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Exam 11: Behavioral Decision Theory

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Question 21

Multiple Choice

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Which of the following is not a concept that helps explain the framing effect?

A) Diminishing sensitivity
B) Transitivity
C) Loss aversion
D) Reference dependence
E) Risk aversion

F) B) and C)
G) All of the above

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Question 22

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As part of expected utility theory, what principle states that preferences should remain the same no matter how preferences are measured and no matter how decision alternatives are described?

A) Probability principles
B) Transitive principle
C) Choice deferral principle
D) Domination principle
E) Invariance principle

F) B) and D)
G) A) and B)

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Question 23

Multiple Choice

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Consumers are more likely to buy ground beef described as 75% lean as opposed to 25% fat.This is an example of which phenomenon?

Define the endowment effect and provide an example of this effect.

Nick is considering buying a new bicycle.Here are his options: Bike A- costs $100.It has a 60% chance of breaking down in the next year.Bike B- costs $200.It has a 20% chance of breaking down in the next year. Bike C- costs $400.It has a 15% chance of breaking down in the next year. Which bike should Nick purchase based on expected utility theory of repair costs?

The framing effect is in direct violation to the invariance principle.

Nick is consideriog buyiog a new bicycle.Here are his options: Bike A- costs $100.It has a 60% chance of breaking down in the next year.Bike B- costs $200.It has a 20% chance ofbreakiog down in the next year.Bike C- costs $400.It has a 15% chance ofbreakiog down in the next year. Which bike should Nick purchase based on expected utility theory of repair costs?

Liz is considering buying a new refrigerator for $1,000.It has a 20% chance of requiring a repair in the next year. The expected value in terms of repair costs for this purchase is $1,200.

Rogaine (a hair replenishment product) uses the framing effect when it states that 26% of men who use the product get excellent results.

The is the tendency to view a product as more valuable if one owns it.

In the endowment effect and the sunk cost effect, consumers underestimate:

Terri decides to take golf lessons and pays $300 for 10 lessons.After the 4th lesson, Terri has decided she hates golf.She continues to play (unhappily) saying, "I don't want to waste the $300!" Terri is experiencing the:

Which of the following statements about the concept of loss aversion, as it relates to the framing effect, is true?

suggest(s) all alternatives can be rank-ordered from worst to best and that alternatives with highest expected values should be preferred.

Sally buys a painting at a garage sale for $25.A houseguest sees the painting hanging in Sally's house and offers to buy the painting from her for $50.Sally does not want to sell the painting despite the fact that she would never pay this much for a similar painting.

Selective thinking influences the degree to which consumers rely on the price-quality heuristic.

Consumers often overestimate the strength the relationship between price and quality, leading to an over-reliance on the price-quality heuristic.This is due to what phenomenon:

Questions about money lead consumers to focus on money.Questions about probabilities lead consumers to focus on probabilities.This is the basis of what concept?

Price bundling is often used by firms to segregate consumer losses.

Consider the following example: Imagine that Mary is planning a vacation and has to choose between two vacation spots.Based on the information, if asked to choose the best spot, which would Mary choose? If asked to reject a choice, which vacation spot would Mary reject? Why? Spot A average weather average beaches medium-quality hotel medium-temperature water average nightlife Spot B lots of sunshine gorgeous beaches and coral reefs ultra-modern hotel very cold water very strong winds no nightlife