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Economics Chapter 8 Practice

Key Concepts:

Terms in this set (38)

__________ theory deals with how consumers plan for and deal with life's ups and downs.
Prospect
Which of the following are cognitive biases?
Hindsight bias
Overconfidence effect
Self-serving bias
Confirmation bias
Planning fallacy
___________ inconsistency is the tendency to systematically misjudge at the present time what you will want to do at some future time.
time
Evaluating consumption options in isolation rather than simultaneously is referred to as:
mental accounting
Which of the following form the basis of prospect theory?
a) Individuals are loss averse

b) Good and bad events are judged in relative terms to the status quo

c) Individuals experience diminishing marginal utility for gains

d) Individuals experience diminishing marginal dis-unity for losses
The __________ effect refers to irrelevant information unconsciously influencing people's estimates about the value of goods and services.
anchoring
Which of the following is not a common heuristic?
Following heuristic
Loss aversion provides an explanation for the __________ effect
endowment
Behavioral economists focus attention on
How people make decisions while neoclassical economists focus on predicting the decision.
___________ errors occur when people constantly make decisions that reduce the likelihood of getting what they want.
Systematic
Behavioral economics complements neoclassical economics by helping to explain
the fact that people will buy things on impulse
Which of the following are examples of precommitments that will help control the time-inconsistency problem?
Putting the alarm clock across the room.

Automatic payroll deductions for retirement savings.

Weight loss competitions
_____________ is an example of a self-control problem.
Planning to order a salad when eating out, but instead ordering a hamburger.
_____________ (two words) bias is the tendency that people have to favor any option that is presented to them as being the default option.
Status quo
An example of ___________ (two words) is when a person is more likely to litter in a place with lots of graffiti and trash than in a clean park.
framing effects
Which of the following reveal interesting facts about how individuals react to "good" and "bad" occurrences?
a) Individuals experience diminishing marginal utility for gains

c) Good and bad events are judged in relative terms to the status quo

d) Individuals experience diminishing marginal dis-unity for losses

e) Individuals are loss averse
System _________ (number) uses a lot of heuristics in the older parts of the brain to make quick, unconscious reactions.
1
____________ are low energy mental short cuts.
Heuristics
____________ effects are important to recognize because they can be manipulated by advertisers, lawyers and politicians in order to alter people's decisions.
Framing
The tendency that people have to put a higher valuation on anything that they currently posses than on identical items that they do not own is called:
the endowment effect
Experimental evidence for fairness includes
The ultimatum game

The dictator game
Feeling no sense of urgency to save for retirement might be considered
Myopia
Which of the following examples indicate that people are interested in fairness as well as self?
b) Purchasing "fair trade" products.

c) Obeying the law.

d) Giving to charity.
The tendency for people to favor any option that is presented to them as the default option is called
Status quo bias
____________ problems, or the inability to control your current self, are caused by time inconsistency.
self-control
Our brains are modular because they
have specific areas that deal with specific sensations, activities, and emotions.
_____________ describes the fact that human brains have hard time conceptualizing the future.
Myopia
Assuming that a person is more likely to be murdered than to die of stomach cancer is an example of the cognitive bias of
the availability heuristic
True or false: Systematic errors occur when people make the same decision error in similar situations.

False
True
True
Changes in people's preferences that are caused by new information altering their sense of whether situations are gains or losses is referred to as:
framing effects
System ____________ (number) uses the newer parts of the brain to undertake slow, deliberate, and conscious calculations.
2
The ______________ effect is the tendency that people have to put a higher valuation on anything that they currently posses than on identical items what they do not own.
endowment
________________ will help fight time-inconsistency problems.
Precommitments
Hard-wired heuristics may
make it very difficult for people to alter detrimental behaviors
Consumers pay for overpriced warranties because:
they incorrectly view the purchase of a good (that carries a warranty) in isolation
A credit card company that quotes a minimum payment that is typically less than what a borrower owes is making use of:
the anchoring effect
The utility-maximizing rule assumes that people:
evaluate all of their potential consumption options simultaneously in order to maximize total utility
In 2008, as the cost of some inputs rose, producers reduced the size of their packaging rather than increasing the price to consumers of their products. Which of the following does this illustrate?
Prospect theory
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