330 Summer 2021 More Practice Quiz 1 Questions

Economics 330 More Practice Exam 1 Questions
1. According to Kahneman’s Thinking Fast and Slow,
A. the quick System 1 is the central source for the majority of our behavior.
B. System 2 is responsible for any complex patterns of thoughts and ideas, System 1 cannot do so.
C. A and B.
D. None of the above.
2. An implication of Kahneman and Tversky’s prospect theory is that in order to enhance appeal,
A. give one larger gift rather than two smaller gifts of equal value.
B. car dealerships should not provide rebates but should just lower the price by the amount of the rebate
since that way taxes will be lower for the individual.
C. A and B.
3. According to class,
A. except for the last race, people bet less money on longshot horses than the rational model predicts.
B. in the last race of the day, it makes sense for a wise NU behavioral student to bet on the favorites.
C. A and B.
4. Based on class,
A. the representativeness bias explains the belief in the Sports Illustrated jinx.
B. In the famous jam study, persons were more likely to buy when presented with many choices than when
they were presented with only a few choices.
C. A and B.
5. According to class,
A. materialistic people tend to have unrealistic ideas about wealth and possessions.
B. education makes people sadder since ignorance is bliss.
C. A and B.
6. Based on class,
A. Kahneman’s comments on the recent re-thinking on happiness indicate that being married is bad for life
satisfaction.
B. we don’t adapt fully to health problems and a lack of autonomy.
C. A and B.
7. Based on the Jennifer Senor New York magazine article on parenting,
A. wealthier parents are more satisfied since they can afford child care to help them.
B. due to greater demands related to work, parents now spend less time with their children than in 1975.
C. A and B.
8. According to the readings,
A. Vernon Smith notes that people engage in rational decision on the basis of cognition alone.
B. Krugman argues that the best economics involves a forceful argument, backed by anecdotal evidence.
C. A and B.
9. If one believes prospect theory, to enhance appeal one should
A. segregate gains.
B. segregate losses.
C. A and B.
10. According to class
A. Decision weights in prospect theory are functions of the stated probabilities and must follow the laws of
probability.
B. most psychologists believe that about 50% of our happiness in genetically-determined.
C. both are true.
D. None is true.
11. Please state the Weber-Fechner Law of Perception and explain how it applied in the experiment on the
psychophysics of prices that we discussed.
12. Choose between A) 5,000 with prob p = .001, 0 with prob p = .999 and B) 5 for sure. In this
experiment, what was the majority choice and what does that imply about the decision weight if the
assumptions of Prospect Theory are correct?
13. Harriet is a hyperbolic discounter who at time 0 chooses consumption C0, C1, and C2. What is the
condition derived in Problem Set 3 for the trade-off between C1 and C2 at time t=0? Show, using an
appropriate Lagrangian, how to derive this. What is the trade-off at t=1? Please explain intuitively how
and why they differ.
14. We discussed in class that some researchers believe that happiness is a false god. In the context of the
class, please explain.
15. Suppose that in an experiment, people are asked to make two decisions and that they will actually get
both of the choices they make.
Decision 1: Choose between A) a 25% chance of gaining $1,000 and a 75% chance of $0 and B) a sure
gain of $240.
Decision 2: Choose between C) a 75% chance of losing $1,000 and a 25% chance of $0 and D) a sure loss
of $750.
i) Prospect theory would predict which choices? Why?
ii) Standard rational theory would predict which choices? Why?
Brief Answers:
1. A, 2. D, 3. B, 4. A 5. A, 6. B, 7. D, 8. D, 9. A; 10. B
11. The statement is in the notes. Persons willing to drive 10 minutes to save $5 on a $25 item but not on a
$500 item.
12. This is #8 of Problem Set 1.

13. See Problem Set 2. The hyperbolic discount function is present-biased. It puts more weight on the
present period than when initially planned. In contrast, the exponential discount function keeps the trade-
off between periods the same as we move through time.
14. Discussed in class at the end of the happiness section.
15. i) Choices are evaluated separately. We might expect that risk aversion in the positive domain makes
B look more attractive. Similarly, risk loving in the negative domain would make C look more attractive.
So, as noted in class, people tend to in experiments choose B in 1, C in 2.
ii) Choices are evaluated together and expected utility is maximized.

This is just the Kahneman & Tversky experiment we went through in class. That is, people would
recognize the result in Slide 10 of 1-20-2021 Notes.

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Economics 330 More Practice Exam 1 Questions

1. According to Kahneman’s Thinking Fast and Slow,

7. Based on the Jennifer Senor New York magazine article on parenting,

8. According to the readings,

10. According to class

12. This is #8 of Problem Set 1.

14. Discussed in class at the end of the happiness section.

ii) Choices are evaluated together and expected utility is maximized.

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