Question

1. Anchoring:

a. can influence decision making with irrelevant information.

b. explains why, for example, hamburger will be advertised as 80% lean rather than 20% fat.

c. causes losses to be felt more intensely than gains.

d. explains why, for example, firms prefer to reduce package sizes to raising prices.

2. The process by which people isolate purchases and fail to consider all consumption options simultaneously is known as:

a. framing

b. mental accounting

c. anchoring

d. the endowment effect

3. Alex was willing to pay $50 for the new World Cup soccer ball. When he received it as a gift, he was willing to sell it, but for no less than $80. According to a behavioral economists:

a. Alex’s behavior is consistent with the endowment effect.

b. Alex’s behavior is irrational because of inconsistent anchoring

c. Alex should sell the ball if he’s offered any amount over $50

d. Alex’s behavior is irrational because his frame has changed

4.Suppose that Dairy Barn Foods produces a regular sour cream with 10 grams of fat per serving and a “low fat” sour cream with only 5 grams of fat per serving( assume that this is still considered a lot of fat to consume per serving). According to prospect theory , how should Dairy Barn promote its “low fat” sour cream?

a. It should make no mention of fat content, either in absolute terms or relative to its regular sour cream.

b. It should advertise that the “low fat” sour cream has only “half the fat” of the regular sour cream

c. It should advertise that the “low fat” sour cream has only 5 grams of fat per serving

d. It won’t matter what strategy Dairy Barn uses, as consumers are sufficiently informed as to bot be affected by the advertising

Answer 1

1) To anchor is referred to as a human trait or behaviour to rely too much on one particular information while decision making . Answer : (A ) can influence decision-making with irrelevant information.

2) A mental accounting bias is when people separate categories based on mentally formed accounts on primarily say source of money . Answer : b. mental accounting

3) Endowment effect : People value things more or ascribe more value to the same thing when they own them . Here Alex's value for the ball increases when he receives it as a gift because now he owns it .Answer : a. Alex’s behavior is consistent with the endowment effect.

4) Prospect theory states that people sometimes prefer certain smaller gains rather than gains involving larger risks . It is theory depicting people's choices between alternatives . Advertising highly affected choices . By mentioning fat percentage the company actually tells people directly about the health risks involved . Rather by claiming that the new cream has only half the fat of the regular one will make consumers think that their risks are getting halved . Answer : b. It should advertise that the “low fat” sour cream has only “half the fat” of the regular sour cream