The hypothesis that people ascribe more value to things merely because

1.The economists ascribing to the theory of endowment effect would consider which one of the following as an example of this effect?

A) A person who receives a gift of a hundred dollar bottle of wine would not normally spend the same amount buying it and choses to drink the wine rather than sell it.

Correct

This choice ticks all the characteristics of the endowment effect as detailed out in the passage. Let’s split the given situation in to bite-sized portions:

The person receives a bottle of wine = he owns it now
He would under not normally spend the same amount buying it = ascribes less value to an identical item
Would rather drink it than sell = hold on to those endowed items rather than sell it.

B) A person, who buys a bottle of his favorite wine for ten dollars, refuses to pay the same amount for a bottle of wine that is very similar in every aspect to the other wine and that his friend is willing to sell.

Incorrect: Out of Scope

As per the theory detailed out in the passage, the item to which less value is ascribed has to be identical not similar. So this choice fails to fulfil a key feature of the theory.

C) A person, who receives a bottle of wine as a gift from a friend, buys the same wine again from the market at a more expensive price than the one paid by his friend.

Incorrect: Opposite

This choice builds a situation in which the person ends up paying more for an identical item. If anything, this action is suggestive of ascribing more rather less value.

D) A person sells a bottle of wine, which was gifted to him, at a price that is not lower than the market price of the wine.

Incorrect: Opposite

The passage says that when the effect is in action, people would much rather own the product rather than sell it. However, in this choice the endowed item is being sold.

E) A person refuses to sell a bottle of wine that was gifted to him because market survey shows that the price of that wine is likely to rise even further in the future.

Incorrect: Out of Scope

The reason given over here is that the person reuses to sell the endowed product since he is waiting for the rate to go high. As stated above, when the effect is in action, people would much rather own the product rather than sell it.
_______________________________________

2. The author is primarily concerned with

A) describing a theory in detail while analyzing the influence it enjoys in the field of economics

Incorrect: Partial Scope

Although the author does describe the endowment theory in detail, the author does not analyze or delve deep in to the kind of influence it enjoys.

B) explaining a theory and its underlying basis to review the individuals experiments done in its support

Incorrect: Partial Scope

The author does explain the endowment theory and its underlying basis (loss aversion); however, all this is not done to review the experiments done in its support. It is done to educate the reader so that the discussion is carried forward and the author can develop on the criticism of the theory. Now the review of all (not individual) experiments done to support it is again to present the criticism meted out to the theory.

C) discussing a theory in detail and bringing out its deficiencies that were deliberately ignored by its proponents

Incorrect: Partial Scope

Indeed the authors discusses a theory and presents certain criticism for it but there is no basis to state that the shortcomings were deliberately ignored by the proponents of the theory.

D) critically evaluating a theory and its underlying basis

Correct

This choice matches our pre-thinking and is indeed the correct answer.

E) describing a theory and suggesting that it should be discarded since it has no empirical soundness

Incorrect: Out of Scope

The author not only describes the theory but also explains it. Also, the author states that the empirical basis of the theory was never perfect not that it has NO empirical soundness.
_______________________________________

3. Which of the following is most supported by the information given in the passage?

A) The value of the endowed item increases with the passage of time.

Incorrect: Out of Scope

There is no information given regarding any increase in the value of the endowed product.

B) The way a response is extracted out of a participant in a study could have an effect in the ultimate outcome of that study.

Correct

This statement follows from the information given to us in the following section of the passage (2nd para):

By making a few changes to the experimental design—such as better training subjects in the auction mechanisms used in the experiments, changing the way subjects were given the items, and modifying the procedures for eliciting choices—to rule out alternative explanations, experimentalist were able to make “endowment effects” that had been observed in the laboratory disappear.

As we can see, “procedures for eliciting choices” were one of the elements that were tweaked, leading to a completely different outcome.

C) The endowment theory lacks any sort of factual support.

Incorrect: Out of Scope

The author states that the theory’s empirical or factual support was never perfect, not that it lacked any kind of factual support.

D) As per the endowment theory, the sole reason that people are reluctant to transfer or sell their endowed item is because of the workings of the loss aversion phenomenon.

Incorrect: Out of Scope

The passage clearly states that, as per the theory, there could be other causes of the observed events but that loss aversion is definitely one of them.

E) The real value of an endowed product is normally considerably less than the value ascribed to it by people.

Incorrect: Out of Scope

We have no information regarding “real” value of the endowed product.
_______________________________________

4. According to the passage, which of the following is NOT true?

A) The endowment theory enjoys more than limited influence.

Incorrect: Given in the passage

This information is explicitly given to us in the first sentence of the second paragraph (ref. below):

Although endowment theory continues to enjoy considerable influence

B) The ownership of an endowed product has an important part to play in whether a particular change is perceived as a gain or loss.

Incorrect: Given in the passage

This information is given to us in the first paragraph (ref. below):

…ownership determines whether one experiences a change as a gain or as a loss…

C) There are holes in the empirical data that support results not in favor of the endowment theory.

Correct

This choice talks about the data that go against the theory and says that it has holes in it or is flawed. However, the author says that the data used to support the theory is flawed. Hence, this choice is the correct choice that does not flow from the contents of the passage.

D) Loss aversion is possibly not the only factor that the theory believes causes the endowment effect.

Incorrect: Given in the passage

This information is given to us in the first paragraph (ref. below):

Endowment theory says that such observable events, whatever their other possible causes, are at least partially explained by the general phenomenon of loss aversion…

E) Some experimental economists have been influenced by the recent data that does not favor the endowment theory.

Incorrect: Given in the passage

This information is given to us in the last sentence of the passage (ref. below):

These results have led experimental economists and cognitive psychologists to develop alternatives to endowment theory.