Question 1

If expected profit is R and variance  $\sigma$ 2 = 0,then:

Accepted Answer

A)  Ri = 0 for all i 
B)  R - Ri is a positive constant for all i. 
C)  R - Ri is a negative constant for all i. 
D)  Ri = 0 for all i. 
E)  Ri = R for all i. 
A)  Ri = 0 for all i 
B)  R - Ri is a positive constant for all i. 
C)  R - Ri is a negative constant for all i. 
D)  Ri = 0 for all i. 
E)  Ri = R for all i. E

Question 2

Nature gives company A one of three endowments; then company A picks one of two options.Depending on A's choice,company B picks one of three options with each one having two possible payoffs,decided by nature.How many chance forks does the decision tree depicting this have?

Accepted Answer

A)  4. 
B)  9. 
C)  19. 
D)  28. 
E)  36. 
A)  4. 
B)  9. 
C)  19. 
D)  28. 
E)  36. C

Question 3

A person who is risk-neutral has a utility function (with income on the horizontal axis and utility on the vertical axis)that,as income increases:

Accepted Answer

A)  is horizontal. 
B)  is vertical. 
C)  has constant, positive slope. 
D)  is curved down. 
E)  is curved up. 
A)  is horizontal. 
B)  is vertical. 
C)  has constant, positive slope. 
D)  is curved down. 
E)  is curved up. C

Question 4

If xi is defined as xi = $\pi$i - E($\pi$i),and pi is the probability of occurrence of any xi,the formula for the square of the standard deviation can be written as:

Accepted Answer

A)  $\Sigma$ xi pi. 
B) $\Sigma$ xi p2i . 
C)  $\Sigma$x2i p2i . 
D)  $\Sigma$x2i pi. 
E) $\Sigma$(xi pi)2. 
A)  $\Sigma$ xi pi. 
B) $\Sigma$ xi p2i . 
C)  $\Sigma$x2i p2i . 
D)  $\Sigma$x2i pi. 
E) $\Sigma$(xi pi)2.

Question 5

A chance fork with payoffs given for each branch is assigned a value based on:

Accepted Answer

A)  the highest-payoff branch. 
B)  the lowest-payoff branch. 
C)  an average of the highest- and lowest-payoff branches. 
D)  an evenly weighted average of all payoff branches. 
E)  a probability weighted average of all payoff branches. 
A)  the highest-payoff branch. 
B)  the lowest-payoff branch. 
C)  an average of the highest- and lowest-payoff branches. 
D)  an evenly weighted average of all payoff branches. 
E)  a probability weighted average of all payoff branches.

Question 6

A project could yield a profit of $1,$2,$3,or $6,with equal probability.Then the variance $\sigma$2,is:

Accepted Answer

A)  1. 
B)  3/2. 
C)  7/2. 
D)  9/2. 
E)  14. 
A)  1. 
B)  3/2. 
C)  7/2. 
D)  9/2. 
E)  14.

Question 7

In a decision tree,a decision fork is represented by a(n):

Accepted Answer

A)  X. 
B)  open circle. 
C)  closed circle. 
D)  triangle. 
E)  square. 
A)  X. 
B)  open circle. 
C)  closed circle. 
D)  triangle. 
E)  square.

Question 8

George is indifferent between $100 and a bet with a 0.6 chance of $50 and a 0.4 chance of $200.If U(50)= a and U(200)= b,then U(100)= :

Accepted Answer

A)  0.4a + 0.6b. 
B)  0.6a + 0.4b. 
C)  (a + b) / 2. 
D)  a + b. 
E)  6a + 4b. 
A)  0.4a + 0.6b. 
B)  0.6a + 0.4b. 
C)  (a + b) / 2. 
D)  a + b. 
E)  6a + 4b.

Question 9

For constants a and b,0 < b,b $\neq$ 1,and expected profit E($\pi$),the expected utility function of a person who is risk-neutral can be written as E(U)= :

Accepted Answer

A)  a + bE($\pi$). 
B)  a - bE($\pi$). 
C)  a + b$\pi$. 
D)  a + [E($\pi$)]b. 
E)  a + [E($\pi$)] -b. 
A)  a + bE($\pi$). 
B)  a - bE($\pi$). 
C)  a + b$\pi$. 
D)  a + [E($\pi$)]b. 
E)  a + [E($\pi$)] -b.

Question 10

Trope Oil Company is considering drilling an exploratory well.The symbol P is the chance of a successful well,R is the revenue from a successful well,L is the price previously paid for the land,and C is the cost of drilling.The well will either be successful or dry.A company that is risk-neutral should drill if:

Accepted Answer

A)  PR > C. 
B)  PR > C + L. 
C)  P(R - 
C)  > 0. 
D)  P(R - C - L) > 0. 
E)  P(R - 
C)  > L. 
A)  PR > C. 
B)  PR > C + L. 
C)  P(R - 
C)  > 0. 
D)  P(R - C - L) > 0. 
E)  P(R - 
C)  > L.

Question 11

Donald Trumpet is indifferent between rates of return satisfying R = 0.10 + 0.01 $\sigma$ ( $\sigma$is the standard deviation).Donald is:

Accepted Answer

A)  risk-averse and profit maximizing. 
B)  risk-averse and not profit maximizing. 
C)  risk loving and profit maximizing. 
D)  risk loving and not profit maximizing. 
E)  risk-neutral. 
A)  risk-averse and profit maximizing. 
B)  risk-averse and not profit maximizing. 
C)  risk loving and profit maximizing. 
D)  risk loving and not profit maximizing. 
E)  risk-neutral.

Question 12

A risk-loving person has a utility function that,with income on the horizontal axis and utility on the vertical axis,as income increases:

Accepted Answer

A)  is horizontal. 
B)  is vertical. 
C)  has constant, positive slope. 
D)  is curved down. 
E)  is curved up. 
A)  is horizontal. 
B)  is vertical. 
C)  has constant, positive slope. 
D)  is curved down. 
E)  is curved up.

Question 13

Billy Joe Bob thinks he will win $3 with probability P; otherwise he will win $11.His expected payoff is:

Accepted Answer

A)  $3 + $8P. 
B)  $11 - $8P. 
C)  $7. 
D)  $3 + $11P. 
E)  $11 - $3P. 
A)  $3 + $8P. 
B)  $11 - $8P. 
C)  $7. 
D)  $3 + $11P. 
E)  $11 - $3P.

Question 14

Harold is indifferent between $2,500 for sure and a bet with a 60% chance of $2,400 and a 40% chance of $2,600.Harold is:

Accepted Answer

A)  risk-averse. 
B)  risk loving. 
C)  risk-neutral. 
D)  a profit maximizer. 
E)  irrational. 
A)  risk-averse. 
B)  risk loving. 
C)  risk-neutral. 
D)  a profit maximizer. 
E)  irrational.

Question 15

If an option pays $6 one-quarter of the time and loses $6 three-quarters of the time,then the variance  $\sigma$2 = :

Accepted Answer

A)  0. 
B)  -3. 
C)  9. 
D)  12. 
E)  27. 
A)  0. 
B)  -3. 
C)  9. 
D)  12. 
E)  27.

Question 16

A manager is indifferent between rates of return satisfying i = 0.08 + 0.02 $\sigma$( $\sigma$ is the standard deviation).The manager's risk premium for  $\sigma$= 2 is:

Accepted Answer

A)  0%. 
B)  2%. 
C)  4%. 
D)  8%. 
E)  12%. 
A)  0%. 
B)  2%. 
C)  4%. 
D)  8%. 
E)  12%.

Question 17

Betty Gamble is willing to pay exactly,but not more than,$20 to get a deal where she has a 1/3 chance of winning $30 and a 1/6 chance of winning $6 and will win $20 otherwise.Betty is:

Accepted Answer

A)  risk-averse and profit maximizing. 
B)  risk-averse, not profit maximizing. 
C)  risk loving and profit maximizing. 
D)  risk loving, not profit maximizing. 
E)  risk-neutral. 
A)  risk-averse and profit maximizing. 
B)  risk-averse, not profit maximizing. 
C)  risk loving and profit maximizing. 
D)  risk loving, not profit maximizing. 
E)  risk-neutral.

Question 18

A person who has a utility function (with income on the horizontal axis and utility on the vertical axis)that is linear is:

Accepted Answer

A)  risk-averse. 
B)  risk loving. 
C)  risk-neutral. 
D)  irrational. 
E)  always sad. 
A)  risk-averse. 
B)  risk loving. 
C)  risk-neutral. 
D)  irrational. 
E)  always sad.

Question 19

You pay $3.75 to roll a normal die one time.You get $1 for each dot that turns up.Your expected profit from this venture is:

Accepted Answer

A)  -$0.75. 
B)  -$0.25. 
C)  $0.25. 
D)  $3.00. 
E)  $3.50. 
A)  -$0.75. 
B)  -$0.25. 
C)  $0.25. 
D)  $3.00. 
E)  $3.50.

Question 20

A company chooses one of four options; then nature decides whether the choice works.If it does not work,the company has two updating options,each with three possible payoffs.How many decision forks are on the tree depicting this?

Accepted Answer

A)  5. 
B)  12. 
C)  17. 
D)  28. 
E)  36. 
A)  5. 
B)  12. 
C)  17. 
D)  28. 
E)  36.

If expected profit is R and variance $\sigma$ ² = 0,then:

Nature gives company A one of three endowments; then company A picks one of two options.Depending on A's choice,company B picks one of three options with each one having two possible payoffs,decided by nature.How many chance forks does the decision tree depicting this have?

A person who is risk-neutral has a utility function (with income on the horizontal axis and utility on the vertical axis)that,as income increases:

If x_i is defined as x_i = $\pi$ _i - E( $\pi$ _i),and p_i is the probability of occurrence of any x_i,the formula for the square of the standard deviation can be written as:

A chance fork with payoffs given for each branch is assigned a value based on:

A project could yield a profit of $1,$2,$3,or $6,with equal probability.Then the variance $\sigma$ ²,is:

In a decision tree,a decision fork is represented by a(n):

George is indifferent between $100 and a bet with a 0.6 chance of $50 and a 0.4 chance of $200.If U(50)= a and U(200)= b,then U(100)= :

For constants a and b,0 < b,b $\neq$ 1,and expected profit E( $\pi$ ),the expected utility function of a person who is risk-neutral can be written as E(U)= :

Donald Trumpet is indifferent between rates of return satisfying R = 0.10 + 0.01 $\sigma$ ( $\sigma$ is the standard deviation).Donald is:

A risk-loving person has a utility function that,with income on the horizontal axis and utility on the vertical axis,as income increases:

Billy Joe Bob thinks he will win $3 with probability P; otherwise he will win $11.His expected payoff is:

Harold is indifferent between $2,500 for sure and a bet with a 60% chance of $2,400 and a 40% chance of $2,600.Harold is:

If an option pays $6 one-quarter of the time and loses $6 three-quarters of the time,then the variance $\sigma$ ² = :

A manager is indifferent between rates of return satisfying i = 0.08 + 0.02 $\sigma$ ( $\sigma$ is the standard deviation).The manager's risk premium for $\sigma$ = 2 is:

Betty Gamble is willing to pay exactly,but not more than,$20 to get a deal where she has a 1/3 chance of winning $30 and a 1/6 chance of winning $6 and will win $20 otherwise.Betty is:

A person who has a utility function (with income on the horizontal axis and utility on the vertical axis)that is linear is:

You pay $3.75 to roll a normal die one time.You get $1 for each dot that turns up.Your expected profit from this venture is:

A company chooses one of four options; then nature decides whether the choice works.If it does not work,the company has two updating options,each with three possible payoffs.How many decision forks are on the tree depicting this?

Introduction

Demand Theory

Consumer Behavior and Rational Choice

Estimating Demand Functions

Production Theory

The Analysis of Costs

Perfect Competition

Monopoly and Monopolistic Competition

Managerial Use of Price Discrimination

Bundling and Intrafirm Pricing

Oligopoly

Game Theory

Auctions

Principalagent Issues and Managerial Compensation

Adverse Selection

Government and Business

Optimization Techniques

Appendix Problems

Filters

Exam 14: Risk Analysis

If expected profit is R and variance σ\sigmaσ 2 = 0,then:

Nature gives company A one of three endowments; then company A picks one of two options.Depending on A's choice,company B picks one of three options with each one having two possible payoffs,decided by nature.How many chance forks does the decision tree depicting this have?

A person who is risk-neutral has a utility function (with income on the horizontal axis and utility on the vertical axis)that,as income increases:

If xi is defined as xi = π\piπ i - E( π\piπ i),and pi is the probability of occurrence of any xi,the formula for the square of the standard deviation can be written as:

A chance fork with payoffs given for each branch is assigned a value based on:

A project could yield a profit of $1,$2,$3,or $6,with equal probability.Then the variance σ\sigmaσ 2,is:

In a decision tree,a decision fork is represented by a(n):

George is indifferent between $100 and a bet with a 0.6 chance of $50 and a 0.4 chance of $200.If U(50)= a and U(200)= b,then U(100)= :

For constants a and b,0 < b,b ≠\neq= 1,and expected profit E( π\piπ ),the expected utility function of a person who is risk-neutral can be written as E(U)= :

Donald Trumpet is indifferent between rates of return satisfying R = 0.10 + 0.01 σ\sigmaσ ( σ\sigmaσ is the standard deviation).Donald is:

A risk-loving person has a utility function that,with income on the horizontal axis and utility on the vertical axis,as income increases:

Billy Joe Bob thinks he will win $3 with probability P; otherwise he will win $11.His expected payoff is:

Harold is indifferent between $2,500 for sure and a bet with a 60% chance of $2,400 and a 40% chance of $2,600.Harold is:

If an option pays $6 one-quarter of the time and loses $6 three-quarters of the time,then the variance σ\sigmaσ 2 = :

A manager is indifferent between rates of return satisfying i = 0.08 + 0.02 σ\sigmaσ ( σ\sigmaσ is the standard deviation).The manager's risk premium for σ\sigmaσ = 2 is:

Betty Gamble is willing to pay exactly,but not more than,$20 to get a deal where she has a 1/3 chance of winning $30 and a 1/6 chance of winning $6 and will win $20 otherwise.Betty is:

A person who has a utility function (with income on the horizontal axis and utility on the vertical axis)that is linear is:

You pay $3.75 to roll a normal die one time.You get $1 for each dot that turns up.Your expected profit from this venture is:

A company chooses one of four options; then nature decides whether the choice works.If it does not work,the company has two updating options,each with three possible payoffs.How many decision forks are on the tree depicting this?

Introduction

Demand Theory

Consumer Behavior and Rational Choice

Estimating Demand Functions

Production Theory

The Analysis of Costs

Perfect Competition

Monopoly and Monopolistic Competition

Managerial Use of Price Discrimination

Bundling and Intrafirm Pricing

Oligopoly

Game Theory

Auctions

Principalagent Issues and Managerial Compensation

Adverse Selection

Government and Business

Optimization Techniques

Appendix Problems

Filters

If expected profit is R and variance $\sigma$ ² = 0,then:

If x_i is defined as x_i = $\pi$ _i - E( $\pi$ _i),and p_i is the probability of occurrence of any x_i,the formula for the square of the standard deviation can be written as:

A project could yield a profit of $1,$2,$3,or $6,with equal probability.Then the variance $\sigma$ ²,is:

For constants a and b,0 < b,b $\neq$ 1,and expected profit E( $\pi$ ),the expected utility function of a person who is risk-neutral can be written as E(U)= :

Donald Trumpet is indifferent between rates of return satisfying R = 0.10 + 0.01 $\sigma$ ( $\sigma$ is the standard deviation).Donald is:

If an option pays $6 one-quarter of the time and loses $6 three-quarters of the time,then the variance $\sigma$ ² = :

A manager is indifferent between rates of return satisfying i = 0.08 + 0.02 $\sigma$ ( $\sigma$ is the standard deviation).The manager's risk premium for $\sigma$ = 2 is: