UNIVERSITY OF CALICUT

SCHOOL OF DISTANCE EDUCATION

QUESTION BANK
Sixth Semester

BEHAVIOURAL ECONOMICS
Elective Course of BA Economics Programme
2019 Admission onwards (CBCSS)

1) Bounded rationality recognizes that decision makers may be constrained due to

a) time
b) cognitive capacity
c)memory
d)social preferences

2) In a shopping mall, a manager decides to play certain types of music at Christmas to

remind people to buy Christmas gifts. This strategy would be utilising what concept in
behavioural economics?
a) Representative heuristic
b) Priming
c)Anchoring
d) Satisficing

3) The customers who loss averse tend to underweight the

a) integrate probabilities
b) segregate probabilities
c)high probabilities
low probabilities

4) The way in which choices are seen and presented by a decision maker is classified as
a) anchor framing
b) critical framing
c)adjustment framing
d) decision framing

5) When the customers base their predictions on example that comes to mind easily are
classified as
a) availability heuristic
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b) representative heuristic
c) anchoring heuristic
d) adjusting heuristic

6) the representative heuristic and availability heuristic are the types of

a) motivation heuristic
b) peripheral heuristic
c)expectancy heuristic
d) decision heuristic

7) Information is classified as
a) peripheral heuristic
b) anchoring heuristic
c)geographic heuristic
d) adjustment framing

8) The type of heuristic in which customer adjust initial judgement on the basis of
additional the way in which choices are seen and presented by a decision maker is
classified as
a) anchor framing
b) critical framing
c) adjustment framing
d) decision framing

9) Which of the following is not among the reasons for complexity of decisions?
a) Managers often share decisions.
b) Experts offer contradictory advice
d)Decisions have immediate, short-term impact

10) In our model of decision making under different conditions, what is the difference
between risk and uncertainty?
a) Under risk, information is reliable; under uncertainty, it is not.
b) Under risk, choices are clear and the chances of different outcomes can be
measured; under uncertainty, neither applies.
c) Under risk, probabilities can be measured; under uncertainty, they cannot.
d) Under risk, there is a well-defined problem; under uncertainty, the definition is
unclear.

11) If a consumer buys a lottery ticket but also purchases fire insurance, then he or she
can be said to be:
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a) risk averse in losses, risk loving in gains

b) risk loving in gains and losses
c) risk loving in losses, risk averse in gains
d)risk neutral in losses and gains

12) The Income Tax Department sent a text message to taxpayers with the reminder that
“most people pay on time to avoid penalties”. This type of message is taking account
of what concept in behavioural economics?
a) risk loving
b) anchoring
c) bounded rationality
d) nudging

13) Conventional neoclassical economic theory assumes that public goods will not be
provided in the free market. Which of the following concepts would lead this
conclusion being rejected?
a) human capital
b) self interest
c)free rider problem
d) social capital

14) A “commitment device” in behavioural economics is necessary to avoid what?

a) nudging
b) time inconsistent preferences
c) anchoring
d)irrationality

15) Which of the following are NOT a nudge?

1. A reminder of how often your neighbours recycle vs your own recycling
2. An advertising campaign of the dangers of plastic bags in the ocean
3. A 5 rupees tax on plastic bags
4. A ban on the use of plastic bags
5. All plastic bags being painted luminous red
a) 1,2,3,4 and 5
b)3 and 4 only
c) 1 and 2 only
d) 3,4, and 5 only

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16) People are offered two different gambles.

Gamble 1:
A) A certain win of Rs. 100, versus
B) A 10% chance to loss Rs 1000 and a 90% chance to lose nothing
Gamble 2:
C) A certain loss of Rs. 900, versus
D) A 10% chance to lose Rs. 1000 and a 90% chance to lose nothing.

When choosing between the Gamble 1 options, a greater proportion of people will opt
for the riskless alternative A), while for the Gamble 2 options, people are more likely
to choose the riskier D).
This is an example of
a) framing
b) herding
c) anchoring
d) bounded rationality

17) The term ‘homo economicus’ is used to describe:

a) finite ability to make rational decisions
b) irrational decision making
c) infinite ability to make irrational decisions
d) infinite ability to make rational decisions

18) When looking to book a hotel online, the website sometimes highlights the following
announcement when I click on a room: “only two more rooms available. The last one
was booked two minutes ago. Two other people viewing this room right now”. This
announcement is an attempt to appeal to which cognitive bias?
a) optimism bias
b) availability bias
c) scarcity bias
d) confirmation bias

19) What are the main differences between neoclassical economics and behavioural
economics?
a) neoclassical economics is mainly theoretical.
b) behavioural economics does not take as given that decision makers are rational.
c) neoclassical economics assumes that decision makers are fully informed.
d) all of the above.

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20) What is a pitfall to felicific calculus?

a) Humans let emotions interfere with their decision making
b) It would take far too long to assign each alternative a multi-faceted value
c) Humans are too rational to operate under this concept
d) Societies that do not use currency cannot operate under this concept

21) Behavioural economics studies:

a) Real-world decision making
b) Theoretical decision making
c) The stock markets
d) Computational models of decision making

22) Why do retailers sometimes give customers only a few options?

a) Retailers know that people tend to make more expensive purchases when there are
a lot of options
b) People tend to become overwhelmed and avoid making a decision when there are
too many choices
c) Retailers know that smaller stores and less shelf-space give the impression of being
local, rather than a chain retailer
d) People tend to buy in bulk when there are only a few items for sale

23) When are humans more likely to be risk averse?

a) When the odds of gaining are low
b) When the penalty amount is high
c) When the odds of being penalized/losing are high
d) All of the above

24) What is the framing effect?

a) People tend to make decisions based on what has happened to them in the past
b) People tend to change their decisions based simply on whether to not the context is
in terms of gains or losses
c) People tend to change their decisions when new options are presented
d) People tend to make decisions by considering what will happen to them in the
future

25) What is loss aversion?

a) People tend to be less willing to give up something they already own than to choose
that same item in another setting
b) People tend to make choices based on what they expect to gain from the decision
c) The refusal to play the lottery
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d) People are so afraid of losing that they refuse to make decisions that might involve
a loss

26) What is quasi-hyperbolic discounting?

a) Placing a disproportionately low value on immediate rewards
b) Placing a disproportionately high value on immediate rewards
c) Placing a disproportionately high value on delayed rewards
d) All of the above

27) Why do humans make different choices concerning money than other items, such as
food?
a) Money is not a primary reward, and was not in existence when our brains were
more primitive
b) People value money more than food, as money can buy you whatever you like,
including food
c) People actually do tend to value food over money
d) Money triggers an innate response

28) When an individual makes a choice for reasons they cannot explain, and allow their
emotions to be involved, they are operating under:
a) Felicific calculus
b) Utilitarianism
c) The intuitive system
d) Behavioural economics

29) Considering all of the features of an option at the same time is called:
a) Sequential processing
b) Parallel processing
c) Delay discounting
d) Quasi-hyperbolic discounting

30) The prospect of immediate reward appears to activate parts of which system?
a) The limbic system
b) The parasympathetic system
c) The motor system
d) The auditory system

31) The endowment effect is associated with loss aversion because:

a) Loss aversion may lead to feelings of wanting to keep what you already own, even
if that same item would not be that important to you if you did not own it
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b) The greater your susceptibility to the endowment effect, the less you feel loss
aversion
c) The endowment effect precedes loss aversion
d) The endowment affect only occurs if you have previously been tested for loss
aversion

32) If someone asked you to choose between a bowl of chili and a slice of pizza, you
would have to make a decision based on:
a) Delay discounting
b) Subjective value
c) Loss aversion
d) Endowment

33) Intertemporal choice refers to:

a) Making a decision based on perceived value
b) Choosing between two very different options
c) Assigning value to immediate and distant rewards
d) None of the above

34) A situation in which a decision maker knows all of the possible outcomes of a
decision and also knows the probability associated with each outcome is referred to as
a) certainty
b) risk
c)uncertainty
d) strategy

35) Which of the following methods of selecting a strategy is consistent with risk averting
behaviour?
a) If two strategies have the same expected profit, select the one with the smaller
standard deviation.
b) If two strategies have the same standard deviation, select the one with the smaller
expected profit.
c) Select the strategy with the larger coefficient of variation.
d) All of the above are correct.

36) Which one of the following does measure risk?

a) Coefficient of variation
b) Standard deviation
c) Expected value
d) All of the above are measures of risk.

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37) If a person's utility doubles when their income doubles, then that person is risk
a) averse.
b) neutral.
c) seeking.
d) There is not enough information given in the question to determine an answer.

38) The winner's curse refers to

a) the reaction of losers in an English auction to the winner.
b) a tax imposed on the winners of English auctions.
c) paying an amount that exceeds the true value of an item at auction.
d) a Dutch auction in which the winner is obliged, by tradition, to berate the
auctioneer.

39) Which of the following is a descending bid auction?

a) Dutch auction
b) First-price sealed bid auction
c) Second-price sealed bid auction
d) English auction

40) Which of the following is a sequential, ascending bid auction?

a) Dutch auction
b) First-price sealed bid auction
c) Second-price sealed bid auction
d) English auction

41) One way to correct a potential principal-agent problem is for stockholders to

a) offer managers "golden parachutes" in the event of a takeover.
b) empower managers to make the decisions they feel are best.
c) ensure that there is no explicit linkage between managers' compensation and the
profitability of the firm.
d) All of these answers are correct.

42) The principal-agent problem may result if

a) a firm is owned and operated by the same person.
b) managers make decisions that are not in the best interest of owners.
c) a firm compensates managers based on the profitability of the firm.
d) All of these answers are correct.

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43) A person with health insurance is more likely to become ill and visit a doctor than is
someone without health insurance. One reason is that a person with health insurance
is less likely to take precautions that will prevent illness. This is an example of
a) propinquity.
b) a futures contract.
c) hedging
d) moral hazard.

44) The tendency for low-quality cars to drive high quality cars out of the used car market
is an example of
a) hedging.
b) adverse selection.
c) portfolio analysis.
d) moral hazard.

45) Asymmetric information refers to circumstances in which

a) both parties to a transaction have identical amounts of information.
b) neither party to a transaction has any relevant information.
c) one party to a transaction has more information than the other party.
d) the riskiness of a transaction is greater than its expected return.

46) Hedging refers to an investment strategy that is used to

a) control risk from variations in currency prices.
b) prevent losses due to corporate bankruptcies.
c) ensure the highest possible rate of return.
d) prevent foreign competition in domestic capital markets.

47) A Futures contract

a) is a type of bond that specifies the amount of interest that must be paid on a loan at
a future point in time.
b) is an agreement to buy or sell a commodity at a specified price at a specified point
in time.
c) is a partnership agreement between two parties that determines their future business
relationship.
d) None of the above is correct.

48) According to a survey carried out by Gitman and Forrester that was published in
1977, the most common way for businesses in the United States to deal with risk in
capital budgeting decisions is by
a) ignoring it.
b) using the certainty equivalent method.
c) using the risk-adjusted discount rate method.
d) using the expected utility method.

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49) The sequence of possible managerial decisions and their expected outcome under
each set of circumstances can be represented and analysed by using
a) the minimax regret criterion.
b) a decision tree.
c) a payoff matrix.
d) simulation.

50) Which of the following is a way to deal with decision making under uncertainty?
a) Simulation
b) Diversification
c) Acquisition of additional information
d) Application of the maximin criterion

51) Fred is willing to pay $1 for a lottery ticket that has an expected value of zero. This
proves that Fred
a) is risk averse.
b) has a certainty-equivalent coefficient that is equal to one.
c) is risk neutral.
d) None of the above is correct.

52) If the market interest rate is 10% and a decision maker's risk adjusted discount rate is
12%, then the decision maker
a) is risk averse.
b) has a certainty-equivalent coefficient that is greater than one.
c) is risk neutral.
d) None of the above is correct.

53) A risk-return trade off function

a) shows the minimum expected return required to compensate an investor for
accepting various levels of risk.
b) slopes upward for a risk averse decision maker.
c) is horizontal for a risk neutral decision maker.
d) All of the above are correct.

54) A strategy that yields an expected monetary payoff of zero is called a

a) risk-neutral strategy.
b) fair game.
c) zero-sum game.
d) certainty equivalent.

55) The marginal utility of money diminishes for a decision maker who is
a) a risk seeker.
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b) risk neutral.
c) a risk averter.
d) in a situation of uncertainty.

56) Strategy A has an expected value of 10 and a standard deviation of 3. Strategy B has
an expected value of 10 and a standard deviation of 5. Strategy C has an expected
value of 15 and a standard deviation of 10. Which one of the following statements is
true?
a) A risk averse decision maker will always prefer A to B, but may prefer C to A.
b) A risk neutral decision maker will always prefer C to A or B.
c) A risk seeking decision maker will always prefer C to A or B.
d) All of the above are correct.

57) The coefficient of variation measures

a) the risk per unit of expected payoff.
b) the risk-adjusted expected value.
c) the payoff per unit of risk.
d) a decision maker's risk-return trade-off.

58) A situation in which a decision maker must choose between strategies that have more
than one possible outcome when the probability of each outcome is unknown is
referred to as
a) diversification.
b) certainty.
c) risk.
d) uncertainty.

59) If a decision maker is risk averse, then the best strategy to select is the one that yields
the
a) highest expected payoff.
b) lowest coefficient of variation.
c) highest expected utility.
d) lowest standard deviation.

60) Circumstances that influence the profitability of a decision are referred to as

a) strategies.
b) a payoff matrix.
c) states of nature.
d) the marginal utility of money.

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Answer Key

1.A 2.B 3.C 4. D 5.A 6.D 7.B 8.D 9.D 10.B

11.A 12.D 13.D 14.B 15.B 16.A 17. D 18. C 19.B 20.C
21.A 22. B 23. D 24. B 25. A 26. B 27. A 28. C 29. B 30. A
31. A 32. B 33.C 34. B 35.A 36.C 37.C 38.C 39.A 40.D
41. A 42. B 43. D 44.B 45.B 46.A 47.B 48.C 49.B 50.A
51.D 52.A 53.D 54.B 55.C 56.D 57.A 58.D 59.C 60.C

Prepared by:
Dr. Shiji O.
Assistant Professor,
SDE, University of Calicut.

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