Deck 17: Making Decisions With Uncertainty

Question 1

You can invest $100,000 into either project A or B.You estimate that A succeeds with probability 0.7 in which case it doubles in value.If it fails,the scrap value is worth $50,000.Project B succeeds with probability 0.6,has value $150,000 if it succeeds and value of $30,000 if not.

A)You should invest in project A
B)You should invest in project B
C)You should not invest in either
D)You cannot tell from the information presented

Answer 1

A

Question 2

Heads and tails are equally likely but you win $2.00 on heads and lose $1.00 on tails

A)the expected value is $0.50
B)the expected value is -$0.50
C)the expected value is $1.00
D)the expected value is $0.00

Answer 2

A

Question 3

Heads and tails are equally likely but you win $3.00 on heads and lose $1.00 on tails

A)the expected value is $0.50
B)the expected value is -$0.50
C)the expected value is $1.00
D)the expected value is $0.00

Answer 3

C

Question 4

Three possibilities have probabilities 0.4,0.4 and 0.2 and values $10,$20,and $30 respectively.The expected value is:

A)$15
B)$16
C)$17
D)$18

Question 5

Four possibilities are equally likely and have payoffs of $2,$4,$6,and $8.The expected value is:

A)$4
B)$5
C)$6
D)$7

Question 6

Three possibilities have probabilities 0.5,0.3 and 0.2 and values $10,$20,and $30 respectively.The expected value is:

A)$15
B)$16
C)$17
D)$18

Question 7

Six possibilities are equally likely and have payoffs of $2,$4,$6,$8,$10,and $12.The expected value is:

A)$4
B)$5
C)$6
D)$7

Question 8

You can invest $100,000 into either project A or B.You estimate that A succeeds with probability 0.6 in which case it doubles in value.If it fails,the scrap value is worth $50,000.Project B succeeds with probability 0.7,has value $150,000 if it succeeds and value of $30,000 if not.

A)You should invest in project A
B)You should invest in project B
C)You should not invest in either
D)You cannot tell from the information presented

Question 9

Heads and tails are equally likely but you win a dollar on heads and lose a dollar on tails

A)the expected value is $0.50
B)the expected value is -$0.50
C)the expected value is $1.00
D)the expected value is $0.00

Question 10

When a variable can take on different values

A)it is a random variable
B)it is a dependent variable
C)it is an independent variable
D)it is an exogenous variable

Question 11

Three possibilities have probabilities 0.5,0.4 and 0.1 and values $10,$20,and $30 respectively.The expected value is:

A)$15
B)$16
C)$17
D)$18

Question 12

Four possibilities have probabilities 0.4,0.2,0.2 and 0.2 and values $10,$20,$30,and $40 respectively.The expected value is:

A)$22
B)$24
C)$26
D)$28

Question 13

You can invest in either project A or B.Project A has value $150 with probability 0.1 and value $75 with probability 0.9.Project B has value $110 with probability 0.2 and value $65 with probability 0.8.

A)You should invest in project A
B)You should invest in project B
C)You should not invest in either
D)You cannot tell from the information presented

Question 14

Five possibilities are equally likely and have payoffs of $2,$4,$6,$8,and $10.The expected value is:

A)$4
B)$5
C)$6
D)$7

Question 15

You can invest in either project A or B.Project A has value $150 with probability 0.1 and value $75 with probability 0.9.Project B has value $120 with probability 0.2 and value $75 with probability 0.8.

A)You should invest in project A
B)You should invest in project B
C)You should not invest in either
D)You cannot tell from the information presented

Question 16

The expected value is

A)the product of the sums of the probability and the values in different states
B)the sum of the products of the probability and the values in different states
C)the difference between the products of the probability and the values in different states
D)the difference between the sums of the probability and the values in different states

Question 17

You can invest in either project A or B.Project A has value $100 with probability 0.1 and value $75 with probability 0.9.Project B has value $110 with probability 0.2 and value $70 with probability 0.8.

A)You should invest in project A
B)You should invest in project B
C)You should not invest in either
D)You cannot tell from the information presented

Question 18

Three possibilities are equally likely and have payoffs of $3,$6,and $9.The expected value is:

A)$4
B)$5
C)$6
D)$7

Question 19

You can invest $100,000 into either project A or B.You estimate that A succeeds with probability 0.5 in which case it doubles in value.If it fails,the scrap value is worth $50,000.Project B succeeds with probability 0.8,has value $150,000 if it succeeds and value of $30,000 if not.

A)You should invest in project A
B)You should invest in project B
C)You should not invest in either
D)You cannot tell from the information presented

Question 20

You can invest in either project A or B.Project A has value $150 with probability 0.1 and value $75 with probability 0.9.Project B has value $110 with probability 0.2 and value $65 with probability 0.8.

A)You should invest in project A
B)You should invest in project B
C)You should not invest in either
D)You cannot tell from the information presented

Question 21

We worry that false negatives occur too often relative to false positives due to

A)most hypotheses being false
B)it being appropriate to set a high standard for acceptance of a hypothesis
C)managers having an incentive to make a false negative conclusion because they are harder for superiors to observe
D)they are not too common

Question 22

Half of all potential customers would pay $16 for your product but half would only pay $10 but you cannot tell them apart.Your marginal costs are $4.If you set the price at $10,the expected profit is:

A)$3
B)$4
C)$5
D)$6

Question 23

Four possibilities have probabilities 0.4,0.2,0.2 and 0.2 and values $20,$20,$40,and $40 respectively.The expected value is:

A)$22
B)$24
C)$26
D)$28

Question 24

Half of all potential customers would pay $10 for your product but half would only pay $8 but you cannot tell them apart.Your marginal costs are $4.If you set the price at $8,the expected profit is:

A)$3
B)$4
C)$5
D)$6

Question 25

Four possibilities have probabilities 0.4,0.2,0.2 and 0.2 and values $40,$30,$20,and $10 respectively.The expected value is:

A)$22
B)$24
C)$26
D)$28

Question 26

You want to run a difference-in-difference experiment with a price increase for your lawn chairs in Miami.If you are worried about "leakage" with your control group,a poor comparison city would be

A)Boston
B)San Francisco
C)St.Paul
D)Tampa Bay

Question 27

You want to run a difference-in-difference experiment with a price increase for the bacon cheeseburger item on your menu.If you are worried about "leakage" with your control group,a good comparison menu item would be

A)soft drink sales
B)the bacon burger without cheese
C)the bacon-lettuce-and-tomato sandwich
D)the regular cheeseburger

Question 28

Half of all potential customers would pay $10 for your product but half would only pay $8 but you cannot tell them apart.Your marginal costs are $4.If you set the price at $10,the expected profit is:

A)$3
B)$4
C)$5
D)$6

Question 29

You want to run a difference-in-difference experiment with a price increase for the bacon cheeseburger item on your menu.If you are worried about the "representativeness" with your control group,a poor comparison menu item would be

A)soft drink sales
B)the bacon burger without cheese
C)the bacon-lettuce-and-tomato sandwich
D)the regular cheeseburger

Question 30

You increase your advertising buy for your product in market A but not in market B.Sales in A rise from 1140 units per week to 1180 while sales in B fall from 1270 to 1230.The Difference-in-difference estimate of the effect of the increased advertising is:

A)80 units
B)100 units
C)120 units
D)140 units

Question 31

A pharmaceutical company executive has to decide whether to fund a new drug development project.For this project,a success would earn $10 million and a failure would cost $90 in lost profits.At what probability of expected success should she fund the project?

A)0)10
B)0)20
C)0)80
D)0)90

Question 32

Four possibilities have probabilities 0.4,0.2,0.2 and 0.2 and values $80,$30,$0,and -$80 respectively.The expected value is:

A)$22
B)$24
C)$26
D)$28

Question 33

You put your product on 20% off sale market A but leave it unchanged in market B.Sales in A increase from 840 units per week to 1040 while sales in B rise from 770 to 830.The Difference-in-difference estimate of the effect of the price change is:

A)80 units
B)100 units
C)120 units
D)140 units

Question 34

You experiment by offering free warranties for your product in market A not in market B.Sales in A rise from 240 units per week to 360 while sales in B rise from 410 to 430.The Difference-in-difference estimate of the effect of the free warranty is:

A)80 units
B)100 units
C)120 units
D)140 units

Question 35

Half of all potential customers would pay $16 for your product but half would only pay $10 but you cannot tell them apart.Your marginal costs are $4.If you set the price at $16,the expected profit is:

A)$3
B)$4
C)$5
D)$6

Question 36

A "false negative" is

A)when you incorrectly conclude that your hypothesis is true
B)when you incorrectly conclude that your hypothesis is false
C)when you correctly conclude that your hypothesis is true
D)when you correctly conclude that your hypothesis is false

Question 37

A "false positive" is

A)when you incorrectly conclude that your hypothesis is true
B)when you incorrectly conclude that your hypothesis is false
C)when you correctly conclude that your hypothesis is true
D)when you correctly conclude that your hypothesis is false

Question 38

A movie executive has to decide to fund a new movie project.For this project,a success would earn $20 million and a failure would cost $60 in lost profits.At what probability of expected success should he fund the movie?

A)0)20
B)0)25
C)0)50
D)0)75

Question 39

You want to run a difference-in-difference experiment with a price increase for your lawn chairs in Miami.If you are worried about the "representativeness" of your control group,a good comparison city would be

A)Boston
B)San Francisco
C)St.Paul
D)Tampa Bay

Question 40

You raise your product price by $10 in market A but leave it unchanged in market B.Sales in A fall from 840 units per week to 740 while sales in B rise from 770 to 790.The Difference-in-difference estimate of the effect of the price change is:

A)80 units
B)100 units
C)120 units
D)140 units

Question 41

A manager may over-research the appropriateness of a decision

A)because the costs of a false positive are usually larger
B)because the costs of a false negative are usually larger
C)because it is important to be 100% certain before making a decision
D)because managers can face inordinate censure from agreeing to a bad decision

Question 42

Which types of poor decisions are more visible to a decision maker's supervisor?

A)agreeing to undertake a project
B)deciding not to undertake a project
C)deciding to investigate a proposed project until one is certain
D)deciding to randomly choose whether to undertake the project

Question 43

The key distinction between risk and uncertainty is

A)risk cannot be quantified,priced or traded
B)uncertainty refers to not knowing possible outcomes or their probabilities
C)uncertainty is modeled by listing the possible outcomes and assigning probabilities to the outcomes
D)risk has to do with not knowing the probability distribution of a random variable