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You Midterm have 50 minutes to answer 35 questions.
1. Ann prefers x to y , and y to z . Then the function u(x) = 3, u(y ) = 1, u(z ) = 10000 is her
(A) experienced utility; (B) decision utility; (C) anticipatory utility; (D) real-time utility.
Answer: B
2. An Ebay seller sells a product at a $20 with $5 shipping. Then he raises the price to $25, but
makes shipping FREE. His sales increase by 40%. This example illustrates
(A) a context eect;
(B) intransitivity; (C) utility maximization; (D) framing.
Answer: D
3. A phone company sells three models of phones at prices $80, $100, and $200. When it adds
another model at a price $40, the sales of the $80-phone double. This is best described as
(A) a context eect;
(B) intransitivity; (C) utility maximization; (D) framing.
Answer: A
4. Each day, Ann spends one half of her spare time reading a novel, and the other half watching
TV. Her behavior
(A) is an example of framing;
(B) can be represented by a Cobb-Douglas utility functions;
(C) is inconsistent with utility maximization;
(D) reveals that she has hyperbolic discounting.
Answer: B
5. Bob has a toothache. To get some medical help, he calls local dentists in the alphabetical
order until he nds one that accepts his insurance. If he cannot nd any dentist who accepts
his insurance, then he will pick the closest one.
(A) Bobs decision procedure is an example of satiscing;
(B) Bobs choice is consistent with utility maximization;
(C) Bobs decision utility will depend on the rst letter of the dentists name;
(D) All of the above.
Answer: D
6. Neuroeconomics
(A) has found some crude measures for real-time experienced utility;
(B) provides a tractable model of human behavior;
(C) has found the brain region that maximizes decision utility;
(D) all of the above.
Answer: A
7. Chris evaluates three models of cars in terms of three attributes (price, mpg, design). The
most expensive model has average mpg and best design. The average-priced model has best
mpg and worst design. The cheapest model has the worst mpg and average design. When
Chris compares any two cars, he picks the one that does better than the other in two attributes
(of course, a lower price is better than a higher price.) His preferences are
(A) intransitive;
(B) aected by framing;
(C) consistent with utility maximization;
(D) incomplete.
Answer: A
8. Evolutionary economics
(A) can model only sophisticated agents;
(B) can explain why people are very good at maximizing utility;
(C) can explain some altruistic and spiteful behaviors for people, sh, and bats;
(D) none of the above.
Answer: C
9. Experienced utility is
(A) cardinal;
(B) ordinal;
(C) the standard concept of utility used in economics;
(D) measured precisely by neuroeconomics.
Answer: A
10. Which of the following behaviors violate utility maximization?
(A) choice avoidance; (B) framing; (C) intransitivity; (D) all of the above.
Answer: D
11. The standard discounted utility model
(A) is based on solid psychological motivation;
(B) allows choices to be time inconsistent;
(C) was proposed by Samuelson as a simple and tractable model of intertemporal choice;
(D) cannot be refuted by empirical data.
Answer: C
12. In the hyperbolic discounting model, the discount function can be
(A) 1/t; (B) (1 + t)1 ;
(C) (1 + t)/ ; (D) all of the above.
Answer: D
13. Ann maximizes discounted utility U (c0 , c1 , c2 ) = c0 + c1 + 2 c2 for < 1. Which of the
following consumption streams will she choose?
(A) c0 = c1 = c2 = 10;
(B) c0 = 9, c1 = 10, c2 = 11;
(C) c0 = 5, c1 = 15, c2 = 10;
(D) not enough information.
Answer: A
14. Hyperbolic discounting model can explain
(A) time inconsistent preferences;
(B) preference for improving sequences;
(C) magnitude eect;
(D) all of the above.
Answer: A
15. Ann plans her vacations for the next three years. Her top two destinations are Hawaii (H) and
Cancun (C). She prefers a sequence of vacations (H, C, H) to (H, H, H). She also prefers the
sequence (C, H, C) to (C, C, C). Her choices can be explained by
(A) standard discounted utility model;
(B) quasi-hyperbolic utility model;
(C) her naivete;
(D) none of the above.
Answer: D
16. Emma needs to take one more economics class to complete her major. Studying has an
immediate cost of 80 and delayed rewards. If she takes her last class at quarter t = 1, 2, 3, 4,
then her delayed rewards are 400, 300, 200, 100 respectively. She has a quasi-hyperbolic utility
with = 1 and = 0.5. If she is sophisticated, then she will take her last class at
(A) t = 1; (B) t = 2;
(C) t = 3;
(D) t = 4.
Answer: A or B
17. If Emma is naive, then she will choose to take her last class at
(A) t = 1;
(B) t = 2;
(C) t = 3;
(D) t = 4.
Answer: A or D
18. If Emma has the standard discounted utility with = 1, then she will take her last class at
(A) t = 1;
(B) t = 2;
(C) t = 3;
(D) t = 4.
Answer: A
19. This example illustrates that
(A) time-inconsistency leads to procrastination; sophisticates procrastinate more than naifs;
(B) procrastination is common even for time-consistent agents;
(C) leads time-inconsistency to procrastination; naifs procrastinate more than sophisticates;
(D) none of the above.
Answer: cancelled
20. Suppose that at t = 1, Emma can commit to take the class at t = 3. Then she will want this
commitment
(A) if she is sophisticated;
(B) if she is naive;
(C) if she has the standard discounted utility model;
(D) none of the above.
Answer: D
21. Ann prefers an improving sequence of annual wages 55K, 60K, 70K to the decreasing sequence
70K, 60K, 55K. Her behavior can be explained by
(A) discounted utility model with positive discounting;
(B) hyperbolic discounting model;
(C) quasi-hyperbolic discounting model;
(D) none of the above.
Answer: D
22. The measurement of the discount factors and in the quasi-hyperbolic discounting model
can be confounded by
(A) savings and reallocation of consumption;
(B) uncertainty and ination;
(C) the concavity of the function u;
(D) all of the above.
Answer: D
23. The models of time-inconsistent preferences can be used to explain
(A) the prevalence of low introductory rates on credit card oers;
(B) the prevalence of monthly or annual fees in health clubs;
(C) the use of rehabilitation centers in treating addicts;
(D) all of the above.
Answer: D
24. Bob needs to decide whether to go to a bar or stay at home on a Friday night. At home, his
menu is H = {a} where a is watch a movie and go to sleep. In the bar, his menu is B = {b, c}
where b is have a nice time with friends, and c is drink a lot and get into trouble. Suppose
that Bob has the utility function with a costly self-control, where u(a) = 0, u(b) = 20 and
u(c) = 10 and v (a) = 0, v (b) = 10 and v (c) = 20. Then
(A) Bob should go to the bar rather than stay at home;
(B) Bob should expect that if he goes to the bar, then he will not get into trouble;
(C) If Bob has an opportunity to commit not to drink in the bar, he should do so;
(D) all of the above.
Answer: D
25. What is Bobs expected cost of self-control if he goes to the bar?
(A) 20; (B) 10;
(C) 0;
(D) 30.
Answer: B
26. What is Bobs expected cost of self-control if he stays at home?
(A) 20; (B) 10;
(C) 0;
(D) 30.
Answer: C
27. Neuroeconomics attributes time-inconsistency to
(A) high levels of the oxytocin hormone;
(B) the quasi-hyperbolic discounting of future consumption;
(C) the dierent cognitive systems that are used to evaluate immediate and distant rewards;
(D) none of the above.
Answer: C
28. The empirical evidence in the dictator game
(A) conforms to the standard assumption of self-interest;
(B) shows that people can be spiteful;
(C) shows that people like to be dictators;
(D) none of the above.
Answer: D
29. The empirical evidence in the ultimatum bargaining games shows that
(A) people typically oer about 20% of their endowments;
(B) people are always altruistic;
(C) people are more willing to reject small oers from humans than those made by computers;
(D) none of the above.
Answer: C
30. The standard assumption of self-interest implies that in the ultimatum bargaining game
(A) the dictator should oer 40-50% of the endowment, and the recipient should accept;
(B) the dictator should oer about 20% of the endowment, and the recipient should reject;
(C) the dictator should make a zero (or very low) oer, and the recipient should accept;
(D) the dictator should oer about 20% of the endowment, and the recipient should accept.
Answer: C
31. The standard assumption of self-interest implies that in the trust games
(A) the truster should trust 40-50% of the endowment, and the recipient should return nothing;
(B) the truster should trust 100% of the endowment, and the recipient should return the entire
amount that she was trusted;
(C) the truster should trust nothing, and the recipient should return nothing;
(D) the truster should rst trust about 40-50% of the endowment, and then if he does not get
anything back, should not trust the recipient again.
Answer: C
32. Neuroeconomics shows that people trust each other more when
(A) they have a low level of oxytocin in their brains;
(B) they communicate with each other before the game is played;
(C) they are students who major in economics;
(D) all of the above.
Answer: B
33. Experimental evidence shows that people usually view a price increase as most unfair
(A) if it results from higher costs for the seller;
(B) when a previous discount gets canceled;
(C) if it results from a surge in demand for the product;
(D) if it only applies to new customers, but not to old ones.
Answer: C
34. Experimental evidence shows that
(A) social norms sometimes motivate people better than money;
(B) social norms and money can be easily combined to motivate people;
(C) most people do not cheat when they have a chance too;
(D) all of the above.
Answer: A
35. Concerns about fairness and social norms can explain why
(A) some rms prefer to re some workers rather than to cut wages across the board;
(B) supermarkets usually vary discounts rather than base prices;
(C) rms often pay a part of wages as a bonus;
(D) all of the above.
Answer: D