Question 1

The variance of a probability distribution is used to measure risk because a higher variance is associated with

Accepted Answer

A)  a wider spread of values around the mean. 
B)  a more compact distribution. 
C)  a lower expected value. 
D)  both a and b 
E)  all of the above 
A)  a wider spread of values around the mean. 
B)  a more compact distribution. 
C)  a lower expected value. 
D)  both a and b 
E)  all of the above

Question 2

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 maximum expected value 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 3

When a manager can list all outcomes and assign probabilities to each

Accepted Answer

A)  uncertainty exists. 
B)  both risk and uncertainty exist. 
C)  risk exists. 
D)  the manager should use the minimax rule for making a decision. 
E)  b and d 
A)  uncertainty exists. 
B)  both risk and uncertainty exist. 
C)  risk exists. 
D)  the manager should use the minimax rule for making a decision. 
E)  b and d

Question 4

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:
 $$\begin{array} { c c } 
\text { Probability } & \text { Profit outcome (\$) } \
\hline 0.20 & - \$ 15,000 \
0.30 & - \$ 5,000 \
0.30 & \$ 5,000 \
0.20 & \$ 25,000
\end{array}$$
-The marginal utility of an extra dollar of profit is __________.

Accepted Answer

A)  0.20 
B)  0.30 
C)  1.0 
D)  10 
E)  none of the above 
A)  0.20 
B)  0.30 
C)  1.0 
D)  10 
E)  none of the above

Question 5

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.
 $$\begin{array} { c c c c } 
&  { \text { Prodi } ( \text { Loss } ) \text { when price is } } \
\hline  \text { Prodiction } & \$ 10 & \$ 15 & \$ 20 \
\hline \text { G,000 } ( A ) & - \$ 200 & \$ 400 & \$ 1,000 \
\text { B,000 } ( B ) & - \$ 400 & \$ 600 & \$ 1,600 \
10,000 ( C ) & - \$ 1,000 & \$ 800 & \$ 3,000
\end{array}$$
-For the above payoff matrix, suppose the manager has no idea about the probability of any of the three prices occurring. If the maximin rule is used how much will 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

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 equal probability 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

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 expected value of project A (in $1,000s) is

Accepted Answer

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

Question 8

Refer to the following:
The following table shows the expected value and variance for 5 projects a firm can undertake.
 $$\begin{array} { c c c } 
\text { Praiecl } & \text { Expeted Value } & \text { Variance } \
\hline A & \$ 100 & \$ 124 \
B & \$ 220 & \$ 110 \
C & \$ 100 & \$ 138 \
D & \$ 180 & \$ 138 \
E & \$ 200 & \$ 124
\end{array}$$
-Which of the following is (are) correct?

Accepted Answer

A)  Project B dominates all others 
B)  Project E dominates all others 
C)  Project C is the least preferable 
D)  a and c 
E)  none of the above 
A)  Project B dominates all others 
B)  Project E dominates all others 
C)  Project C is the least preferable 
D)  a and c 
E)  none of the above

Question 9

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 profit?

Accepted Answer

A)  $12,000 
B)  $13,000 
C)  $14,000 
D)  $15,000 
E)  none of the above 
A)  $12,000 
B)  $13,000 
C)  $14,000 
D)  $15,000 
E)  none of the above

Question 10

Refer to the following probability distribution for profit
 $$\begin{array} { c c } 
\text { Prafit } & \text { Prabability } \
\hline \$ 30 & 0.05 \
40 & 0.25 \
50 & 0.60 \
60 & 0.10
\end{array}$$
-What is the coefficient of variation for this distribution?

Accepted Answer

A)  1.67 
B)  0.675 
C)  18.6 
D)  0.147 
E)  1.03 
A)  1.67 
B)  0.675 
C)  18.6 
D)  0.147 
E)  1.03

Question 11

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.
 $$\begin{array} { c c c c } 
&  { \text { Prodi } ( \text { Loss } ) \text { when price is } } \
\hline  \text { Prodiction } & \$ 10 & \$ 15 & \$ 20 \
\hline \text { G,000 } ( A ) & - \$ 200 & \$ 400 & \$ 1,000 \
\text { B,000 } ( B ) & - \$ 400 & \$ 600 & \$ 1,600 \
10,000 ( C ) & - \$ 1,000 & \$ 800 & \$ 3,000
\end{array}$$
-For the above payoff matrix, suppose the manager has no idea about the probability of any of the three prices occurring. If the maximax rule is used how much will 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

Question 12

Refer to the following probability distribution for profit
 $$\begin{array} { c c } 
\text { Prafit } & \text { Prabability } \
\hline \$ 30 & 0.05 \
40 & 0.25 \
50 & 0.60 \
60 & 0.10
\end{array}$$
-What is the expected profit for this distribution?

Accepted Answer

A)  $11,875 
B)  $46 
C)  $47.50 
D)  $48.75 
E)  none of the above 
A)  $11,875 
B)  $46 
C)  $47.50 
D)  $48.75 
E)  none of the above

Question 13

Refer to the following:
A firm is considering the decision of investing in new plants. It can choose no new plants, one new plant, or two new plants. The following table gives the profits for each choice under three states of the economy. The manager assigns the following probabilities to each state of the economy: the economy expands, 20%, the economy contracts, 40%, or the economy is unchanged 40%.
 $\text { The economy }$
$\begin{array}{lccc} 
& \text { expands }(0.20) & \text { contracts }(0.40) & \text { unchanged }(0.40) \
\hline  \text { no new plants } & \$ 10 \text { million } & -\$ 2 \text { million } & \$ 3 \text { million } \
1 \text { new plant } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 7 \text { million } \
2 \text { new plants } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 5 \text { million }
\end{array}$
-Using the expected value rule which is correct-Building

Accepted Answer

A)  no new plants is better than one. 
B)  one new plant is better than two. 
C)  one new plant is equivalent to building two. 
D)  one new plant is better than none. 
E)  c and d 
A)  no new plants is better than one. 
B)  one new plant is better than two. 
C)  one new plant is equivalent to building two. 
D)  one new plant is better than none. 
E)  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 coefficients of variation for Distributions 1 and 2 are, respectively, ___________ and ___________, so Distribution ______ has MORE risk relative to its mean.

Accepted Answer

A)  0.22; 0.25; 2 
B)  0.22; 0.25; 1 
C)  0.31; 0.44; 1 
D)  0.31; 0.44; 2 
A)  0.22; 0.25; 2 
B)  0.22; 0.25; 1 
C)  0.31; 0.44; 1 
D)  0.31; 0.44; 2

Question 15

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 minimax regret 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 16

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 higher expected profit?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Both Options have the same expected profit 
D)  cannot calculate expected profit with the given information 
A)  Option A 
B)  Option B 
C)  Both Options have the same expected profit 
D)  cannot calculate expected profit with the given information

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 variance of the distribution?

Accepted Answer

A)  136.4 
B)  278.8 
C)  18.6 
D)  346.4 
E)  162.3 
A)  136.4 
B)  278.8 
C)  18.6 
D)  346.4 
E)  162.3

Question 18

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 expected profit if 10,000 units are produced?

Accepted Answer

A)  $500 
B)  $700 
C)  $625 
D)  $1,000 
E)  $1,754 
A)  $500 
B)  $700 
C)  $625 
D)  $1,000 
E)  $1,754

Question 19

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 expected value?

Accepted Answer

A)  16.5 
B)  28 
C)  36.5 
D)  42.5 
E)  49 
A)  16.5 
B)  28 
C)  36.5 
D)  42.5 
E)  49

Question 20

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 maximax rule, the decision maker would choose

Accepted Answer

A)  A. 
B)  B. 
C)  C. 
D)  impossible to say from the information given 
A)  A. 
B)  B. 
C)  C. 
D)  impossible to say from the information given

The variance of a probability distribution is used to measure risk because a higher variance is associated with

When a manager can list all outcomes and assign probabilities to each

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 expected value of project A (in $1,000s) is

Refer to the following: The following table shows the expected value and variance for 5 projects a firm can undertake. Praiecl Expeted Value Variance A \ 100 \ 124 B \ 220 \ 110 C \ 100 \ 138 D \ 180 \ 138 E \ 200 \ 124 -Which of the following is (are) correct?

Refer to the following probability distribution for profit Prafit Prabability \ 30 0.05 40 0.25 50 0.60 60 0.10 -What is the coefficient of variation for this distribution?

Refer to the following probability distribution for profit Prafit Prabability \ 30 0.05 40 0.25 50 0.60 60 0.10 -What is the expected profit for this distribution?

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 variance of the distribution?

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 expected value?

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

The variance of a probability distribution is used to measure risk because a higher variance is associated with

When a manager can list all outcomes and assign probabilities to each

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 expected value of project A (in $1,000s) is

Refer to the following: The following table shows the expected value and variance for 5 projects a firm can undertake. Praiecl Expeted Value Variance A \ 100 \ 124 B \ 220 \ 110 C \ 100 \ 138 D \ 180 \ 138 E \ 200 \ 124 -Which of the following is (are) correct?

Refer to the following probability distribution for profit Prafit Prabability \ 30 0.05 40 0.25 50 0.60 60 0.10 -What is the coefficient of variation for this distribution?

Refer to the following probability distribution for profit Prafit Prabability \ 30 0.05 40 0.25 50 0.60 60 0.10 -What is the expected profit for this distribution?

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 variance of the distribution?

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 expected value?

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