Exam 12: Decision Making Under Uncertainty

The following is the distribution of outcomes from two alternative advertising strategies: Which strategy is the riskier strategy? Explain.

Risk aversion describes a person's tendency to:

Consider a situation where Japanese yen has depreciated.This implies:

An individual is risk neutral if her utility curve for wealth is:

How are certainty equivalent and attitude toward risk related? Illustrate with an example.

Mary runs her own small business,and has a utility function for assets of: U(A)= 22A - 0.07A2‚ for all 0≤ A ≤ 100,where 'A' denotes total assets in thousands of dollars. (a)Describe Mary's attitude toward risk.

A firm supplies aircraft engines to the government and to private firms.It must decide between two mutually exclusive contracts.If it contracts with a private firm,its profit will be $2 million,$0.7 million,or -$0.5 million with probabilities 0.25,0.41,and 0.34,respectively.If it contracts with the government,its profit will be $4 million or -$2.5 million with respective probabilities 0.45 and 0.55.Which contract offers the greater expected profit or loss?

Apply the expected-value criterion to choose between these investments. Investment A has possible outcomes: $100,000 (50% chance),$40,000 (30% chance),and $50,000 (20% chance).Investment B has possible outcomes: $150,000,$60,000,$20,000,and $80,000 with each outcome equally likely.

The probability of an outcome:

A financial analyst considers three funds.The funds' estimated returns depend on future economic conditions - summarized by outcomes A,B,C,or D.The table lists the probabilities of these outcomes and each fund's expected return for each outcome. (a)Which fund has the greatest expected monetary return?

An individual is said to risk averse if his/her certainty equivalent for a risky prospect is:

The figure given below represents the decision tree of an operations head of a facility who considers a new production technique.ER represents his expected return (in thousand $)from the new technique.If he does not adopt the technique his expected return would be zero.The probabilities of the technique being a success or a failure are 0.7 and 0.3 respectively.Compute the expected return (in thousand $)from the adoption of the new production technique.

The term expected value is defined as:

A firm is thinking about introducing a new product.Marketing experts have determined that the product has a 10% chance of high success,a 60% chance of moderate success,and a 30% chance of failure.The gross profit from high success is $2.2 million and from moderate success $1.2 million.The estimated gross loss from failure is $500,000.Finally,the cost of introducing the product is $700,000.Should the firm introduce the product?

An individual is uncertain whether to bet on a football game.He believes that the probability of his team winning is 40%.If his team wins,he will receive $180.If his team loses,he'll pay $130.If the decision is made based exclusively on the expected value criterion,then the individual will:

Define probability with an example.

A manager who chooses among options by applying the expected value criterion is:

An individual has a utility of money function U = 20 + 0.5M and considers two options: Option 1: Invest $100,000 in a building plot,which will be sold for $150,000 if interest rates decrease or for $80,000 the interest rates do not change. Option 2: Invest the same $100,000 in bonds,which will be worth $135,000 if interest rates decrease,and $100,000 if the interest rates remain the same. The consensus among economic forecasters is that interest rates have an 80% chance of decreasing and 20% chance of remaining constant. Which investment option will this individual select?

Estimate the expected utility of two individuals,A and B,from the investment that has the following possible outcomes:

A manager reveals that she has a utility function U = 100M - 2M2,for 0 ≤ M ≤ 25,where 'U' stands for Utility,'M' stands for Money.Is this person risk averse,risk neutral,or risk loving?