Question 1

Choosing the decision with the maximum possible payoff

Accepted Answer

A)  is the maximax rule. 
B)  ignores possible bad outcomes. 
C)  is a guide for decision making under uncertainty. 
D)  all of the above 
E)  none of the above 
A)  is the maximax rule. 
B)  ignores possible bad outcomes. 
C)  is a guide for decision making under uncertainty. 
D)  all of the above 
E)  none of the above D

Question 2

Using the following:
The manager's utility function for profit is U $\pi$ = 50 $\pi$, where  $\pi$ is the dollar amount of profit. The manager is considering a risky decision with the four possible profit outcomes shown below. The manager makes the following subjective assessments about the probability of each profit outcome:
 $$\begin{array} { c c } 
\text { Probability } & \text { Profit outcome (\$) } \
\hline 0.20 & - \$ 15,000 \
0.30 & - \$ 5,000 \
0.30 & \$ 5,000 \
0.20 & \$ 25,000
\end{array}$$
-What is the expected profit?

Accepted Answer

A)  $2,000 
B)  $3,000 
C)  $4,000 
D)  $5,000 
E)  none of the above 
A)  $2,000 
B)  $3,000 
C)  $4,000 
D)  $5,000 
E)  none of the above C

Question 3

Refer to the following:
A firm making production plans believes there is a 30% probability the price will be $10, a 50% probability the price will be $15, and a 20% probability the price will be $20. The manager must decide whether to produce 6,000 units of output (A), 8,000 units (B) or 10,000 units (C). The following table shows 4 possible outcomes depending on the output chosen and the actual price.
 $$\begin{array} { c c c c } 
&  { \text { Prodi } ( \text { Loss } ) \text { when price is } } \
\hline  \text { Prodiction } & \$ 10 & \$ 15 & \$ 20 \
\hline \text { G,000 } ( A ) & - \$ 200 & \$ 400 & \$ 1,000 \
\text { B,000 } ( B ) & - \$ 400 & \$ 600 & \$ 1,600 \
10,000 ( C ) & - \$ 1,000 & \$ 800 & \$ 3,000
\end{array}$$
-If the mean-variance rule is used, how much should the firm produce?

Accepted Answer

A)  6,000 
B)  8,000 
C)  10,000 
D)  can't use this rule to make the decision 
A)  6,000 
B)  8,000 
C)  10,000 
D)  can't use this rule to make the decision D

Question 4

Using the following:
The manager's utility function for profit is U $\pi$ = 10 ln $\pi$, where  $\pi$ is the dollar amount of profit. The manager is considering a risky decision with the four possible profit outcomes shown below. The manager makes the following subjective assessments about the probability of each profit outcome:
 $$\begin{array} { c c } 
\text { Prabability } & \text { Profit outcome (\$) } \
\hline 0.05 & \$ 5,000 \
0.10 & \$ 10,000 \
0.35 & \$ 15,000 \
0.50 & \$ 20,000
\end{array}$$
-What is the expected utility of profit?

Accepted Answer

A)  97 
B)  245 
C)  462 
D)  974 
E)  1,033 
A)  97 
B)  245 
C)  462 
D)  974 
E)  1,033

Question 5

Refer to the following situation:
A firm is making production plans for next quarter, but the manager does not know what the price of the product will be next month. She believes there is a 30 percent chance price will be $500 and a 70 percent chance price will be $750. The four possible profit outcomes are:
 $$\begin{array} { l c c } 
& \text { Prod (toss) when pice is: } \
\hline  & \$ 500 & \$ 750 \
\hline\text { Option } A \text { produce } 1,000 \text { unids } & - \$ 12,000 & \$ 80,000 \
\text { Oplion } B \text { produce } 2,000 \text { unids } & \$ 20,000 & \$ 150,000
\end{array}$$
-Which option has the highest (absolute) risk?

Accepted Answer

A)  Option A is riskier than Option B. 
B)  Option B is riskier than Option A. 
C)  Both options have the level of risk if the manager is risk averse. 
D)  cannot calculate risk with the given information 
A)  Option A is riskier than Option B. 
B)  Option B is riskier than Option A. 
C)  Both options have the level of risk if the manager is risk averse. 
D)  cannot calculate risk with the given information

Question 6

Refer to the following:
A firm is considering the decision of investing in new plants. The following is the profit payoff matrix under three conditions: it does not expand, it builds two new plants, or it builds one new plant. Three possible states of nature can exist--no change in the economy, the economy contracts and the economy grows. The firm has no idea of the probability of each state.
 $\text { The economy }$
$\begin{array}{lccc} 
& \text { expands } & \text { contracts } & \text { unchanged } \
\hline \text { no new plants } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 4 \text { million } \
1 \text { new plant } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 6 \text { million } \
2 \text { new plants } & \$ 40 \text { million } & -\$ 12 \text { million } & \$ 8 \text { million }
\end{array}$
-What decision would be made using the maximax rule?

Accepted Answer

A)  no new plants 
B)  one new plant 
C)  two new plants 
D)  not enough information to tell 
A)  no new plants 
B)  one new plant 
C)  two new plants 
D)  not enough information to tell

Question 7

Subjective probabilities are

Accepted Answer

A)  determined from actual data on part experiences. 
B)  used in the presence of uncertainty. 
C)  almost never used from decision making. 
D)  are based on feelings or hunches. 
E)  c and d 
A)  determined from actual data on part experiences. 
B)  used in the presence of uncertainty. 
C)  almost never used from decision making. 
D)  are based on feelings or hunches. 
E)  c and d

Question 8

Refer to the following:
A firm is considering two projects, A and B, with the following probability distributions for profit.
 $$\begin{array} { c c c } 
\begin{array} { c } 
\text { Profit } \
\text { (\$1,000s) }
\end{array} & \begin{array} { c } 
\text { Praject } A \
\text { Probability } ( \% )
\end{array} & \begin{array} { c } 
\text { Project B} \
\text { Prabability (\%) }
\end{array} \
\hline \$ 20 & 10 & 10 \
40 & 15 & 15 \
{ 5 0 } & 50 & { 2 5 } \
{ 8 0 } & 15 & 40 \
100 & 10 & 10
\end{array}$$
-What is the expected value of project B (in $1,000s)?

Accepted Answer

A)  $60 
B)  $65 
C)  $70 
D)  $75 
E)  $80 
A)  $60 
B)  $65 
C)  $70 
D)  $75 
E)  $80

Question 9

Refer to the following:
A firm is considering two projects, A and B, with the following probability distributions for profit.
 $$\begin{array} { c c c } 
\begin{array} { c } 
\text { Profit } \
\text { (\$1,000s) }
\end{array} & \begin{array} { c } 
\text { Praject } A \
\text { Probability } ( \% )
\end{array} & \begin{array} { c } 
\text { Project B} \
\text { Prabability (\%) }
\end{array} \
\hline \$ 20 & 10 & 10 \
40 & 15 & 15 \
{ 5 0 } & 50 & { 2 5 } \
{ 8 0 } & 15 & 40 \
100 & 10 & 10
\end{array}$$
-A decision maker using the analysis of variance rule would

Accepted Answer

A)  choose project A. 
B)  choose project A only if risk averse. 
C)  choose project B. 
D)  choose project B only if risk loving. 
E)  not be able to make a decision using that rule. 
A)  choose project A. 
B)  choose project A only if risk averse. 
C)  choose project B. 
D)  choose project B only if risk loving. 
E)  not be able to make a decision using that rule.

Question 10

Refer to the following:
The following payoff matrix shows the various profit outcomes for 3 projects, A, B, and C, under 2 possible states of nature: the product price is $10 or the product price is $20.
 $\begin{array}{l}
\text { Profit }\
\begin{array}{l|c|c|}
\hline \text { Project }&P=\$ 10 & P=\$ 20 \
\hline A&20 & 80 \
\hline B&40 & 60 \
\hline C&-26 & 140 \
\hline
\end{array}
\end{array}$
-Using the minimax regret rule the decision maker would choose

Accepted Answer

A)  A. 
B)  B. 
C)  C. 
D)  impossible to tell from the information 
A)  A. 
B)  B. 
C)  C. 
D)  impossible to tell from the information

Question 11

Refer to the following:
The following payoff matrix shows the various profit outcomes for 3 projects, A, B, and C, under 2 possible states of nature: the product price is $10 or the product price is $20.
 $\begin{array}{l}
\text { Profit }\
\begin{array}{l|c|c|}
\hline \text { Project }&P=\$ 10 & P=\$ 20 \
\hline A&20 & 80 \
\hline B&40 & 60 \
\hline C&-26 & 140 \
\hline
\end{array}
\end{array}$
-Using the equal probability rule the decision maker would choose

Accepted Answer

A)  A. 
B)  B. 
C)  C. 
D)  impossible to tell from information 
A)  A. 
B)  B. 
C)  C. 
D)  impossible to tell from information

Question 12

The maximin rule

Accepted Answer

A)  ignores bad outcomes. 
B)  is used by optimistic managers. 
C)  minimizes the potential regret. 
D)  a and c 
E)  none of the above 
A)  ignores bad outcomes. 
B)  is used by optimistic managers. 
C)  minimizes the potential regret. 
D)  a and c 
E)  none of the above

Question 13

Refer to the following:
A firm is considering two projects, A and B, with the following probability distributions for profit.
 $$\begin{array} { c c c } 
\begin{array} { c } 
\text { Profit } \
\text { (\$1,000s) }
\end{array} & \begin{array} { c } 
\text { Praject } A \
\text { Probability } ( \% )
\end{array} & \begin{array} { c } 
\text { Project B} \
\text { Prabability (\%) }
\end{array} \
\hline \$ 20 & 10 & 10 \
40 & 15 & 15 \
{ 5 0 } & 50 & { 2 5 } \
{ 8 0 } & 15 & 40 \
100 & 10 & 10
\end{array}$$
-The coefficient of variation (to 2 decimal places) is

Accepted Answer

A)  higher for A. 
B)  higher for B. 
C)  equal for the two. 
D)  unable to be used for this choice. 
E)  both c and d 
A)  higher for A. 
B)  higher for B. 
C)  equal for the two. 
D)  unable to be used for this choice. 
E)  both c and d

Question 14

Use the following two probability distributions for sales of a firm to answer Questions :
 $$\begin{array} { c c c } 
\text { Sales } & \begin{array} { c } 
\text { Distribution1} \
\text { Probability }
\end{array} & \begin{array} { c } 
\text { Distribution2} \
\text { Probability }
\end{array} \
\hline 2,000 & 0.05 & 0.05 \
3,000 & 0.20 & 0.15 \
4,000 & 0.50 & 0.20 \
5,000 & 0.20 & 0.35 \
6,000 & 0.05 & 0.25
\end{array}$$
-The expect value of sales for Distribution 2 is _____________.

Accepted Answer

A)  2,500 
B)  2,758 
C)  2,800 
D)  3,000 
E)  none of the above 
A)  2,500 
B)  2,758 
C)  2,800 
D)  3,000 
E)  none of the above

Question 15

Refer to the following:
A firm is considering two projects, A and B, with the following probability distributions for profit.
 $$\begin{array} { c c c } 
\begin{array} { c } 
\text { Profit } \
\text { (\$1,000s) }
\end{array} & \begin{array} { c } 
\text { Praject } A \
\text { Probability } ( \% )
\end{array} & \begin{array} { c } 
\text { Project B} \
\text { Prabability (\%) }
\end{array} \
\hline \$ 20 & 10 & 10 \
40 & 15 & 15 \
{ 5 0 } & 50 & { 2 5 } \
{ 8 0 } & 15 & 40 \
100 & 10 & 10
\end{array}$$
-The variance of project A is

Accepted Answer

A)  7.07 
B)  50 
C)  440 
D)  4,000 
E)  380 
A)  7.07 
B)  50 
C)  440 
D)  4,000 
E)  380

Question 16

Using the minimax regret rule the manager makes the decision

Accepted Answer

A)  with the smallest worst-potential regret. 
B)  with the largest worst-potential regret. 
C)  knowing he will not regret it. 
D)  that has the highest expected value relative to the other decisions. 
A)  with the smallest worst-potential regret. 
B)  with the largest worst-potential regret. 
C)  knowing he will not regret it. 
D)  that has the highest expected value relative to the other decisions.

Question 17

Refer to the following table showing the probability distribution of payoffs from an activity.
 $$\begin{array} { c c c } 
\text { Units } & \text { Payaff } & \text { Prabability } \
\hline 1 & \$ 30 & 10 \% \
2 & 40 & 25 \% \
3 & 60 & 30 \% \
4 & 50 & 20 \% \
5 & 10 & 15 \%
\end{array}$$
-What is the coefficient of variation for this distribution?

Accepted Answer

A)  0.39 
B)  2.34 
C)  0.86 
D)  1.02 
E)  0.10 
A)  0.39 
B)  2.34 
C)  0.86 
D)  1.02 
E)  0.10

Question 18

A probability distribution

Accepted Answer

A)  is a way of dealing with uncertainty. 
B)  lists all possible outcomes and the corresponding probabilities of occurrence. 
C)  shows only the most likely outcome in an uncertain situation. 
D)  both a and b 
E)  both a and c 
A)  is a way of dealing with uncertainty. 
B)  lists all possible outcomes and the corresponding probabilities of occurrence. 
C)  shows only the most likely outcome in an uncertain situation. 
D)  both a and b 
E)  both a and c

Question 19

Using the following:
The manager's utility function for profit is U $\pi$ = 50 $\pi$, where  $\pi$ is the dollar amount of profit. The manager is considering a risky decision with the four possible profit outcomes shown below. The manager makes the following subjective assessments about the probability of each profit outcome:
 $$\begin{array} { c c } 
\text { Probability } & \text { Profit outcome (\$) } \
\hline 0.20 & - \$ 15,000 \
0.30 & - \$ 5,000 \
0.30 & \$ 5,000 \
0.20 & \$ 25,000
\end{array}$$
-What is the expected utility of profit?

Accepted Answer

A)  -2,500 
B)  5,000 
C)  15,000 
D)  30,000 
E)  100,000 
A)  -2,500 
B)  5,000 
C)  15,000 
D)  30,000 
E)  100,000

Question 20

Refer to the following:
A firm making production plans believes there is a 30% probability the price will be $10, a 50% probability the price will be $15, and a 20% probability the price will be $20. The manager must decide whether to produce 6,000 units of output (A), 8,000 units (B) or 10,000 units (C). The following table shows 4 possible outcomes depending on the output chosen and the actual price.
 $$\begin{array} { c c c c } 
&  { \text { Prodi } ( \text { Loss } ) \text { when price is } } \
\hline  \text { Prodiction } & \$ 10 & \$ 15 & \$ 20 \
\hline \text { G,000 } ( A ) & - \$ 200 & \$ 400 & \$ 1,000 \
\text { B,000 } ( B ) & - \$ 400 & \$ 600 & \$ 1,600 \
10,000 ( C ) & - \$ 1,000 & \$ 800 & \$ 3,000
\end{array}$$
-What is the variance if 6,000 units are produced?

Accepted Answer

A)  490,000 
B)  176,400 
C)  100,000 
D)  68,200 
E)  76,460 
A)  490,000 
B)  176,400 
C)  100,000 
D)  68,200 
E)  76,460

Choosing the decision with the maximum possible payoff

Subjective probabilities are

The maximin rule

Use the following two probability distributions for sales of a firm to answer Questions : Sales Distribution1 Probability Distribution2 Probability 2,000 0.05 0.05 3,000 0.20 0.15 4,000 0.50 0.20 5,000 0.20 0.35 6,000 0.05 0.25 -The expect value of sales for Distribution 2 is _____________.

Refer to the following: A firm is considering two projects, A and B, with the following probability distributions for profit. Profit ( \1 ,000s) Praject A Probability (\%) Project B Prabability (\%) \ 20 10 10 40 15 15 50 50 25 80 15 40 100 10 10 -The variance of project A is

Using the minimax regret rule the manager makes the decision

Refer to the following table showing the probability distribution of payoffs from an activity. Units Payaff Prabability 1 \ 30 10\% 2 40 25\% 3 60 30\% 4 50 20\% 5 10 15\% -What is the coefficient of variation for this distribution?

A probability distribution

Managers, Profits, and Markets

Demand, Supply, and Market Equilibrium

Marginal Analysis for Optimal Decisions

Basic Estimation Techniques

Theory of Consumer Behavior

Elasticity and Demand

Demand Estimation and Forecasting

Production and Cost in the Short Run

Production and Cost in the Long Run

Production and Cost Estimation

Managerial Decisions in Competitive Markets

Managerial Decisions for Firms With Market Power

Strategic Decision Making in Oligopoly Markets

Advanced Pricing Techniques

Government Regulation of Business

Filters

Exam 15: Decisions Under Risk and Uncertainty

Choosing the decision with the maximum possible payoff

Subjective probabilities are

The maximin rule

Use the following two probability distributions for sales of a firm to answer Questions : Sales Distribution1 Probability Distribution2 Probability 2,000 0.05 0.05 3,000 0.20 0.15 4,000 0.50 0.20 5,000 0.20 0.35 6,000 0.05 0.25 -The expect value of sales for Distribution 2 is _____________.

Refer to the following: A firm is considering two projects, A and B, with the following probability distributions for profit. Profit ( \1 ,000s) Praject A Probability (\%) Project B Prabability (\%) \ 20 10 10 40 15 15 50 50 25 80 15 40 100 10 10 -The variance of project A is

Using the minimax regret rule the manager makes the decision

Refer to the following table showing the probability distribution of payoffs from an activity. Units Payaff Prabability 1 \ 30 10\% 2 40 25\% 3 60 30\% 4 50 20\% 5 10 15\% -What is the coefficient of variation for this distribution?

A probability distribution

Managers, Profits, and Markets

Demand, Supply, and Market Equilibrium

Marginal Analysis for Optimal Decisions

Basic Estimation Techniques

Theory of Consumer Behavior

Elasticity and Demand

Demand Estimation and Forecasting

Production and Cost in the Short Run

Production and Cost in the Long Run

Production and Cost Estimation

Managerial Decisions in Competitive Markets

Managerial Decisions for Firms With Market Power

Strategic Decision Making in Oligopoly Markets

Advanced Pricing Techniques

Government Regulation of Business

Filters