Question

Shawn Van​ Dike, a construction industry​ consultant, wrote on a home building​ site:   

Brains do some pretty funny things when making a buying decision. If you understand your​ customers' brain​ activities, then you can use this knowledge to help increase your sales and deliver on value...​ There's an old question in advertising.​ "How do you sell a​ $2,000 watch? Put it next to a​ $10,000 watch." This is an example of price anchoring.

​Source: Shawn Van​ Dike, "The Psychology of Price​ Anchoring," finehomebuilding.com, December​ 26, 2016.

Price anchoring is when consumers

A.

relate a​ good's value to some other known value.

B.

attribute a nonmonetary value to a good.

C.

value a good more if it is already owned.

D.

establish the value of an item using the concept of fairness.

Explain why Van Dike cited the​ "old advertising​ question" as an example of price anchoring.

A.

The values of the watches are anchored to the appearance of the store.

B.

The​ $2,000 watch's value is anchored to the​ $10,000 watch.

C.

The​ $2,000 watch's value is already known.

D.

The values of each watch are anchored to their prices.

Answer 1

Answer- The correct answer to first part of the question is A ie., When consumers relate a good’s value to someother known value. Anchoring is a part of behavioural ginance and evonomics where the behaviours of consumers affect the economic choice they make. In case of anchoring they relate the value of the product to some other value like in case of investments people relate the fair value proce to the original price at which they purchased the financial intrument(s) even if they are incurring losses. Anchoring leads the people to make decisions in a biased manner and not considering the actual fundamental when buying or selling.

Answer- The correct answer to the second part of the question is B. In the given case the value of the $2000 watch is anchored to the $10,000 watch. People will make decisions based on anchoring. Here people will think that the $2000 watch is inexpensive because they will relate it to the watch of $10,000 and then think that they have saved money. But in relaity the marketers wanted the customers to go for the $2000 watch and kept the $10,000 watch so that the consumers can make their decisions easily.