Deck 15: Decisions Under Risk and Uncertainty

Question 1

refer to the following:
A firm is considering two projects, A and B, with the following probability distributions for profit.Profit
?

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

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

Answer 1

$60

Question 2

refer to the following:
A firm is considering two projects, A and B, with the following probability distributions for profit.Profit
?

-What is the expected value of project B (in $1,000s)?

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

Answer 2

$65

Question 3

refer to the following probability distribution for profit
?

-What is the coefficient of variation for this distribution?

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

Answer 3

0.147

Question 4

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.



-What is the expected profit if 10,000 units are produced?

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

Question 5

refer to the following table showing the probability distribution of payoffs from an activity.


-What is the expected value?

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

Question 6

refer to the following table showing the probability distribution of payoffs from an activity.


-What is the variance of the distribution?

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

Question 7

refer to the following table showing the probability distribution of payoffs from an activity.


-What is the coefficient of variation for this distribution?

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

Question 8

Use the following two probability distributions for sales of a firm


-The expect value of sales for Distribution 1 is _____________.

A) 2,500
B) 2,758
C) 2,800
D) 3,000
E) 4,000

Question 9

Use the following two probability distributions for sales of a firm


-Which distribution is more risky?

A) Distribution 1 has a higher variance than Distribution 2, so Distribution 1 is more risky.
B) Distribution 2 has a higher variance than Distribution 1, so Distribution 2 is more risky.
C) Distribution 2 has a larger standard deviation than Distribution 1, so Distribution 2 is more risky.
D) both a and c

Question 10

Use the following two probability distributions for sales of a firm


-The coefficients of variation for Distributions 1 and 2 are, respectively, ___________ and ___________, so Distribution ______ has MORE risk relative to its mean.

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 11

using the following:
The manager's utility function for profit is U(? ) = 50? , where ? 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:


-What is the expected profit?

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

Question 12

using the following:
The manager's utility function for profit is U(π ) = 50π , where π 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:


-What is the expected utility of profit?

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

Question 13

using the following:
The manager's utility function for profit is U(? ) = 50? , where ? 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:


-The marginal utility of an extra dollar of profit is __________.

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

Question 14

using the following:
The manager's utility function for profit is U(?) = 10 ln(?), where ? 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:


-What is the expected profit?

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

Question 15

A manager faces the following two probability distributions for sales:

-For Distribution 1, the expected sales are ______________. For Distribution 2, the expected sales are ______________.

Question 16

A manager faces the following two probability distributions for sales:

-For Distribution 1, the variance is ______________. For Distribution 2, the variance is ______________.

Question 17

A manager faces the following two probability distributions for sales:

-For Distribution 1, the standard deviation is ______________. For Distribution 2, the standard deviation is ______________.

Question 18

A manager faces the following two probability distributions for sales:

-Distribution ____ is the riskier of the two distributions of sales.

Question 19

A manager faces the following two probability distributions for sales:

-For Distribution 1, the coefficient of variation is ______________. For Distribution 2, the coefficient of variation is ______________. Distribution _____ has the greater level of risk relative to its mean.

Question 20

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:
-Option ____ maximizes expected profit.

Question 21

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:
-Option ____ is the riskier of the two options.

Question 22

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:
-The manager _____________ (can, cannot) apply mean-variance rules in this decision. If the manager can use mean-variance rules, the manager would choose Option ____.

Question 23

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:
-Using the coefficient of variation rule, the manager would choose Option ____.

Question 24

A manager's utility function for profit is U(π ) = 50π , where π 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:

-The expected profit is $_______________________.

Question 25

A manager's utility function for profit is U(? ) = 50? , where ? 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:


-The expected utility of profit is __________________.

Question 26

A manager's utility function for profit is U(π ) = 50π , where π 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:

-The marginal utility of an extra dollar of profit is ________.

Question 27

A manager's utility function for profit is U(π ) = 50π , where π 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:

-The manager is risk ___________ because the marginal utility of profit is ________.

Question 28

Suppose the manager of a firm has a utility function for profit U(π ) = 10 ln(π ), where π is the dollar amount of profit. The manager is considering a risky project with the following profit payoffs and probabilities:

-  The expected profit is $_______________________.

Question 29

Suppose the manager of a firm has a utility function for profit U(π ) = 10 ln(π ), where π is the dollar amount of profit. The manager is considering a risky project with the following profit payoffs and probabilities:

-     The expected utility of profit is __________________.

Question 30

Suppose the manager of a firm has a utility function for profit U(π ) = 10 ln(π ), where π is the dollar amount of profit. The manager is considering a risky project with the following profit payoffs and probabilities:

-  Fill in the blanks in the table showing the marginal utility of an additional $1,000 of profit.

Question 31

Suppose the manager of a firm has a utility function for profit U(π ) = 10 ln(π ), where π is the dollar amount of profit. The manager is considering a risky project with the following profit payoffs and probabilities:

-   The manager is risk _________ because the marginal utility of profit is __________.

Question 32

Suppose the manager in Problem 15-2F has absolutely no idea about the probabilities of the two prices occurring. Which option would the manager choose under each of the following rules?
-Maximax rule _________________

Question 33

Suppose the manager in Problem 15-2F has absolutely no idea about the probabilities of the two prices occurring. Which option would the manager choose under each of the following rules?
-Maximin rule _________________

Question 34

Suppose the manager in Problem 15-2F has absolutely no idea about the probabilities of the two prices occurring. Which option would the manager choose under each of the following rules?
-Minimax regret rule _________________

Question 35

Suppose the manager in Problem 15-2F has absolutely no idea about the probabilities of the two prices occurring. Which option would the manager choose under each of the following rules?
-Equal probability rule _________________