SOLVED

21) Jamal, Lawson and Kyle have been standing in line for almost an hour waiting to be served at Kirala, a popular new Japanese restaurant. It is possible that some of the people in line won’t be served at all before the restaurant closes. Which of the following could explain why the restaurant does not simply raise prices high enough to eliminate the lines? a.In situations where consumption takes place publicly, demand for the product is also influenced by how many other people are buying the product. Consequently, a popular restaurant that increased its prices enough to eliminate lines might find that it had also eliminated its popularity. b.Firms may sometimes not raise their prices for fear that it violates people’s sense of fairness and might alienate customers. c.The demand for restaurant meals is relatively elastic and if the firm raise prices it will lower its profits. A) a only B) a and b only C) a and c only D) a, b, and c 22) Which of the following is an experiment which tests whether fairness is important in consumer decision making? A) the fair trade principle B) the ultimatum game C) the preferential treatment game D) the behavioral experiment 23) In the ultimatum game, allocators usually offer recipients at least a 40 percent share of the money, and recipients almost always reject offers of less than a 10 percent share. Which of the following does not explain why allocators offer recipients a relatively generous share and why recipients reject meager offers? A) Fear of arousing outrage and abhorrence could influence economic decisions. B) People can and often do reject offers that offend their sense of fairness even if doing so means taking a monetary loss. C) Some people are careful not to engage in economic behavior that might offend and alienate others. D) Allocators can count on recipients to ignore all considerations except financial benefit. 24) Economists have used ________ and ________ in experiments designed to determine whether consumers care about fairness when they make decisions. A) Giffen goods; luxury goods B) the income effect; the substitution effect C) the ultimatum game; the dictator game D) network externalities; the endowment effect 25) A network externality refers to a situation in which the usefulness of a product decreases with the number of consumers who use it. 26) Economists have shown that when the ultimatum game experiment is carried out, both allocators and recipients act as if fairness is important. 27) The iPod is a product without any significant network externalities. 28) Why might network externalities result in products that contain inferior technologies? 29) List three reasons why demand for a product will often increase if the product is endorsed by a celebrity. 2. Buying the product may make people feel closer to the celebrity. 3. Buying the product may make people feel fashionable. 30) Professor Parallax chooses two students in his economics class, Jasmine and Cassandra, to participate in the ultimatum game. He chooses Jasmine to be the allocator and Cassandra to be the recipient. He gives Jasmine $50 and as the allocator, she gets to decide how to split the money with Cassandra. If Cassandra decides to accept the amount allocated to her by Jasmine, both students get to keep the money. If Cassandra decides to reject her allocation, neither student gets to keep the money. How much will each student end up with if each student acts as if fairness is important? How much will each student end up with if only Cassandra acts as if fairness is important? How much will each student end up with if neither student cares about fairness? 31) Music writer Anthony Kuzminski praised rock star Tom Petty in a 2007 article in the online Unrated Magazine. Kuzminski wrote: “Something Petty never can get enough credit for is his fan-friendly attitude. He kept ticket prices for [his concerts] at $50 when other acts this summer are charging upwards of $100 for stadium gigs. Petty could charge more, but he doesn’t see the point. He has stated time and time again he still makes millions when he’s on the road, regardless of his ticket prices. He is the last of the fan friendly rock stars out there.” Use economic reasoning to write a rationale for Tom Petty’s decision to charge prices for his band’s (“Tom Petty and the Heartbreakers”) concerts that are less than market clearing prices.