Question 1

The use of intuitive prediction in forecasting:

Accepted Answer

A) puts the wrong weights on different kinds of information. 
B) provides approximately correct decisions most of the time. 
C) is objective and reliable. 
D) gives statistically significant results. 
E) is consistent with probabilistic prediction. 
A) puts the wrong weights on different kinds of information. 
B) provides approximately correct decisions most of the time. 
C) is objective and reliable. 
D) gives statistically significant results. 
E) is consistent with probabilistic prediction.

Question 2

Explain how ascending and descending probabilities of success in research affect investment strategies.

Accepted Answer

With ascending probabilities,o

Question 3

A firm hires an economist to conduct market research and determine demand for a new product.If the test is correct and the firm launches the product,it earns a profit of $600,000.If the firm launches the product when there is weak demand,it incurs a loss of $250,000.
  
 What is the firm's expected profit from an accurate and inaccurate test respectively? What can you conclude about the quality of the market research?

Accepted Answer

If the test is accurate,the firm will la

Question 4

The owner of a DVD rental store notes that 1 out of every 50 DVDs that are rented are not returned on time.He also calculates that 1 out of every 100 DVDs that are returned late are action movies.What is the probability that an action movie will be returned late?

Accepted Answer

A) 0.006 
B) 0.03 
C) 0.1 
D) 0.0002 
E) 0.01 
A) 0.006 
B) 0.03 
C) 0.1 
D) 0.0002 
E) 0.01

Question 5

A company is trying to decide whether to build a large plant or a small plant to supply future sales of a new product.However,it is uncertain about the market response to the product;whether demand will be strong or weak.According to the firm's marketing department,the probability of strong demand is 0.3 and of weak demand is 0.7.The table below lists the firm's profits (in millions of dollars)depending on plant capacity and the market response:
   (a)The company must make its plant decision now,before it will know what the market response will be.Which plant size maximizes its expected profit?

Accepted Answer

The joint probability table is

Question 6

A real estate broker is attempting to sell a warehouse.She estimates that an offer from a typical potential buyer will be centered on $5.5 million plus or minus $0.5 million and that any offers will be uniformly distributed within this range.The broker has located four potential buyers.What will be the best price,on average,that she can expect to receive?

Accepted Answer

Since there are four potential

Question 7

If Pr(a)= 0.5 and Pr(b)= 0.3,then the value of Pr(a&b)_____.

Accepted Answer

A) is equal to 0.8 
B) is equal to 0.375 
C) is equal to 0.15 
D) is equal to 0.2 
E) cannot be determined without more information 
A) is equal to 0.8 
B) is equal to 0.375 
C) is equal to 0.15 
D) is equal to 0.2 
E) cannot be determined without more information

Question 8

Kevin goes trick-or-treating on Halloween.His neighbor gives him 3 small bags with two candies in each of them.One bag has two Snickers bars,one has a Tootsie Roll and a Snickers bar,and the third bag has two Tootsie Rolls.Kevin opens one of the bags and sees a Snickers bar.What are the odds that the other candy in the bag is also a Snickers bar?

Accepted Answer

A) 2/5 
B) 5/7 
C) 1/2 
D) 3/4 
E) 2/3 
A) 2/5 
B) 5/7 
C) 1/2 
D) 3/4 
E) 2/3

Question 9

Stake Gold Mines has the option to purchase a parcel of land adjacent to its current mining operations in a Western state.The seller's best and final price is $3 million.If the land has commercial mineral deposits,Stake Gold estimates its value at $5 million.If there are no deposits,the estimated value is $2 million.A preliminary look at the land leads Stake Gold to believe that the chance of mineral deposits is 50:50.
(a)Given this information,should Stake Gold purchase the land? For a fee of $200,000,the seller has agreed to let Stake Gold collect extensive mineral samples on the site.Based on past experience,if there are minerals present,the samples will provide a favorable indication 80% of the time.If no minerals are present,the samples will (falsely)give a favorable reading 40% of the time.Determine Pr(M|F)and Pr(M|U).(Here,M denotes mineral deposits,NM denotes no mineral deposits,F denotes favorable samples,and U denotes unfavorable samples. )

Accepted Answer

Upon collecting the mineral samples,Stak

Question 10

Buyer A has offered $20,000 for a painting you are trying to sell.You are about to approach Buyer B whose best offer,you believe,might be anywhere between $16,000 and $24,000,with all values in between being equally likely.After hearing B's price,you will pick the higher of the two offers.What is the price that you expect to get for the painting?

Accepted Answer

A) $20,000 
B) $21,333 
C) $22,000 
D) $22,680 
E) $23,700 
A) $20,000 
B) $21,333 
C) $22,000 
D) $22,680 
E) $23,700

Question 11

Oliver undergoes a standard medical test while at his regular checkup.The test is 90% reliable in detecting a form of cancer (C)that is found in 2% of the population.In particular,Pr(+|C)= 0.90.The test is also 90% reliable in screening out cancer,that is,Pr(-|H)= 0.90.
(a)If Oliver tests positive,how likely is it that he actually has cancer? If he tests negative,what is his cancer risk?

Accepted Answer

The joint probability of a patient recei

Question 12

Firm X is currently selling a consumer good at a standard price,but is also considering cutting its price.The main risk facing the firm concerns the course of the economy in the near-term: whether the economy will grow at a steady pace (G)or whether it will experience a recession (R).The table below shows the firm's possible profit results (in $ millions).Finally,the firm judges that there is a 70% chance of growth and a 30% chance of a recession.
   (a)Firm X must make its decision now (before knowing the future course of the economy).Which pricing policy maximizes its expected profit?

Accepted Answer

After a positive macro forecast,cutting

Question 13

A price cut would increase the firm's profits by $2 million if demand is weak but would decrease profit by $3 million if demand proves to be strong.The firm's best assessment is a 0.3 probability of strong demand.The firm conducts market research that clearly indicates that demand is weak.The expected value of this information from market research is _____.

Accepted Answer

A) $0 
B) $0.5 million 
C) $1.5 million 
D) $1.4 million 
E) $2 million 
A) $0 
B) $0.5 million 
C) $1.5 million 
D) $1.4 million 
E) $2 million

Question 14

Explain how Bayes Theorem is used to revise probabilities.

Accepted Answer

Bayes Theorem offers a logical means for

Question 15

The test result B has no value in predicting outcome A if:

Accepted Answer

Question 16

A high-tech firm is pursuing research and development (R&D)to commercialize the next generation of DVD players (using very high-definition DVDs).Two R&D approaches are available: laser technology and digital technology.Either way,the firm will receive the same expected profit if successful.Development costs are $100 million and $125 million,and probabilities of success are 0.3 and 0.5,for the respective approaches.Which R&D method should the firm pursue first?

Accepted Answer

Digital's profitability-to-cos

Question 17

A middle manager is an avid runner and keeps an informal diary of her daily 5-mile training runs.Most of the time,she spends 10 minutes or more stretching before running,believing that this will help prevent minor muscle injuries.In fact,she estimates that 64% of days over the last year,she has stretched and avoided any muscle problems,that is,the relevant joint probability is Pr(Stretch & Healthy)= 0.64.
(a)Is she correct in concluding that there is a positive association between stretching and being injury free? Now suppose she does some additional thinking and recalls many days when she hadn't bothered to stretch and fortunately still avoided any muscle pulls.Her guess is that Pr(No Stretch & Healthy)= 0.20.Determine Pr(Stretch|Healthy).Does this indicate that stretching reduces the risk of injury?

Accepted Answer

The complete joint probability table is:

Question 18

A company is about to launch a new product and is considering one of two prices: high or low.However,the company is uncertain about the market response to the product - whether demand will be strong or weak.According to the firm's marketing department,the probability of strong demand is 0.6 and of weak demand is 0.4.The following table lists the firm's economic profit (in millions of dollars)at the two prices under strong and weak demand:
   (a)Suppose the company is risk neutral and must commit to a price before knowing what the market response will be.Should it launch the product? If so,at what price?

Accepted Answer

From the joint proba

Question 19

Describe how a decision-maker's attitude toward risk affects her strategy for acquiring information.

Accepted Answer

Information is valuable whether the mana

Question 20

You are offered a favorable bet on a coin toss,heads or tails.If you correctly call the result,you gain $20.If your call is incorrect,you lose $10.What is the expected value of information if you could perfectly predict the coin toss?

Accepted Answer

A) $5 
B) $10 
C) $15 
D) $20 
E) $25 
A) $5 
B) $10 
C) $15 
D) $20 
E) $25

The use of intuitive prediction in forecasting:

Explain how ascending and descending probabilities of success in research affect investment strategies.

The owner of a DVD rental store notes that 1 out of every 50 DVDs that are rented are not returned on time.He also calculates that 1 out of every 100 DVDs that are returned late are action movies.What is the probability that an action movie will be returned late?

If Pr(a)= 0.5 and Pr(b)= 0.3,then the value of Pr(a&b)_____.

Explain how Bayes Theorem is used to revise probabilities.

The test result B has no value in predicting outcome A if:

Describe how a decision-maker's attitude toward risk affects her strategy for acquiring information.

You are offered a favorable bet on a coin toss,heads or tails.If you correctly call the result,you gain $20.If your call is incorrect,you lose $10.What is the expected value of information if you could perfectly predict the coin toss?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Perfect Competition

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Auctions and Competitive Bidding

Linear Programming

Filters

Exam 13: The Value of Information

The use of intuitive prediction in forecasting:

Explain how ascending and descending probabilities of success in research affect investment strategies.

The owner of a DVD rental store notes that 1 out of every 50 DVDs that are rented are not returned on time.He also calculates that 1 out of every 100 DVDs that are returned late are action movies.What is the probability that an action movie will be returned late?

If Pr(a)= 0.5 and Pr(b)= 0.3,then the value of Pr(a&b)_____.

Explain how Bayes Theorem is used to revise probabilities.

The test result B has no value in predicting outcome A if:

Describe how a decision-maker's attitude toward risk affects her strategy for acquiring information.

You are offered a favorable bet on a coin toss,heads or tails.If you correctly call the result,you gain $20.If your call is incorrect,you lose $10.What is the expected value of information if you could perfectly predict the coin toss?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Perfect Competition

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Auctions and Competitive Bidding

Linear Programming

Filters