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Exam 7: Behavioral Economics and Game Theory

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Question 21

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Consider the following scenario to answer the questions that follow. Suppose that, in an experimental setting, 100 students are presented with two situations involving risk and return. The students are first asked to choose between Gamble A and Gamble B, where: Gamble A: The student will receive $1 million with a 100% probability. Gamble B: The student will receive $1 million with an 89% probability, $5 million with a 10% probability, and $0 million (nothing) with a 1% probability. The students are then asked to choose between Gamble C and Gamble D, where: Gamble C: The student will receive $5 million with a 10% probability. Gamble D: The student will receive $1 million with an 11% probability. -A student who is risk neutral would choose Gamble C,which has an expected value of ________,over Gamble D,which has an expected value of ________.

A) $0.5 million; $1 million
B) $0.5 million; $0.11 million
C) $0.11 million; $1 million
D) $1 million; $0.11 million
E) $5 million; $1 million

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

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Question 22

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What are the three ways that bounded rationality,or limited reasoning,can be explained?

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Bounded rationality,or limited reasoning...

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Question 23

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The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of volleyball. At this point in the game, the ball has just been hit to Deidra, and she chooses whether to hit right or hit left. At the same time, Ashley chooses whether to jump right (Deidra's right) or jump left (Deidra's left) . If a player receives a payoff of 1, the player wins the point; if the player receives a payoff of -1, the player loses the point. Use this information to answer the questions that follow. -Deidra ________ a dominant strategy,and this game ________ a Nash equilibrium.

For mathematical convenience,assuming that people are fully rational and self-interested:

When people want to maintain their current lifestyles and are reluctant to change,they may exhibit what is known as the:

Consider the following scenario to answer the questions that follow. In 2000, researchers Brigitte Madrian and Dennis Shea analyzed the 401(k) savings behavior of employees in a large U.S. corporation before and after an interesting change in the company 401(k) plan. Before the plan change, employees were not automatically enrolled as participants in the company 401(k) plan upon being hired and were required to complete paperwork if they wanted to opt in. After the plan change, new employees were automatically enrolled in the 401(k) plan and were required to complete paperwork if they wanted to opt out. The amount of time and effort required to either opt in or opt out was approximately equal. None of the economic features of the plan changed. -A finding of no significant difference in 401(k) plan participation after the plan change provides evidence that employee 401(k) participation decisions are made ________ and ________ effects do not exist in the context of 401(k) plan participation.

In 2011,Edward Cartwright,a behavioral economist,gave credit to the Nobel Prize-winning economist Herbert Simon for launching what Cartwright calls the "you cannot be serious attack" on the standard economic model.Cartwright cites a paper published by Simon in 1955 where the author uses the standard economic model to solve elegantly how a rational person should behave.After solving an equation for this rational person's optimal behavior,Simon states: My first empirical proposition is that there is a complete lack of evidence that,in actual human choice situations of any complexity,these computations can be,or are in fact,performed. Source: "A Behavior Model of Rational Choice." Quarterly Journal of Economics (1955) : 104. This statement by Simon can be best described as a call to:

The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of Rock,Paper,Scissors.If a player receives a payoff of 1,the player wins; if the player receives a payoff of -1,the player loses; if both players receive 0 (zero) ,the players tie.If Stan chooses paper and Eric chooses paper,Stan's payoff is ________ and Eric's payoff is ________.

Refer to the accompanying table.If Jeff confesses,Gerry will spend ________ years in jail if he also confesses and ________ years in jail if he keeps quiet.

Which general observation can be inferred from the observation of real people playing the ultimatum game?

Consider the following scenario to answer the questions that follow. Sarah and Laura are playing an ultimatum game where Laura is given an eight-slice pizza and asked to propose a way of splitting it with Sarah. When Sarah learns Laura's proposal, Sarah chooses whether to accept or reject the split. If Sarah accepts the split, both players receive the slices of pizza according to Laura's split proposal. If Sarah rejects the split, both players receive nothing. This game will be played only once, so Laura does not have to worry about reciprocity when making her choice. Assume that both players enjoy pizza and each would strictly prefer to eat more pizza than less. -The standard economic model predicts that Laura will offer Sarah ________ slice(s) and Sarah ________ accept the offer.

The traditional economic model conceptualizes the economy as made up of infinitely calculating,unemotional maximizers that have been called:

Suppose 600 cancer patients have identical diagnoses.The patients are separated into two groups of 300 and asked the following questions regarding a potentially beneficial radiation therapy treatment. The first group was given the following statement and then asked the following question: "Statistically,950 out of every 1,000 cancer patients survive more than two years following the radiation treatment.Would you be willing to undergo the radiation treatment?" The second group was given the following statement and then asked the following question: "Statistically,50 out of every 1,000 cancer patients die within the two years following the radiation treatment.Would you be willing to undergo the radiation treatment?" Suppose that 78% of the patients in the first group answered yes and that 31% of the patients in the second group answered yes.Because the first statement that was given to both groups essentially states the same statistical fact in a different way,the significant difference in the answers recorded for each group is likely an example of a ________ effect in decision-making.

When decision-makers face incentives that make it difficult to achieve mutually beneficial outcomes,we say they are in a(n) ________ dilemma.

Suppose 5,000 students were split into two groups of 2,500.Both groups were first presented with an image of a new high-end pair of shoes produced by UGG,a footwear company. The first group was given the following statement and then asked the following question: "The normal retail price of these shoes is $200.Would you be willing to pay $125 for them?" The second group was given the following statement and then asked the following question: "The normal retail price of these shoes is $450.Would you be willing to pay $125 for them?" Suppose that 13% of the students in the first group answered yes and that 63% of the students in the second group answered yes.It is likely that more students in the second group were willing to pay $125 for the pair of shoes because they were told the normal price was much higher.This is an example of a ________ effect in decision-making.

Suppose 500 residents of a dormitory are separated into two groups.The first group is asked the following questions in this order: "How happy are you with your experience living in the dormitory?" followed by "To how many social gatherings held in the dormitory have you been invited?" The second group is asked the following questions in this order: "To how many social gatherings held in the dormitory have you been invited?" followed by "How happy are you with your experience living in the dormitory? Further suppose that residents in the second group who reported that they had been invited to fewer social gatherings held in the dormitory reported being less happy with their experience living in the dormitory than did similar residents in the first group.This is an example of ________ effects.

In January,Home Depot offered a 10% off coupon and Lowe's did not.In February,Lowe's offered a 10% off coupon and Home Depot did not.In March,Home Depot offered a 10% off coupon and Lowe's did not.It is likely that Home Depot and Lowe's are both playing the ________ strategy.

The ________ game is a common game that behavioral economists use in an experimental setting to study how fairness enters into the rational decision-making process.

For the past five years,John S.has been purchasing Citizens of Humanity brand jeans each time he needs a new pair of jeans,even though a different brand,such as RocaWear or Ecko,would in all likelihood bring him more utility per dollar spent.A behavioral economist would suspect John S.is suffering from the ________ bias.

Consider the following scenario to answer the questions that follow. Suppose that, in an experimental setting, 100 students are presented with two situations involving risk and return. The students are first asked to choose between Gamble A and Gamble B, where: Gamble A: The student will receive $1 million with a 100% probability. Gamble B: The student will receive $1 million with an 89% probability, $5 million with a 10% probability, and $0 million (nothing) with a 1% probability. The students are then asked to choose between Gamble C and Gamble D, where: Gamble C: The student will receive $5 million with a 10% probability. Gamble D: The student will receive $1 million with an 11% probability. -According to the standard economic model (expected utility theory) ,a student who is risk neutral would choose Gambles ________ because they both have higher expected values than ________,respectively.