economic models _______ the fact that people sometimes regret making decisions with perfectly predictable consequences.

cannot explain

Suppose Paul just saw a car accident while driving home from work. According to the availability heuristic, this is likely to make Paul think that:

car accidents are more common than they really are.

Suppose Whitney is willing to pay $200 to buy a new phone. Loss aversion implies that if Whitney already had just bought the phone, you would:

have to pay her more than $200 to part with it.

Suppose Vincent is willing to pay $350 to buy a new bike. Loss aversion implies that if Vincent had just bought the bike, you would:

have to pay him more than $350 to part with it.

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. For both Joe and Sam, ____ is a ___

cutting the price to $2.90; dominant strategy

In the realm of public policy, loss aversion makes it:

difficult to enact policy changes.

According to the adaptive rationality standard, people might choose to have unselfish preferences because:

doing so could be in their own best interest.

If an entity is fungible, then its individual units are:

interchangeable.

According to the Weber-Fechner law, the perceived size of a change in a stimulus will be large when the change in the stimulus:

is large in proportion to the original stimulus.

Suppose Danielle receives the highest grade in the class on the first exam in her economics course. Regression to the mean implies that Danielle:

isn't likely to do as well on the second exam.

According to the representative heuristic, people are more likely to believe that something belongs to a given category if:

it shares characteristics with the stereotypical members of that category.

Rules of thumb that reduce computation costs are known as:

judgmental and decision heuristics.

According to the Weber-Fechner law, when the change in a stimulus is large in proportion to the original stimulus, the perceived size of the change will be:

large

Regression to the mean refers to the phenomenon in which unusual events are:

likely to be followed by events that are more normal.

The tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude is known as:

loss aversion.

According to the adaptive rationality standard, individuals:

might rationally choose to have preferences that are not self-interested.

In numerous experiments, researchers have found that if a Proposer and a Responder are asked to split a fixed sum on money in the ultimatum bargaining game, the Proposer will, on average, offer the Responder:

more than would be predicted by standard economic theory.

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. To an economic naturalist, this model helps explain why political candidates:

move toward more centrist positions during campaign season.

Most cartels cease to be effective because:

of the incentive to cheat on the cartel agreement

Consider the accompanying payoff matrix. If Row Resorts keeps its rates high, then Column Cruises would receive the highest payoff if it:

offered reduced rates.

Traditional economic models cannot explain why:

people donate money to charity completely anonymously.

The phenomenon that unusual events are likely to be followed by more nearly normal is known as:

regression to the mean.

According to the _______, if Carla has many of the characteristics of a stereotypical basketball player (for example, she is tall), then people will be more likely to assume she plays basketball.

representative heuristic

The _______ is the rule of thumb according to which people's belief about the likelihood that something belongs to a given category increases with the extent to which it shares characteristics with the stereotypical members of that category.

representative heuristic

In sequential games, the player who moves first:

sometimes has an advantage and sometimes has a disadvantage.

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Quick Buck and Pushy Sales decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Quick Buck cheats by reducing its price to $1 and Pushy Sales matches the price cut, then if consumers are evenly split between the two firms, what will be Quick Buck's economic profit?

$1500

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. invest/invest 20 both invest/not 70 A 5 for B Not/invest 5 for A 70 for B Not/Not both 50 An industry spy from firm A comes to firm B and offers to pay B in exchange for B's certain and enforceable promise to not invest. What is the most that firm A will be willing to pay B to not invest?

$50 million

Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Price at $4 quantity 0 Straight line to $0 for 200 Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 and Acme matches the price cut, then if consumers are evenly split between the two firms, Acme's economic profit will be ______.

$75

Suppose two companies, Macrosoft and Apricot, are considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). Suppose Apricot makes its decision first, and then Macrosoft makes its decision after seeing Apricot's choice. What will happen if, before Apricot chooses, Macrosoft announces that it is going to develop a touch-screen t-shirt no matter what Apricot does?

Apricot will develop a touch-screen t-shirt, and Macrosoft will not because Macrosoft's threat is not credible.

One thousand adults live in Milltown. Every day, they all leave work at 4:30 p.m., arrive home at exactly 5:00 p.m., and go to bed at 9:00 p.m. Three fundraisers, Alpha, Beta, and Charlie, have targeted Milltown's population. To get a donation, they must call Milltown's residents after they get home from work but before they go to bed. Because the charities raising the funds are identical, the first to call a willing donor will get the donation. Beta's manager has decided that the best time to call is 7:00 p.m. because it is exactly halfway between 5:00 p.m. and bedtime. Which of the following is true?

Beta's manager did not choose wisely.

The table below shows how the payoffs to two political candidates depend on whether the candidates run a positive or negative campaign. The payoffs are given in terms of the percentage change in the number of votes received. Positive/positive 0 for both Pos/neg -5 for D +5 for R Neg/Pos +5 for D -5 for R Neg/Neg -2 both In the Nash equilibrium of this game

Both candidates run negative campaigns

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. If candidate Y is running against candidate Z

Both candidates will have an incentive to move toward each other's position.

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. In the Nash equilibrium of this game

Both firms cheat on the agreement

Suppose one group of people is asked to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket, and a second group of people is asked to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets. According to the rational choice model, which group should be more likely to say they would still attend the performance?

Both groups should be equally likely to say they would attend.

Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. If before Tracy chose, Amy could make a credible commitment to choose either the top or bottom branch when her turn came, then Amy would commit to the ______ branch and Tracy would choose the ______ branch.

Bottom; Top

_______ is the property of an entity whose individual units are interchangeable.

Fungibility

In a repeated prisoner's dilemma players:

Can sustain cooperation by employing a tit-for-tat strategy

A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n):

Cartel

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. Cheat/cheat 40 Both Cheat/Abide 80 for BRU 0 For BW Abide/Cheat 0 for BRU 80 For BW Cheat/Cheat 45 both For Bagel World, _______ is a _____

Cheating on the agreement; dominant strategy

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. For Joe, keeping his price at $3 per gallon is a

Dominated strategy

Suppose Firm A and Firm B are considering whether to invest in a new production technology. For each firm, the payoff to investing (given in thousands of dollars per day) depends upon whether the other firm invests, as shown in the payoff matrix below. What is the nash equilibrium of this game?

Firm A doesn't invest, and Firm B doesn't invest.

The last time you went on a road trip, you noticed that there were several fast food outlets clustered near some freeway exits, but none at the others. Now that you are familiar with Hotelling's model, you know that the reason for this is:

Firms vying for a favorable location

One thousand adults live in Milltown. Every day, they all leave work at 4:30 p.m., arrive home at exactly 5:00 p.m., and go to bed at 9:00 p.m. Three fundraisers, Alpha, Beta, and Charlie, have targeted Milltown's population. To get a donation, they must call Milltown's residents after they get home from work but before they go to bed. Because the charities raising the funds are identical, the first to call a willing donor will get the donation. To an economic naturalist, this scenario would explain why:

Fundraising calls typically occur shortly after people arrive home from work.

A credible threat is:

In the Threatener's interest to carry out

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Which of the following statements is true? Lee/jordan comedy 3 for Lee 5 for J Lee comedy Jordan documentary 1 for both Lee documentary Jordan comedy: 2 for both Lee doc jordan doc 5 for lee 3 for Jordan

Jordan does not have a dominant strategy

According to the representative heuristic, people will tend to think that Karen is a vegetarian if:

Karen has many of the characteristics of a stereotypical vegetarian.

_______ is the tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude:

Loss aversion

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. In this situation, the Nash equilibrium yields A:

Lower payoff than each would receive if each played his dominated strategy

Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. The equilibrium to the game results in ______ for Amy and Tracy relative to what they could get if they could solve their ______.

Lower payoffs; commitment problem

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. Which of the following statements is correct

Mexico's dominant strategy is to cheat on the agreement.

Suppose Firm A and Firm B are considering whether to invest in a new production technology. For each firm, the payoff to investing (given in thousands of dollars per day) depends upon whether the other firm invests, as shown in the payoff matrix below. is this game a prisoner's dilemma?

No.

Lee and Cody are playing a game in which Lee has the first move at A in the decision tree shown below. Once Lee has chosen either aggression or cooperation, Cody, who can see what Lee has chosen, must choose either aggression or cooperation at B or C. Both players know the payoffs at the end of each branch. Suppose Cody tells Lee that if Lee chooses aggression, then Cody will also choose aggression, and if Lee chooses cooperation, then Cody will also choose cooperation. Cody's statement is:

Not credible.

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. Extreme Left X is around 18 Y at 26 Z at 59 Extreme right is 100 If Candidate X is running against Candidate Z, by moving to the right Candidate X would:

Not lose any votes from voters on the left and gain some votes from Z

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. which of the following statements is correct?

OPEC does not have dominant strategy.

The use of psychological incentives to solve commitment problems would be least effective in games played:

Once between strangers

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. What is the equilibrium outcome of the game?

Player 1 chooses Down and Player 2 chooses Up. $6 for player 1 $11 for player 2

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. What is the equilibrium outcome of this game?

Player 1 chooses up and player 2 chooses down. $30 for player 1 $50 for player 2

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. Invest/invest 20 for both invest/not invest 70 for A 5 for B Not/invest 5 for A 70 for B not/not 50 both This game is an example of a:

Prisoners dilemma

_______ is the phenomenon that unusual events are likely to be followed by more nearly normal ones.

Regression to the mean

Suppose Evan and Robert are each filling out a separate survey about parking on campus. On Evan's survey, the first question asks about whether he thinks the fine for parking illegally on campus should be $50, and on Robert's survey the first question asks about whether he thinks the fine should be $100. For both Evan and Robert, the second question asks how much each thinks the fine currently is. If Evan and Robert know nothing about the parking fines on campus, but each uses anchoring and adjustment to form his assessment, then, all else equal, you would expect:

Robert's estimate of the current fine to be higher than Evan's.

According to the text, everyone shouts at a party in order to be heard. If instead everyone spoke at a normal volume people would still be heard, but people continue to shout because:

Shouting is a dominant strategy

According to the textbook, the owners of restaurants encourage tipping in order to:

Solve a commitment problem with their wait staff

Game theory provides tools that are used to model:

Strategic interdependencies

Typically, when people use anchoring and adjustment to estimate something, the importance of _______ in influencing their assessment is too large.

The Anchor

_______ is the relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus.

The Weber-Fechner law

Consider two coupons: one offers 10 percent off a pair of jeans that costs $100, and the other offers 50 percent off a pair of sunglasses that costs $20. Using either coupon requires driving to the shopping mall across town. According to the Weber-Fechner law, which coupon will people tend to perceive as being more valuable?

The coupon for the sunglasses since 50 percent is greater than 10 percent.

When researchers compare people who are asked to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket to people who are asked to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets, which group is more likely to say that they would still attend the performance?

The lost $10 group

The dilemma in a prisoner's dilemma is that:

The players would be better off if they both played a dominated strategy

Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested, and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. Suppose residents of each island often play prisoner's dilemma games, always matched with a person from the same island, but not a person who they know or will play with again. If the same number of games is played on each island, you would expect:

The residents of Altruism to have higher average payoffs than the residents of Avarice

A commitment problem exists when people cannot achieve their goals because:

They cannot make credible threats or promises

Refer to the figure below. If Jess chooses A, then Cory's best response is: A/A 5 both A/B 0 for Jess -5 for Cory B/A 10 for Jess 0 for Cory B/B -5 for Jess 10 for Cory

To chose A

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. Suppose the game above is repeated every day, and both firms adopt the following strategy: cooperate on the first day, then if the other firm cheats, cheat the next day, and if the other firm abides, abide the next day. This type of strategy is known as:

a Tit-for-tat strategy

Lee and Cody are playing a game in which Lee has the first move at A in the decision tree shown below. Once Lee has chosen either aggression or cooperation, Cody, who can see what Lee has chosen, must choose either aggression or cooperation at B or C. Both players know the payoffs at the end of each branch. In the equilibrium of this game, Lee chooses ______, and then Cody chooses ______.

agression; cooperation

Satisficing is the decision-making strategy that:

aims for adequate results when achieving optimal results may necessitate an excessive expenditure of resources.

The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. If Row Restaurant publishes coupons, Column Cafe would earn the highest profit if it:

also publish coupons

An estimation technique that begins with an initial approximation, which is then modified in accordance with additional information, is known as:

anchoring and adjustment.

According to the adaptive rationality standard, people's goals:

are a choice variable, and people's choices about which goals to pursue are made efficiently.

Fungibility is the property of an entity whose individual units:

are interchangeable.

The adaptive rationality standard:

assumes that people's goals are themselves a choice variable and that people's choices about which goals to pursue are made efficiently.

Relative to a world in which some people are motivated by nonmaterial incentives, if all people were motivated solely by financial incentives, then:

both business transactions and personal interactions would be different.

Suppose that you have noticed that almost all of the car dealers in your city are located along a three-block stretch of the same street. A likely reason for this clustering of car dealers is that:

each dealer is attempting to locate closest to the customers.

Status quo bias is the:

general resistance to change, often stemming from loss aversion.

Brandon is having difficulty deciding between two jobs, X and Y. As shown in the accompanying diagram, X entails a greater risk of injury than Y, but pays more. Ideally, Brandon would like a job that both pays well and does not entail a high risk of injury. If Brandon behaves like most decision-makers, then the addition of option Z would:

increase his likelihood of picking Y.

The present aim standard of rationality:

takes people's goals as given and assumes that people are efficient at pursuing whatever goals they happen to hold at the moment of action.

According to the representative heuristic, you are more likely to assume that someone you just met is an architect if:

that person has many of the characteristics of an architect.

The relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus is known as:

the Weber-Fechner law.

According to the availability heuristic, we often estimate the frequency of an event by:

the ease with which we can recall relevant examples.

The ultimatum bargaining game is a game in which:

the first player confronts the second player with a take-it-or-leave-it offer.

Suppose Anna just received a parking ticket. According to the availability heuristic, this will tend to make Anna:

think people frequently receive parking tickets.

Last week, Gina's bakery sold fewer cupcakes than ever before. Regression to the mean implies that the bakery:

will sell more cupcakes this week.

Suppose Stephen's first novel makes the New York Times bestseller list. Regression to the mean implies that his second novel:

won't be as popular as his first novel.

Suppose Bobby just watched a documentary about the massive decline in house prices during the Great Recession. According to the availability heuristic, this is likely to make Bobby:

worry that the price of his own house might fall.