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					HOMEWORK 1 ECO23/PSY23 FALL 2011 UDAYAN ROY

This homework is due on October 12, 2011, in class. That is also the day of the first midterm. The
answers are all there in my PowerPoint lectures. Read them carefully.


1. Behavioral economics studies cases where people persistently diverge from which of the following
assumptions of standard economics?

    a)   people know what they like (known preferences)
    b)   people know what is available (market information)
    c)   people spend more in times of inflation (money circulation)
    d)   people prefer more money to less money (money value)
    e)   people choose rationally to maximize their own “utility” (rational choice)

Nudges and experiments

2. _____ economics relies on _______ data to analyze the economy. Under the heavy influence of ____,
_____ economics relies heavily on ______ data.

    a.   Behavioral; real-world; psychology; standard (or traditional); experimental
    b.   Behavioral; real-world; neuroscience; standard; experimental
    c.   Standard; real-world; psychology; behavioral; experimental
    d.   Standard; experimental; psychology; behavioral; real-world

3. In their book, Nudge, Richard Thaler and Cass Sunstein argue that policies need to be guided by

    a.   Libertarianism
    b.   Paternalism
    c.   Libertarian paternalism
    d.   The profit motive

4. According to libertarianism,

    a. Individuals and businesses by and large make rational decisions. The government should take a
       hands-off attitude towards private enterprise and private choice
    b. Human beings are vulnerable to much predictable irrationality. Therefore, it is the government’s
       job to intervene to protect ourselves from our own mistakes
    c. Although individuals and businesses often make rational decisions, they also show predictably
       irrational behavior. Policy makers should guide or ‘nudge’ people to the choices that the people
       themselves would regard as desirable, and without restricting their freedom to act as they wish
    d. The resources of a society should be shared equally

5. According to paternalism,

    a. Individuals and businesses by and large make rational decisions. The government should take a
       hands-off attitude towards private enterprise and private choice
    b. Human beings are vulnerable to much predictable irrationality. Therefore, it is the government’s
       job to intervene to protect ourselves from our own mistakes
    c. Although individuals and businesses often make rational decisions, they also show predictably
       irrational behavior. Policy makers should guide or ‘nudge’ people to the choices that the people
       themselves would regard as desirable, and without restricting their freedom to act as they wish
    d. The resources of a society should be shared equally

6. According to libertarian paternalism,

    a. Individuals and businesses by and large make rational decisions. The government should take a
       hands-off attitude towards private enterprise and private choice
    b. Human beings are vulnerable to much predictable irrationality. Therefore, it is the government’s
       job to intervene to protect ourselves from our own mistakes
    c. Although individuals and businesses often make rational decisions, they also show predictably
       irrational behavior. Policy makers should guide or ‘nudge’ people to the choices that the people
       themselves would regard as desirable, and without restricting their freedom to act as they wish
    d. The resources of a society should be shared equally

Violations of the assumptions of standard economics

7. Behavioral economics studies cases where people persistently diverge from which of the following
assumptions of standard economics?

    a)   people know what they like (known preferences)
    b)   people know what is available (market information)
    c)   people spend more in times of inflation (money circulation)
    d)   people prefer more money to less money (money value)
    e)   people choose rationally to maximize their own “utility” (rational choice)

8. An example of costly choice removal—or, a person paying money to remove a choice option—would
be

    a) Paying for an all-you-can eat option at the local KFC restaurant
    b) Spending money for clothes using a high-interest credit card
    c) Borrowing money to buy a new sports car that will rapidly depreciate in value
    d) A recovering alcoholic paying for a prescription to Antabuse (disulfiram) which causes alcohol to
       be nauseating
    e) Spending all of your savings on an addictive substance like heroin

9. The widespread presence of people paying to remove a choice option requires irrationality because

    a) If paying to remove a choice is rational, then it means the person would make irrational choices
       in the presence of the option.
    b) If the person would NOT make irrational choices in the presence of the option, then paying to
       remove the choice is irrational.
    c) Either A or B MUST be true, therefore paying to remove a choice indicates irrationality.
    d) The completely rational, utility-maximizing model of a human being suggests that people often
       make choices that they know will reduce their utility.
    e) Crazy people are a significant part of the population

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10. People are said to engage in costly choice removal when they

    a. Take costly measures to make certain options unavailable to their children
    b. Take costly measures to make certain options unavailable to themselves
    c. Reject an expensive option and choose a cheap option, even when the cheap option provides no
       benefit at all
    d. Unreasonably assume that the costliest item on the menu should be avoided at all costs

Dual-self Model I

11. In an experiment discussed in class, when asked to compare (i) $1.00 today to (ii) $1.05 tomorrow,
most people picked _____. When asked to compare (iii) $1.00 a year from today to (iv) $1.05 a year plus
a day from today, most people picked _____. These results are consistent with _____.

    a.   (i); (iii); the standard economic model of rational individuals
    b.   (i); (iv); the standard economic model of rational individuals
    c.   (ii); (iv); the standard economic model of rational individuals
    d.   (i); (iv); a non-standard model that assumes that each individual adopts one persona when
         making decisions about the future, and a different persona when making decisions that affect
         the present

12. In an experiment discussed in class, when asked to compare (i) fruit for lunch today to (ii) chocolate
for lunch today, most people picked _____. When asked to compare (iii) fruit for lunch a month from
today to (iv) chocolate for lunch a month from today, most people picked _____. These results are
consistent with _____.

    a.   (i); (iii); the standard economic model of rational individuals
    b.   (ii); (iv); the standard economic model of rational individuals
    c.   (ii); (iii); the standard economic model of rational individuals
    d.   (ii); (iii); a non-standard model that assumes that each individual adopts one persona when
         making decisions about the future, and a different persona when making decisions that affect
         the present

13. The experiments discussed in the questions above provide evidence for

    a.   The rational choice assumption of standard economic theory
    b.   Hyperbolic discounting
    c.   Diversification bias
    d.   anchoring

Dual-self Model II

14. In examining different dual-self models of consumer choice, Thaler and Shefrin’s “Planner” is similar
to

    a) Fudenberg and Levine’s long-run, patient self
    b) Thaler and Shefrin’s “Doer”

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    c) Fudenberg and Levine’s short-run, impulsive selves
    d) Adam Smith’s “The Passions”
    e) Loewenstein’s “Affective” or “Visceral” side

15. In examining different dual-self models of consumer choice, Thaler and Shefrin’s “Doer” is similar to

    a)   Thaler and Shefrin’s “Planner”
    b)   Fudenberg and Levine’s long-run, patient self
    c)   The rational human of standard economic theory
    d)   Adam Smith’s “Impartial Spectator”
    e)   Fudenberg and Levine’s short-run, impatient selves

16. Adam Smith’s “Impartial Spectator” is similar to

    a)   Thaler and Shefrin’s “Doer”
    b)   Fudenberg and Levine’s long-run, patient self
    c)   The rational human of standard economic theory
    d)   Thaler and Shefrin’s Planner
    e)   B, C, & D

17. Adam Smith’s “The Passions” is similar to

    a)   The rational human of standard economic theory
    b)   Thaler and Shefrin’s “Planner”
    c)   Fudenberg and Levine’s short-run impulsive selves
    d)   Thaler and Shefrin’s “Doer”
    e)   C and D

18. Which of the following is NOT similar to the “cold” state?

    a)   Adam Smith’s “The Passions”
    b)   Fudenberg and Levine’s long-run, patient self
    c)   The rational human of standard economic theory
    d)   Adam Smith’s “Impartial Spectator”
    e)   Thaler and Shefrin’s “Planner”

19. The “hot” state is similar to

    a)   The rational human of standard economic theory
    b)   Adam Smith’s “The Passions”
    c)   Fudenberg and Levine’s short-run impulsive selves
    d)   Thaler and Shefrin’s “Doer”
    e)   B, C & D

20. Which emotions would NOT be represented by the “affective” or “visceral” side of the dual-self
consumer?

    a) Hunger

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b)   Forgiveness
c)   Anger
d)   Fear
e)   Lust




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ANSWER SHEET HOMEWORK 1 ECO23/PSY23 FALL 2011 UDAYAN ROY

Name: ___________________________________________

Date: ____________________________________




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