Question

- Once a sports team signs a player to a guaranteed contract, the value of that contract becomes a nonmonetary opportunity cost.

a) True

b) False

- What is behavioral economics?

a) the study of situations in which people act in ways that are not economically rational

b) the study of how people make wealth-maximizing decisions

c) the study of how people behave in the face of scarcity

d) the study of how people make decisions at the margin

- The order of the letters along the rows of computer keyboards could be changed to allow users to type faster, but this would inconvenience the vast majority of people who learned to type with the current keyboard layout. The costs of switching to a new layout make this change unlikely. This is an example of

a) how consumers sometimes do not behave rationally.

b) path dependency.

c) how the elasticity of demand for typewriters has been affected by externalities.

d) how social influences overwhelm the substitution effect of a price change

Answer 1

Behavioral Economics is the study of psychology as it relates to the economic decision-making processes of individuals and institutions. The two most important questions in this field are:

1.

Understanding Behavioral Economics

In an ideal world, people would always make optimal decisions that provide them with the greatest benefit and satisfaction. In economics, rational choice theory states that when humans are presented with various options under the conditions of scarcity, they would choose the option that maximizes their individual satisfaction. This theory assumes that people, given their preferences and constraints, are capable of making rational decisions by effectively weighing the costs and benefits of each option available to them. The final decision made will be the best choice for the individual. The rational person has self-control and is unmoved by emotions and external factors and, hence, knows what is best for himself. Alas behavioral economics explains that humans are not rational and are incapable of making good decisions. economists' assumptions of utility or profit maximization good approximations of real people's behavior?

2. Do individuals maximize subjective expected utility?