ECON 102 Chapter 10 (Consumer Choices and Behavioral Economics)

Utility refers to how much consumers utilize a product or service.

False

Substitution effect

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.

According to a news story, the website Stickk offers a service where you give them money that they will donate to charity if you fail to go to the gym as often as you promise to. (You can even have the money donated to an anti-charity - a cause you disprove of.) Why would anyone use this service? People who fail to go to a gym to work out as often as they promise

are overly optimistic about their future behavior in attending the gym regularly and Stickk provides a financial incentive for them to reach these goals.

According to behavioral economics, consumers

do not always behave rationally because they fail to ignore sunk costs.

The rule of equal marginal utility per dollar spend suggests that consumers maximize utility by

equalizing the marginal utility per dollar spent across goods and services.

According to the law of diminishing marginal utility, as the consumption of a particular good increases,

marginal utility decreases.

If people are uncertain whether the price of a product is high or​ low, they often compare the price to the previous price of the product.

True

In many cases, the popularity of people who use a product can make the product desirable.

True

In the ultimatum game, if neither the allocator nor the recipient cared about fairness, what would be the optimal distribution of $20.00?

$19.99 for the allocator and $0.01 for the recipient.

Network externality

A characteristic of a product in which its usefulness increases with the number of consumers who use it.

Sunk cost

A cost that has already been paid and cannot be recovered.

Rules of thumbs are guides to decision making that always produce optimal choices.

False

How does the fact that consumers apparently value fairness affect the decisions that businesses make?

Firms will not raise prices in response to an increase in demand.

Baseball writer Rob Neyer described attending a Red Sox game at Fenway Park in Boston and having a seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." What should Rob do?

He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.

In considering the attitudes of consumers toward fairness, which of the following have economists found to be true?

People attempt to treat other fairly, even if doing so makes them worse off financially.

In the ultimatum game, when the allocator and the recipient cares about fairness, how does that affect the distribution of $20.00?

Recipients usually reject offers of less than a 10 percent share.

Economically rational means that consumers and firms

take actions that are appropriate to reach goals given available information.

The optimal combination of pizza and coke you should consume is the one

where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke.

Marginal utility is more useful than total utility in consumer decision making because

optimal decisions are made at the margin.

In the presence of shortages, why would a firm, such as a restaurant with people waiting for a table or a theater with people waiting for a ticket, not raise prices when doing so would seem to increase profits?

- Increasing prices might result in short run gains at the expense of long run profits. - Increasing prices might alienate customers. - Increasing prices requires the firm to pay substantial "switching costs." - Both a and b.

Which of the following reasons do economists use to explain why people are overweight?

- People overvalue the utility from current choices. ​- People's preferences are not consistent over time. - People undervalue the utility to be received in the future. - All of the above explain why people are overweight.

Which of the following mistakes do consumers commonly commit when making decisions?

- They fail to ignore sunk costs. - They are unrealistic about their future behavior. - They take into account monetary costs but ignore nonmonetary opportunity costs. - All of the above are mistakes consumers commonly commit when making decisions.

1) When does the law of diminishing marginal utility hold​ true? 2) In which of the following situations does the law of diminishing marginal utility not hold?

1) It holds true in most situations involving the consumption of a good. 2) For methamphetamine addicts, the more dosages of the illegal drug, the more euphoric they become.

An article in the New York Times notes that classic rock star Tom Petty likes to perform in smaller venues that don't have as many seats as large venues such as Madison Square Garden in New York. According to the article, Petty insists that tickets to his concert be sold "below market price." The author of the article wondered why "Petty and his promoter would price tickets so low when there were clearly people willing to pay much, much more." 1) What is the best indicator that Petty sells tickets below market price? 2) Petty and his manager might want tickets to have prices below the market because

1) Scalpers are able to sell many tickets high above the original price. 2) below market prices allow poorer fans to attend the concert.

Consumers commonly commit the following three mistakes when making decisions:

1) They take into account monetary costs but ignore nonmonetary opportunity costs that don't involve explicitly spending money. 2) They fail to ignore sunk costs. 3) They are unrealistic about their future behavior.

In early 2015, gasoline prices in many parts of the United States had fallen to below $2.00 per gallon, which a news story called "one of the swiftest declines on record." 1) For most people, gasoline is likely to be Why is your answer important for predicting how much the quantity of gasoline demanded will increase as a result of the price decline? 2) When the price of a good declines, the income effect tells us that quantity demanded will ______________________ if the good is a normal good than if it is an inferior good.

1) a normal good because as incomes increase people drive more. 2) increase more

1) Assume that a consumer buys only two goods - pizza and Coke. He is faced with a budget constraint because he has a limited amount of income to spend on the two goods. All the following statements regarding the individual's demand curve for pizza are true except that... 2) When the price of pizza falls along the demand curve for pizza,

1) at each point on the demand curve, marginal utility from the consumption of pizza equals marginal utility from the consumption of Coke. 2) the consumer adjusts the consumption of both pizza and Coke following the rule of equal marginal utility per dollar.

Maya spends her $50 budget on two goods, cans of tuna and bottles of ginger ale. Initially, the marginal utility per dollar she spends on tuna is equal to the marginal utility per dollar she spends on ginger ale. Then the price of ginger ale decreases, while her income and the price of tuna does not change. 1) Her marginal utility from consuming ginger ale _____________________________. 2) The marginal utility per dollar she spends on ginger ale _______________________. 3) Because of the substitution effect, Maya will buy more ginger ale. Can we conclude that ginger ale is a normal good? 4) As Maya adjusts to the change in the price of ginger ale, her marginal utility per dollar spent on tuna will

1) does not change 2) increases 3) No, because normal and inferior goods designations are related to the income effect, not the substitution effect 4) increase because she will buy less tuna

In studying the consumption of very poor families in China, Robert Jensen and Nolan Miller found that in both Hunan and Gansu "Giffen behavior is most likely to be found among a range of households that are poor (but not too poor or too rich)." 1) "Giffen behavior" describes the purchase of 2) The poorest of the poor would be less likely to exhibit this behavior than people with slightly higher incomes because 3) If a good has an upward-sloping demand curve, then it has to be

1) more of a good when the price rises. 2) the poorest of the poor often cannot purchase more of a good when the price rises. 3) an inferior good, and the income effect would have to be larger than the substitution effect.

1) Utility is 2) Is it measurable?

1) the enjoyment or satisfaction a person receives from consuming one additional unit of a good or service. 2) No

The chapter states that: "When the price of a normal good falls, the income and substitution effects work in the same direction." This statement means:

If the price of a normal good falls, the income effect will increase quantity demanded while the substitution effect will increase quantity demanded, so these two effects are in the same directions.

According to the endowment effect, people appear to be behaving irrationally when they are unwilling to sell a good they already own in which of the following situations?

If they are offered a price greater than the price they would pay if they did not already own the good.

What is a budget constraint?

It is the limited amount of income available to consumers to spend on goods and services.

Dubai, one of the seven emirates that form the UAE, has a very high proportion of immigrants who account for more than 80 percent of its population. The city has been witnessing a massive growth in the construction sector fuelled by a very high demand for rental space in the city. This in turn led to an impressive increase in the availability of new rental property in Dubai. A substantial downward pressure was thus created on rental rates which declined by more than 50 percent earlier this year. With supply far exceeding the demand, industry analysts has earlier predicted a sharper fall in rental rates, given the construction boom. Which of the following, if true, can explain why rental rates in Dubai did not decline further?

Low rents have attracted many foreign firms, increasing overseas clients' demand for housing.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power, holding all other factors constant.

Marginal utility (MU)

The change in total utility a person receives from consuming one additional unit of a good or service.

What is the definition of marginal utility?

The change in utility from consuming an additional unit of a good or service.

What happens when consumption of a product is path dependent?

The cost of switching to a product with a better technology gives the product with the initial technology an advantage.

Utility

The enjoyment or satisfaction people receive from consuming goods and services.

What would need to be true for a demand curve to be upward sloping?

The good would have to be an inferior good and the income effect would have to be larger ( in absolute value) than the substitution effect.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

What happens when network externalities are present?

The usefulness of a product increases with the number of consumers who use it.

Budget constraint

The limited amount of income available to consumers to spend on goods and services.

Law of diminishing marginal utility

The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

Behavioral economics

The study of situations in which people make choices that do not appear to be economically rational.

Endowment effect

The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.

Las Vegas is one of the most popular tourist destinations in the United States. In November​ 2008, the Rio Hotel and Casino in Las Vegas dropped the price of its breakfast buffet to​ $5.99 for local​ residents, while keeping the regular price of​ $14.99 for nonlocals. ​ Why would the restaurant do​ this?

They were willing to trade off some profits to keep their regular customers happy.

LaToya is buying corn chips and soda. She has 4 bags of corn chips and 5 bottles of soda in her shopping cart. The marginal utility of the fourth bag of corn chips is​ 10, and the marginal utility of the fifth bottle of soda is also 10. Is LaToya maximizing​ utility?

This cannot be determined because we do not know the price of corn chips and soda and whether or not she fully spent her budget allocated to corn chips and soda.

The economic model of consumer behavior predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.

True

Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price.

When the price of a good declines, the ratio of the marginal utility to price rises, leading consumers to buy more of that good.

The marginal utility per dollar you are spending on iTunes music downloads is less than the marginal utility per dollar you are spending on Red Bull. According to the rule of equal marginal utility per dollar spent, what can you do to increase your total utility from consumption of music downloads and Red Bull?

You can increase your consumption of Red Bull.

The substitution effect is the change in the quantity demanded of a good that results from ________________________, holding constant the effect of the price change on the consumer purchasing power.

a change in price making the good more or less expensive relative to other goods

In which of the following situations are social influences on consumer decisions making likely to be greater: choosing a restaurant for dinner or choosing a brand of toothpaste to buy? Consumer decision making is likely to be more affected by social influences when

choosing a restaurant for dinner because this takes place publicly.

The law of diminishing marginal utility suggests that

consumers experience diminishing additional satisfaction as they consume more of a good or service.

Assume the price of CDs is $14 and of DVDs is $24. At those prices, Isabel consumes 15 CDs and 14 DVD's. Her marginal utility from the last CD is 121 and her marginal utility from the last DVD consumed is 250. Without changing the amount spent on CD's and DVD's, Isabel can increase her utility by consuming _________ CDs and _________ DVDs.

fewer; more

The income effect causes quantity demanded to _____________ when the price of a normal good decreases, and causes quantity demanded to ________________ when the price of an inferior good decreases.

increase, decrease

A budget constraint:

indicates the limited amount of income available to consumers to spend on goods and services.

How does using "rules of thumb" impact the likelihood of a consumer making an optimal choice? Consumer utility

may be sub-optimized because rules of thumb may not reflect current reality.

Marvin visits his aunt and uncle who live in Milwaukee. The Milwaukee Bucks basketball team is scheduled to play a home game against the Golden State Warriors during​ Marvin's visit. An online broker has a ticket for sale in Section 212 of the arena where the game will be played but the​ price, $75, is more than Marvin is willing to pay. From another online ticket broker he buys a ticket for​ $50 for a seat in Section 212 of the arena. On the day of the​ game, a friend of​ Marvin's uncle offers to pay Marvin​ $75 for his ticket. He declines the offer. ​Marvin's refusal to sell his ticket can be explained by

the endowment effect in which Marvin is not considering the nonmonetary opportunity cost of the ticket.

The construction of a nuclear power plant near a town was heavily opposed by the residents once they became aware of the health risks that the plant could pose if it became operational. The opposition to the construction was on various grounds. Although the town was located in an area with hardly any seismic activity, the inhabitants claimed that the power plant would still be dangerous. Apart from spent nuclear fuel, the plant would also release radioactive isotopes that can cause radiation poisoning to the inhabitants. Lobbyists in favor of the construction claimed that stopping now would lead to massive losses because the construction was half-way through and millions of dollars have already been invested. They also highlighted the power plant's potential to generate jobs. Not only would the plant reduce power shortages in this region, but it would also allow the state to trade excess power that would generate revenue for its government. The residents and the lobbyists most likely disagree on which of the following issues related to the power plant's construction?

whether expected benefits from constructing the plant will exceed the expected cost from the release of toxic pollutants.

Suppose that you are a big fan of the Harry Potter books. You would love to own a copy of the very first printing of the first book, but unfortunately you can't find it for sale for less than $5,000. You are willing to pay at most $200 for a copy, but can't find one at that price until one day in a used bookstore you see a copy selling for $10, which you immediately buy. If you keep the copy rather than sell it, then all of the following are correct except - you are behaving in a way that can be explained by the endowment effect. - you value the book you already own more than a book you do not yet own. - you have made choices that do not appear to be economically rational. - you are making a rational choice since the opportunity cost of the book is $5,000.

you are making a rational choice since the opportunity cost of the book is $5,000.