Question 1

Describe how a decision-maker's attitude toward risk affects her strategy for acquiring information.

Accepted Answer

Information is valuable whether the mana

Question 2

With declining probabilities of success, the optimal-stopping strategy is to:

Accepted Answer

A)  continue to invest until the venture becomes successful. 
B)  continue investing till sunk cost of investment is equal to zero. 
C)  not invest in the project at all. 
D)  discontinue investing when the expected profit is zero. 
E)  invest once in pursuit of commercial success and then discontinue investing. 
A)  continue to invest until the venture becomes successful. 
B)  continue investing till sunk cost of investment is equal to zero. 
C)  not invest in the project at all. 
D)  discontinue investing when the expected profit is zero. 
E)  invest once in pursuit of commercial success and then discontinue investing.

Question 3

What are the conditions suitable for a seller to use an auction? Explain.

Accepted Answer

An auction occupies a kind of middle gro

Question 4

A firm's expected profit without information is $50,000, while its expected value with test information is $75,000. If the cost of the test is $40,000, then the expected value of information is:

Accepted Answer

A)  $85,000. 
B)  $35,000. 
C)  $25,000. 
D)  $10,000. 
E)  $40,000. 
A)  $85,000. 
B)  $35,000. 
C)  $25,000. 
D)  $10,000. 
E)  $40,000.

Question 5

Oliver undergoes a standard medical test while at his regular checkup. The test is 90% reliable in detecting a form of cancer (C) that is found in 2% of the population. In particular, Pr(+|C) = .90. The test is also 90% reliable in screening out cancer, that is, Pr(-|H) = .90.
(a) If Oliver tests positive, how likely is it that he actually has cancer? If he tests negative, what is his cancer risk?
(b) Persons who test negative, and who actually have cancer, are able to sue for malpractice. Plaintiffs in such legal suits are awarded $250,000 on average (to cover medical expenses, pain and suffering, and legal fees). What is the hospital’s expected monetary liability due to the risk of incorrect negative tests?

Accepted Answer

The joint probability of a patient recei

Question 6

In the late 1990s, many local affiliates of the three TV networks (ABC, CBS, and NBC) left their current partner to join a rival network that was seeking new stations (The networks pay their affiliates to carry programs, which is a major source of revenue for the stations). Why would the affiliates leave their current partner for a new network?

Accepted Answer

The affiliates (probably) have the goal

Question 7

In a medical study of 5,000 middle-aged men, it was found that (i) 10% suffered heart disease, (ii) 20% got little or no exercise, and (iii) Of those suffering from heart disease, 60% had a history of little or no exercise. Based on this information, determine the risk of heart disease for a middle-aged man who does not exercise.

Accepted Answer

According to Bayes theorem, the probabil

Question 8

An event's revised probability depends on:

Accepted Answer

A)  purely subjective assessments. 
B)  prior probabilities and the accuracy of new information. 
C)  the sum of the prior probability and the conditional probability. 
D)  the expected value of information. 
E)  a consensus among experts' opinions. 
A)  purely subjective assessments. 
B)  prior probabilities and the accuracy of new information. 
C)  the sum of the prior probability and the conditional probability. 
D)  the expected value of information. 
E)  a consensus among experts' opinions.

Question 9

The use of intuitive prediction in forecasting:

Accepted Answer

A)  puts the wrong weights on different kinds of information. 
B)  provides approximately correct decisions most of the time. 
C)  is objective and reliable. 
D)  likely to produce inaccurate and biased results. 
E)  is consistent with probabilistic prediction. 
A)  puts the wrong weights on different kinds of information. 
B)  provides approximately correct decisions most of the time. 
C)  is objective and reliable. 
D)  likely to produce inaccurate and biased results. 
E)  is consistent with probabilistic prediction.

Question 10

Suppose that two independent geologists begin with different prior assessments concerning the chance of oil and natural gas at a particular site. They both observe the results of a seismic test. Will they agree concerning their revised probabilities? In what instance, would their revised probabilities be identical?

Accepted Answer

Bayes theorem instructs us that differen

Question 11

A firm wants to launch a new luxury product only if demand for the product is strong. The probability that demand is strong is estimated to be .6. With a perfect market survey, what is the probability that the test will show that demand is strong?

Accepted Answer

A)  .6 
B)  .4 
C)  .24 
D)  .5 
E) .2 
A)  .6 
B)  .4 
C)  .24 
D)  .5 
E) .2

Question 12

The test result B has no value in predicting outcome A if:

Accepted Answer

A)  Pr(A$\mid$
B)  = 1. 
B)  Pr(A&
B)  = Pr(
A) Pr(
B) . 
C)  Pr(A$\mid$
B)  = Pr(B$\mid$
A) . 
D)  Pr(
A)  > Pr(A$\mid$
B) . 
E)  Pr(A$\mid$
B)  = 0. 
A)  Pr(A$\mid$
B)  = 1. 
B)  Pr(A&
B)  = Pr(
A) Pr(
B) . 
C)  Pr(A$\mid$
B)  = Pr(B$\mid$
A) . 
D)  Pr(
A)  > Pr(A$\mid$
B) . 
E)  Pr(A$\mid$
B)  = 0.

Question 13

Which of the following is true of an English auction with private values?

Accepted Answer

A)  The bid value can exceed the reservation price of the buyer who wins. 
B)  A typical buyer shades his/her bid below the true private value. 
C)  A buyer's optimal bid strategy depends on the bidding behavior of other buyers. 
D)  The final price is approximately equal to the second highest buyer value. 
E)  Answers c and d are both correct. 
A)  The bid value can exceed the reservation price of the buyer who wins. 
B)  A typical buyer shades his/her bid below the true private value. 
C)  A buyer's optimal bid strategy depends on the bidding behavior of other buyers. 
D)  The final price is approximately equal to the second highest buyer value. 
E)  Answers c and d are both correct.

Question 14

If Pr(a) = .5 and Pr(b) = .3, then the value of Pr(a&b):

Accepted Answer

A)  equals .8. 
B)  equals .375. 
C)  equals .15. 
D)  equals .2. 
E)  cannot be determined without more information. 
A)  equals .8. 
B)  equals .375. 
C)  equals .15. 
D)  equals .2. 
E)  cannot be determined without more information.

Question 15

In a metropolitan area, one out of ten drivers on the road on Saturday after midnight is intoxicated. Half of all accidents during this time period involve drunk drivers. Finally, the overall accident rate on Saturday after midnight is 3 accidents per 100 cars on the road. For a drunk driver, the risk of accident is:

Accepted Answer

A)  .10. 
B) .15. 
C)  .50. 
D) .03 
E)  .05 
A)  .10. 
B) .15. 
C)  .50. 
D) .03 
E)  .05

Question 16

Explain with an example the potential benefit of competitive bidding versus bargaining to secure a better price by a seller.

Accepted Answer

A firm is seeking to sell one of its div

Question 17

Suppose that the firm's expected profit without test information is $75,000. There exists a perfectly reliable test that produces a positive result with a probability of 0.75 and a negative result otherwise. In light of a positive result, the firm's expected profit is $120,000; after a negative result, its expected profit is $40,000. Find the expected value of information.

Accepted Answer

With the information, expected

Question 18

Joint probability refers to:

Accepted Answer

A)  the decision maker's prior probability. 
B)  the accuracy of new test information. 
C)  a long-run frequency. 
D)  the chance of two events both happening. 
E)  the chance that at least one of the two events will occur. 
A)  the decision maker's prior probability. 
B)  the accuracy of new test information. 
C)  a long-run frequency. 
D)  the chance of two events both happening. 
E)  the chance that at least one of the two events will occur.

Question 19

The winner's curse occurs when:

Accepted Answer

A)  buyers are realistic in their value estimates. 
B)  the winning bid exceeds the true value of a good. 
C)  the contract bidder experiences frequent cost overruns. 
D)  the winning bid is drawn from the left tail of the bid distribution. 
E)  the firm's bid discount exceeds its (upward) estimation error. 
A)  buyers are realistic in their value estimates. 
B)  the winning bid exceeds the true value of a good. 
C)  the contract bidder experiences frequent cost overruns. 
D)  the winning bid is drawn from the left tail of the bid distribution. 
E)  the firm's bid discount exceeds its (upward) estimation error.

Question 20

Suppose that the chance of having both a favorable survey and a successful product launch is .3. In addition, the frequency of favorable market surveys for all new product launches is .5. Then the chance of a successful product launch given a favorable survey is:

Accepted Answer

A) .8 
B)  .5 
C)  .4 
D)  .6 
E)  .3 
A) .8 
B)  .5 
C)  .4 
D)  .6 
E)  .3

Describe how a decision-maker's attitude toward risk affects her strategy for acquiring information.

With declining probabilities of success, the optimal-stopping strategy is to:

What are the conditions suitable for a seller to use an auction? Explain.

A firm's expected profit without information is $50,000, while its expected value with test information is $75,000. If the cost of the test is $40,000, then the expected value of information is:

An event's revised probability depends on:

The use of intuitive prediction in forecasting:

A firm wants to launch a new luxury product only if demand for the product is strong. The probability that demand is strong is estimated to be .6. With a perfect market survey, what is the probability that the test will show that demand is strong?

The test result B has no value in predicting outcome A if:

Which of the following is true of an English auction with private values?

If Pr(a) = .5 and Pr(b) = .3, then the value of Pr(a&b):

Explain with an example the potential benefit of competitive bidding versus bargaining to secure a better price by a seller.

Joint probability refers to:

The winner's curse occurs when:

Suppose that the chance of having both a favorable survey and a successful product launch is .3. In addition, the frequency of favorable market surveys for all new product launches is .5. Then the chance of a successful product launch given a favorable survey is:

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

Decision Making Under Uncertainty

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters

Exam 13: The Value of Information

Describe how a decision-maker's attitude toward risk affects her strategy for acquiring information.

With declining probabilities of success, the optimal-stopping strategy is to:

What are the conditions suitable for a seller to use an auction? Explain.

A firm's expected profit without information is $50,000, while its expected value with test information is $75,000. If the cost of the test is $40,000, then the expected value of information is:

An event's revised probability depends on:

The use of intuitive prediction in forecasting:

A firm wants to launch a new luxury product only if demand for the product is strong. The probability that demand is strong is estimated to be .6. With a perfect market survey, what is the probability that the test will show that demand is strong?

The test result B has no value in predicting outcome A if:

Which of the following is true of an English auction with private values?

If Pr(a) = .5 and Pr(b) = .3, then the value of Pr(a&b):

Explain with an example the potential benefit of competitive bidding versus bargaining to secure a better price by a seller.

Joint probability refers to:

The winner's curse occurs when:

Suppose that the chance of having both a favorable survey and a successful product launch is .3. In addition, the frequency of favorable market surveys for all new product launches is .5. Then the chance of a successful product launch given a favorable survey is:

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

Decision Making Under Uncertainty

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters