Deck 15: Making Decisions With Uncertainty

Question 1

​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

Answer 1

C

Question 2

​You can either invest in project A or B.Project A could have a value of $100 with a probability of 0.1 or a value of $75 with probability 0.9.Project B could have a value of $110 with probability 0.2 or a value of $70 with a probability of 0.8.Which project should you invest in?

A)​Project A
B)Project B
C)Neither of the projects
D)​You cannot tell from the information presented

Answer 2

B

Question 3

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

A)​$5
B)$6
C)$7
D)​$8

Answer 3

B

Question 4

​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 5

​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 6

​You can either invest in project A or B.Project A could have a value of $150 with a probability of 0.1 or a value of $75 with probability 0.9.Project B could have a value of $120 with probability 0.2 or a value of $75 with a probability of 0.8.Which project should you invest in?

A)​Project A
B)Project B
C)Neither of the projects
D)​You cannot tell from the information presented

Question 7

​When a variable can take on different values

A)​it is a random variable
B)it is a dependent variable
C)it is an dummy variable
D)​it is an endogenous variable

Question 8

​Expected value is

A)​(Probability of state A+Value in state A)(Probability of state B+Value in state B)
B)(Probability of state A*Value in state A)+(Probability of state B*Value in state B)
C)(Probability of state A*Value in state A)-(Probability of state B*Value in state B) 
D)​(Probability of state A-Value in state A)(Probability of state B-Value in state B)

Question 9

​You can invest $100,000 into either project A or B.You estimate that A would succeed with a probability of 0.7 in which case it doubles in value.If it fails,its scrap value is $50,000.Project B would succeed with probability 0.6,in which case it would have a value of $150,000.If it fails,project B's scrap value is $30,000.Which project should you invest in?

A)​Project A
B)Project B
C)Neither of the projects
D)​You cannot tell from the information presented

Question 10

​In a coin toss bet,where both heads and tails are equally likely,you win a dollar on heads but lose a dollar on tails.The expected value of the bet is

A)​$0.50
B)-$0.50
C)$1.00
D)​$0.00

Question 11

​In a coin toss bet,where both heads and tails are equally likely,you win a $3 on heads but lose $1 on tails.The expected value of the bet is

A)​$0.50
B)-$0.50
C)$1.00
D)​$0.00

Question 12

​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 13

​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 14

​You can either invest in project A or B.Project A could have a value of $150 with a probability of 0.1 or a value of $75 with probability 0.9.Project B could have a value of $110 with probability 0.2 or a value of $65 with a probability of 0.8.Which project should you invest in?

A)​Project A
B)Project B
C)Neither of the projects
D)​You cannot tell from the information presented

Question 15

​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 16

​You can invest $100,000 into either project A or B.You estimate that A would succeed with a probability of 0.6 in which case it doubles in value.If it fails,its scrap value is $50,000.Project B would succeed with probability 0.7,in which case it would have a value of $150,000.If it fails,project B's scrap value is $30,000.Which project should you invest in

A)​Project A
B)Project B
C)Neither of the projects
D)​You cannot tell from the information presented

Question 17

​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 18

​In a coin toss bet,where both heads and tails are equally likely,you win a $2 on heads but lose $1 on tails.The expected value of the bet is

A)​$0.50
B)-$0.50
C)$1.00
D)​$0.00

Question 19

​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 20

​You can invest $100,000 into either project A or B.You estimate that A would succeed with a probability of 0.5 in which case it doubles in value.If it fails,its scrap value is $50,000.Project B would succeed with probability 0.8,in which case it would have a value of $150,000.If it fails,project B's scrap value is $30,000.Which project should you invest in?

A)​Project A
B)Project B
C)Neither of the projects
D)​You cannot tell from the information presented

Question 21

​At a fair carnival roulette wheel,a player can either win $10,$30,or $80.If the player were to be made indifferent between playing the game or not,how much should the owner charge him?

A)​$30
B)$40
C)$50
D)​$80

Question 22

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​If the firm can only afford developing one of the software,which one would it rather develop (based on expected profit/gain)

A)​The simple voice-activated software
B)The complicated thought-activated software
C)Neither of the software
D)​Need more information

Question 23

​At a carnival roulette wheel,a player can either win $10,$30,or $80.If it costs $50 to play,we would expect to see

A)​A long line of players waiting to play
B)No players for the game
C)The carnival losing money per play
D)​All of the above

Question 24

​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 25

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​What is the expected revenue from developing the simplified software?

A)​$4million
B)$6million
C)$8million
D)​$10million

Question 26

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​What is the expected revenue from developing the complicated software?

A)​$10million
B)$15million
C)$20million
D)​$50million

Question 27

​At a fair carnival roulette wheel,a player can either win $10,$30,or $80.Assuming a rational player,how much should the game owner charge the player,to maximize his own profit?

A)​$30
B)$40
C)$50
D)​$80

Question 28

​At a carnival roulette wheel,a player can either win $10,$30,or $80.If it costs $20 to play,should the player expect the game to be fair?

A)​Yes,because it costs to play
B)No,because on average the individual would be earning money on the wheel
C)No,because all the carnival attractions are unfair
D)​Need more information

Question 29

​At a fair carnival roulette wheel,a player can either win $10,$30,or $80.Assuming that the wheel is fair,what is the expected value of the play?

A)​$20
B)$40
C)$60
D)​$80

Question 30

​If a deal looks too good to be true

A)​The seller most likely made a mistake
B)Be cautious.It probably is too good to be true
C)Trust the seller to give you a good deal
D)​A good deal is a good deal.Go for it.

Question 31

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​If the complicated technology costs $10million to develop,what is the expected gain from developing the thought activated software

A)​$5million
B)$10million
C)$25million
D)​$50million

Question 32

​At a carnival roulette wheel,a player can either win $10,$30,or $80.At what cost of play should the player expect the wheel to be fair?

A)​$10
B)$20
C)$30
D)​$40

Question 33

​A random variable is

A)​A variable that takes of values that are uncertain
B)A variable that takes on known values
C)A variable that is always zero
D)​A variable that takes on null values only

Question 34

​Expected values are

A)​Values that you expect from an individual
B)Mean values
C)Weighted average outcomes
D)​Both B&C

Question 35

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 36

​At a carnival roulette wheel,a player can either win $10,$30,or $80.If it costs $35 to play,we would expect to see

A)​A long line of players waiting to play
B)No players for the game
C)The carnival losing money per play
D)​Both A&C

Question 37

​At a fair carnival roulette wheel,a player can either win $10,$30,or $80.If it costs $30 to play,would an individual gain or lose from playing the game?

A)​Gain
B)Lose
C)Breakeven-neither gain nor lose
D)​None of the above

Question 38

​At a fair carnival roulette wheel,a player can either win $10,$30,or $80.If it costs $50 to play,would an individual gain or lose from playing the game

A)​Gain
B)Lose
C)Breakeven-neither gain nor lose
D)​None of the above

Question 39

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​If the simplified technology costs $2 million to develop,what is the expected gain from developing the voice activated software

A)​$5million
B)$6million
C)$7million
D)​$10million

Question 40

​At a fair carnival roulette wheel,a player can either win $10,$30,or $80.If it costs $40 to play,would an individual gain or lose from playing the game

A)​Gain
B)Lose
C)Breakeven-neither gain nor lose
D)​None of the above

Question 41

​You expect one-third of your customers to be high value,willing to pay $9 for your product,and the other two-thirds to be low value customers willing to pay only $3.You cannot tell them apart.If the product costs $3,and you charge $9,what is your expected profit?

A)​$1
B)$2
C)$3
D)​$4

Question 42

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​Launching the simplified version would be a mistake for probabilities less than ___?

A)​0.6
B)0.7
C)0.8
D)​1.0

Question 43

​Half of all your potential customers would pay $10 for your product but the other half would only pay $8.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 44

​Half of all your potential customers would pay $16 for your product but the other half would only pay $10.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 45

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​Of the two software options,complicated software,now costing $15.5 million with a probability of success at 50%,and the simplified software,with a probability of a success at 65%,which one would the firm choose to develop if it can develop only one?

A)​The simple voice-activated software
B)The complicated thought-activated software
C)Neither of the software
D)​Need more information

Question 46

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​If the firm learns that the complicated technology can be made more stable with a few tweaks increasing the cost by 5.5million and increasing the probability of a launch to 50%.Is it worth for the firm to invest the $500,000 in tweaks?

A)​No,because it decreases the total expected value
B)Yes,because it increases expected value
C)No,because it increases risk
D)​Yes,because tweaking is good

Question 47

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​Launching the complicated version would be a mistake for probabilities less than ___?

A)​0.2
B)0.28
C)0.30
D)​0.32

Question 48

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​If the simplified version costs $2 million and its probability of success is 75%,whereas the cost of the complicated version is $10million,what is the minimum probability of success for the complicated version that would make the firm indifferent between the two software?

A)​0.3
B)0.31
C)0.32
D)​0.33

Question 49

​To better align your agent's incentives to your own when buying securities

A)​Offer the agent a high price
B)Offer the agent a low price
C)Offer the agent a price based on performance of the security
D)​All of the above

Question 50

You raise your product price by $10 in market A but leave it unchanged in market B.Sales in A fall from 840 to 740 units per week while sales in B rise from 770 to 790 units.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 51

​Half of all your potential customers would pay $16 for your product but the other half would only pay $10.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 52

​You are considering buying a store.The store owner shows you sales figures of the store on a "typical" day.The owner has most likely shown you figures for

A)​The less productive day
B)The more productive day
C)Any typical day
D)​All the days that the store was owned by him

Question 53

​You are considering buying a store.The storeowner gives you an estimate of the net profits of the store on a typical day.The owner has most likely given you the figures for the day when

A)​Sales are low,costs are high
B)Sales are very close to costs
C)Sales are high,costs are low
D)​All of the above

Question 54

​Half of all your potential customers would pay $10 for your product but the other half would only pay $8.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 55

​You are considering buying a store.In order to better access your return on the investment,you must ask the storeowner for the figures on days when

A)​Sales are high,costs are low
B)Sales are low,costs are high
C)Both sales and costs are high
D)​All of the above

Question 56

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​If the firm learns that the complicated technology can be made more stable with a few tweaks increasing the price to 15.5 million and increasing the probability of a launch to 50%.Given the new costs and probabilities of launch for the complicated software,which technology would the firm rather invest in now?

A)​The simple voice-activated software
B)The complicated thought-activated software
C)Neither of the software
D)​Need more information

Question 57

​You are considering buying a store.In order to better access your return on the investment,your expectations of the return should be based on

A)​Days where sales are high,costs are low
B)Days where sales are low and costs are high
C)Days where both sales and costs are low
D)A weighted average of all the above scenarios

Question 58

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​The firm learns that the probability of launch estimated for the voice activated software was too optimistic and instead is actually 65%.Is it still worth for the company to develop the simplified software?

A)​No,because the expected return is lower
B)No,because the expected return is higher
C)Yes,because the expected return is higher
D)​Yes,because the expected return is lower

Question 59

​You are considering buying a store.The storeowner gives you an estimate of the net profits of the store on a typical day.The owner has most likely given you the figures for

A)​The best case scenario
B)The worst case scenario
C)Any typical day
D)​Any typical year

Question 60

​Use the following information for questions
Transcendent Technologies is deciding between developing a complicated thought-activated software,or a simple voice-activated software.Since the thought-activated software is complicated,it only has a 30% chance of actually going through to a successful launch,but would generate revenues of $50million if launched.The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million.The complicated technology costs 10million,whereas the simple technology costs 2million.
​If the complicated technology costs $10million to develop while the simple technology costs $2million to develop,which technology is more profitable to develop?

A)​The simple voice-activated software
B)The complicated thought-activated software
C)Neither of the software
D)​Need more information

Question 61

The manager of an ice-cream parlor decides to introduce a new ice-cream flavor in his Dallas,TX based restaurants to compare the sales of these restaurants to the ones with no new flavors.She decides to run a difference in difference approach.Which of the following is true?

A)​The first difference would be the difference in the sales of the Dallas stores before and after the introduction
B)The second difference would be the difference in the sales in other stores before and after the Dallas stores introduced the new flavor
C)The second difference would be the difference between the post introduction sales in the Dallas stores and the control group
D)​Only A&B

Question 62

​Two important considerations during the difference-in-difference approach are

A)​Representativeness,Reflectiveness
B)Injections,Leakages
C)Representativeness,Leakages
D)​Reflectiveness,Injections

Question 63

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

A)​Boston,MA
B)San Francisco,CA
C)St.Paul,MN
D)​Tampa Bay,FL

Question 64

​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 65

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 66

​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 67

​The VP in charge of product launches hypothesizes that a particular product would be profitable,then launching an unprofitable product is a

A)​Type I error
B)Type II error
C)Type III error
D)​Type IV error

Question 68

You put your product on 20% off sale market A but leave it unchanged in market B.Sales in A increase from 840 to 1040 units per week 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)​130 units

Question 69

​A movie producer has to decide to fund a new movie project.For this project,a success would earn $20 million and a failure would cost $60 million 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 70

​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 71

You decrease your product price by $10 in market A but leave it unchanged in market B.Sales in A rise from 840 units per week to 940 while sales in B also 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 72

​A pharmaceutical company executive has to decide whether to fund a new drug development project.For this project,a success would earn $90 million and a failure would cost $10 million 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 73

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

A)​Boston,MA
B)San Francisco,CA
C)St.Paul,MN
D)​Tampa Bay,FL

Question 74

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 75

​Type II errors are

A)​False negatives
B)False positives
C)True negatives
D)​True positives

Question 76

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

A)​Agreeing to undertake an unprofitable project
B)Deciding not to undertake a profitable project
C)Deciding not to undertake an unprofitable project
D)​Deciding to investigate a proposed project until one is certain

Question 77

You experiment by offering free warranties for your product in market A but not in market B.Sales in A rise from 240 to 360 units per week 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 78

​Type I errors are

A)​False negatives
B)False positives
C)True negatives
D)​True positives

Question 79

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

A)​0 units
B)80 units
C)100 units
D)​120 units

Question 80

​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