Question 1

Based on the following utility schedule determine the decision maker's attitude toward risk.

Accepted Answer

Since the utility schedule is linear,the individual is risk neutral.

Question 2

A firm must decide whether to launch a new product before knowing whether sales demand will be strong or weak.In addition,depending on how demand unfolds,the firm has the flexibility to set either a high price or a low price.The best order in which to draw the firm's decision tree is:

Accepted Answer

A) launch,set price,and observe demand. 
B) observe demand,launch,and set price. 
C) launch,observe demand,and set price. 
D) set price,observe demand,and launch. 
E) set price,launch,and observe demand. 
A) launch,set price,and observe demand. 
B) observe demand,launch,and set price. 
C) launch,observe demand,and set price. 
D) set price,observe demand,and launch. 
E) set price,launch,and observe demand. C

Question 3

The expected profit determined from a decision tree is the weighted average of all the possible outcomes.The weights represent the:

Accepted Answer

A) probability of the outcome. 
B) total cost of production. 
C) number of times the game is repeated. 
D) total number of outcomes. 
E) total number of decision makers involved in the process. 
A) probability of the outcome. 
B) total cost of production. 
C) number of times the game is repeated. 
D) total number of outcomes. 
E) total number of decision makers involved in the process. A

Question 4

Which of the following is true of subjective probability?

Accepted Answer

A) It is a measure of the historical frequency of an uncertain event. 
B) It is a measure of the frequency of a certain event. 
C) It represents the decision maker's best assessment,based on current information,of the likelihood of an uncertain event. 
D) It represents an arbitrary or ad hoc assessment. 
E) It measures the degree of variation around the mean. 
A) It is a measure of the historical frequency of an uncertain event. 
B) It is a measure of the frequency of a certain event. 
C) It represents the decision maker's best assessment,based on current information,of the likelihood of an uncertain event. 
D) It represents an arbitrary or ad hoc assessment. 
E) It measures the degree of variation around the mean.

Question 5

A manufacturer of air-conditioning systems expects to sell 10,000 units next year if the economy recovers from the present recession.If the economy remains at its present state,the firm expects to sell 7,000 units,and if the recession worsens,sales will fall to 3,000 units.A survey of 40 economists reveals that 30 of them are forecasting recovery,5 of them are expecting no change,and the rest expect a worse recession.Estimate the expected sales of air-conditioning systems for next year.

Accepted Answer

Probability of recovery = (30/40)= 0.75,

Question 6

An investor estimates the expected return of option A to be $180,000 and its expected utility to be 400.The expected return of option B is $120,000,and its expected utility is 450.The investor should:

Accepted Answer

A) select option A because it has the higher expected return. 
B) select option B because it has the higher expected utility. 
C) select option A because 180,000/120,000 > 450/400. 
D) be indifferent between option A and option B. 
E) re-analyze the values of expected returns. 
A) select option A because it has the higher expected return. 
B) select option B because it has the higher expected utility. 
C) select option A because 180,000/120,000 > 450/400. 
D) be indifferent between option A and option B. 
E) re-analyze the values of expected returns.

Question 7

While taking risky decisions,the most common pitfalls that the managers face include:

Accepted Answer

A) seeing too many possibilities. 
B) holding pessimistic beliefs. 
C) not relying on verbal expressions of probability. 
D) relying on verbal expressions of probability. 
E) relying on the rules of thumb. 
A) seeing too many possibilities. 
B) holding pessimistic beliefs. 
C) not relying on verbal expressions of probability. 
D) relying on verbal expressions of probability. 
E) relying on the rules of thumb.

Question 8

Which of the following is true of a decision tree?

Accepted Answer

A) It is an ill-defined puzzle used to arrive at a decision amidst uncertainty. 
B) It represents decisions,chance events,and possible outcomes in choices under risk and uncertainty. 
C) It is based purely on logic and thus fails to provide a visual explanation for the recommended choice. 
D) It calculates the risks associated with a decision in chronological order of occurrence. 
E) It is typically represented in a simple way and can be solved without complex calculations. 
A) It is an ill-defined puzzle used to arrive at a decision amidst uncertainty. 
B) It represents decisions,chance events,and possible outcomes in choices under risk and uncertainty. 
C) It is based purely on logic and thus fails to provide a visual explanation for the recommended choice. 
D) It calculates the risks associated with a decision in chronological order of occurrence. 
E) It is typically represented in a simple way and can be solved without complex calculations.

Question 9

Suppose that Rick is fortunate enough to receive a gift from a family member of $5,000,which he may use as he does see fit.Rick is then offered a chance to receive an additional $2,000 with certainty,or a 50-50 chance of either $5,000 or $0.
(a)Which would Rick accept?

Accepted Answer

It is inconsistent to take the certain c

Question 10

Consumer surveys indicate that 40% of newspaper readers read automobile ads and 5% of those who read the ads actually purchase automobiles.On the other hand,50% of magazine readers read automobile ads but only 3% of those who read the ads actually buy a car.Among those who do not read either newspaper or magazine auto ads,1% buys cars anyway.Sixty percent of the population reads newspapers,while 20 percent primarily read magazines.Compute the overall percentage of the population that purchases automobiles in a given year.(To aid your analysis,you might wish to draw a decision tree listing appropriate probabilities for the three aforementioned reading segments. )

Accepted Answer

Newspaper readers buy cars at the rate o

Question 11

Firm X is currently selling a consumer good and faces two related decisions,one with respect to pricing and the other with respect to marketing.With respect to pricing,it can maintain its "standard" price or it can adopt a lower "discount" price.With respect to marketing,it can keep with its current advertising campaign or it can expand its advertising.The main risk facing the firm concerns the course of the economy in the near-term: whether the economy will continue healthy growth or whether it will experience a recession.The table below shows the firm's possible profit results (in $ millions)depending on its price and advertising actions.Finally,the firm judges that there is an 80% chance of growth and a 20% chance of a recession.
   (a)Firm X must make its decision now (before knowing the future course of the economy).Which of the four alternatives maximizes its expected profit?

Accepted Answer

The decision tree is:
 @#IMG-DLM& Accord

Question 12

A manager's utility of money schedule is (monetary amounts are in $,000s):
   Two investment opportunities have the following net present values (again in $000s):
   (a)Select the optimal investment based on the expected-value criterion.

Accepted Answer

The expected values are equal but invest

Question 13

Define uncertainty with an example.

Accepted Answer

Uncertainty (or risk)is present when the

Question 14

If a fair coin is tossed 1,000 times,the frequency of heads will be close to:

Accepted Answer

A) 0.6. 
B) 0.5. 
C) 0.3. 
D) 0.2. 
E) 0.7. 
A) 0.6. 
B) 0.5. 
C) 0.3. 
D) 0.2. 
E) 0.7.

Question 15

When there is more than one possible outcome for a decision,it results in:

Accepted Answer

A) higher expected return. 
B) greater losses. 
C) uncertainty. 
D) lower risks. 
E) better profits. 
A) higher expected return. 
B) greater losses. 
C) uncertainty. 
D) lower risks. 
E) better profits.

Question 16

(a)You are offered a choice between two lotteries,K and L:
Lottery K: You win $1,000 with complete certainty.
Lottery L: You win: $5,000 with probability .10
$1,000 with probability .75
$0 with probability .15
Compute the expected value of both lotteries,and indicate which you would choose.Explain your choice,using the concept of certainty equivalent.

Accepted Answer

The expected value of R = (.387)($1,000)

Question 17

Consider a situation where an insurance contract has a negative expected value for the purchaser.Under this insurance policy,the premium paid exceeds the expected payout.Is it rational to buy this insurance? Give explanation with reason.

Accepted Answer

Insurance is a method of reducing the ex

Question 18

An investment has the possibility of earning $10,000,$8,000 or $2,000 depending on the state of the economy that is prosperity,modern growth,and recession respectively.The probabilities of prosperity,moderate growth,and recession are 0.4,0.3,and 0.3 respectively.The expected value of the investment is:

Accepted Answer

A) $10,000. 
B) $21,000. 
C) $7,000. 
D) $3,000. 
E) $8,000. 
A) $10,000. 
B) $21,000. 
C) $7,000. 
D) $3,000. 
E) $8,000.

Question 19

Consider the following risky prospect:   The expected utility is equal to:

Accepted Answer

A) $30,000. 
B) 18. 
C) 20. 
D) 24. 
E) $34,000. 
A) $30,000. 
B) 18. 
C) 20. 
D) 24. 
E) $34,000.

Question 20

Which of the following is a feature of the expected-value standard?

Accepted Answer

A) The expected-value criterion helps the decision taker to choose the course of action that involves the maximum risk and return. 
B) The expected-value criterion cannot be employed in situations involving multiple and related risks. 
C) The expected-value criterion is employed for short-term and one-time decisions involving high risks. 
D) The expected value of a risky prospect represents the average monetary outcome if it were repeated indefinitely. 
E) The expected-value standard is appropriate for playing the short-run averages. 
A) The expected-value criterion helps the decision taker to choose the course of action that involves the maximum risk and return. 
B) The expected-value criterion cannot be employed in situations involving multiple and related risks. 
C) The expected-value criterion is employed for short-term and one-time decisions involving high risks. 
D) The expected value of a risky prospect represents the average monetary outcome if it were repeated indefinitely. 
E) The expected-value standard is appropriate for playing the short-run averages.

Based on the following utility schedule determine the decision maker's attitude toward risk.

A firm must decide whether to launch a new product before knowing whether sales demand will be strong or weak.In addition,depending on how demand unfolds,the firm has the flexibility to set either a high price or a low price.The best order in which to draw the firm's decision tree is:

The expected profit determined from a decision tree is the weighted average of all the possible outcomes.The weights represent the:

Which of the following is true of subjective probability?

An investor estimates the expected return of option A to be $180,000 and its expected utility to be 400.The expected return of option B is $120,000,and its expected utility is 450.The investor should:

While taking risky decisions,the most common pitfalls that the managers face include:

Which of the following is true of a decision tree?

Suppose that Rick is fortunate enough to receive a gift from a family member of $5,000,which he may use as he does see fit.Rick is then offered a chance to receive an additional $2,000 with certainty,or a 50-50 chance of either $5,000 or $0. (a)Which would Rick accept?

A manager's utility of money schedule is (monetary amounts are in $,000s): Two investment opportunities have the following net present values (again in $000s): (a)Select the optimal investment based on the expected-value criterion.

Define uncertainty with an example.

If a fair coin is tossed 1,000 times,the frequency of heads will be close to:

When there is more than one possible outcome for a decision,it results in:

Consider a situation where an insurance contract has a negative expected value for the purchaser.Under this insurance policy,the premium paid exceeds the expected payout.Is it rational to buy this insurance? Give explanation with reason.

Consider the following risky prospect: The expected utility is equal to:

Which of the following is a feature of the expected-value standard?

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

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Auctions and Competitive Bidding

Linear Programming

Filters

Exam 12: Decision Making Under Uncertainty

Based on the following utility schedule determine the decision maker's attitude toward risk.

A firm must decide whether to launch a new product before knowing whether sales demand will be strong or weak.In addition,depending on how demand unfolds,the firm has the flexibility to set either a high price or a low price.The best order in which to draw the firm's decision tree is:

The expected profit determined from a decision tree is the weighted average of all the possible outcomes.The weights represent the:

Which of the following is true of subjective probability?

An investor estimates the expected return of option A to be $180,000 and its expected utility to be 400.The expected return of option B is $120,000,and its expected utility is 450.The investor should:

While taking risky decisions,the most common pitfalls that the managers face include:

Which of the following is true of a decision tree?

Suppose that Rick is fortunate enough to receive a gift from a family member of $5,000,which he may use as he does see fit.Rick is then offered a chance to receive an additional $2,000 with certainty,or a 50-50 chance of either $5,000 or $0. (a)Which would Rick accept?

A manager's utility of money schedule is (monetary amounts are in $,000s): Two investment opportunities have the following net present values (again in $000s): (a)Select the optimal investment based on the expected-value criterion.

Define uncertainty with an example.

If a fair coin is tossed 1,000 times,the frequency of heads will be close to:

When there is more than one possible outcome for a decision,it results in:

Consider a situation where an insurance contract has a negative expected value for the purchaser.Under this insurance policy,the premium paid exceeds the expected payout.Is it rational to buy this insurance? Give explanation with reason.

Consider the following risky prospect: The expected utility is equal to:

Which of the following is a feature of the expected-value standard?

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

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Auctions and Competitive Bidding

Linear Programming

Filters