Question 1

​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

Accepted Answer

We can use the formula for expected value to find the expected profit:

Expected profit = (Probability of High-Value customer * Profit from High-Value customer) + (Probability of Low-Value customer * Profit from Low-Value customer) 
= (1/3 * 6) + (2/3 * 0) 
= 2

Therefore, our expected profit is $2.

The best choice is B, because it correctly calculates the expected profit based on the given information.

Question 2

​Use the following information for question
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

Accepted Answer

The answer of ​Use the following information for question
Transcendent Technologies...

Question 3

​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

Accepted Answer

If the price is set at $8, half of the customers would buy the product and the other half wouldn't. So, the expected revenue would be:

Expected revenue = ($8 x 0.5) + ($10 x 0.5) = $9

However, the marginal cost of the product is $4. Therefore, the expected profit would be:

Expected profit = expected revenue - marginal cost
Expected profit = $9 - $4
Expected profit = $5

If the price is set at $10, all customers would buy the product. So, the expected revenue would be:

Expected revenue = $10 x 1 = $10

However, the marginal cost of the product is still $4. Therefore, the expected profit would be:

Expected profit = expected revenue - marginal cost
Expected profit = $10 - $4
Expected profit = $6

Thus, setting the price at $10 would yield a higher profit. However, since half the customers are only willing to pay $8, the demand for the product may reduce if the price is set at $10. Therefore, setting the price at $8 would be a safer option, even though it would yield a lower profit.

Question 4

​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

Accepted Answer

Setting the price at $16 means only half of the potential customers will buy the product. The profit per unit is $16 - $4 = $12. Since only half of the customers buy it, the expected profit per potential customer is $12 * 0.5 = $6.

Question 5

​Use the following information for question
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

Accepted Answer

To determine the expected value of each option, we use the following formula:

Expected Value = Probability of Success x Revenue - Cost

For the complicated software:
Expected Value = 0.5 x $50 million - $15.5 million = $9.5 million

For the simple software:
Expected Value = 0.65 x $10 million - $2 million = $4.5 million

Therefore, the expected value of the complicated software is higher than the expected value of the simple software. Therefore, the firm should choose to develop the complicated thought-activated software.

Question 6

​Use the following information for question
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

Accepted Answer

Before tweaking, the expected value of the complicated software is:
Expected Value = (0.3 * $50million) - $10million = $5million
After tweaking, the expected value of the complicated software is:
Expected Value = (0.5 * $50million) - $15.5million = $9.5million
Therefore, the expected value of the complicated software increases by $4.5million ($9.5million - $5million) after tweaking. Since the cost of tweaking is $500,000, the net increase in expected value is $4million ($4.5million - $0.5million), which is greater than the cost of tweaking. Therefore, it is worth for the firm to invest in the tweaks. Answer B is correct.

Question 7

​Use the following information for question
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

Accepted Answer

The answer of ​Use the following information for question
Transcendent Technologies...

Question 8

​Use the following information for question
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

Accepted Answer

To find the minimum probability of success for the complicated version that would make the firm indifferent between the two software options, we need to set up an equation:

Expected revenue from complicated version = Expected revenue from simple version
0.3($50 million) - $10 million = 0.75($10 million) - $2 million

Solving for the probability of success for the complicated version:
0.3($50 million) - $10 million = 0.75($10 million) - $2 million
$5 million - $10 million = $7.5 million - $2 million
-$5 million = $5.5 million
-1 = 0.55

Therefore, we need the probability of success for the complicated version to be at least 0.31 (or 31%) to make the firm indifferent between the two options. Since this is higher than the given probability of 0.3, the best choice would be to develop the simple voice-activated software with a probability of success of 80%.

Question 9

​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

Accepted Answer

Offering the agent a price based on the performance of the security will align their incentives with your own because if the security does well, they will earn more. This encourages them to make well-informed investment decisions. Offering a high or low price may not necessarily align their incentives with yours, as they may still prioritize their own profit over your investment goals.

Question 10

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

Accepted Answer

The difference-in-difference estimate is calculated as the difference in the change in sales between the treatment group (Market A) and the control group (Market B).

For Market A: 
- The change in sales is 840 - 740 = -100 units. 
- This is a result of the price increase, so the treatment effect is -$10.

For Market B: 
- The change in sales is 790 - 770 = 20 units. 
- Sales increased, but the price was not changed, so this is the control group.

The difference-in-difference estimate is therefore: 
- (-100) - 20 = -120 units. 
This means that the price increase in Market A led to a 120-unit decrease in sales compared to what would have been expected if prices had remained the same.

Question 11

​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

Accepted Answer

The answer of ​Half of all your potential customers would...

Question 12

​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

Accepted Answer

The store owner is likely to show figures from a more productive day to make the business appear more successful and appealing to a potential buyer.

Question 13

​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

Accepted Answer

When sales are high and costs are low, it is more likely that the store will have a higher net profit. Option A, when sales are low and costs are high, will lead to a low net profit or even losses. Option B, when sales are very close to costs, may result in a small net profit, but it is risky and any small shift in sales or costs will result in losses. Option D is not correct, as not all options lead to high net profits. Thus, option C is the best choice as it aligns with the conditions for high net profit.

Question 14

​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

Accepted Answer

Half of the customers would pay $10, and the other half would pay $8. The expected profit is (10-4)*0.5 + (8-4)*0.5 = $3.

Question 15

​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

Accepted Answer

In order to accurately assess the return on investment, it's best to have data on both high sales/low costs and low sales/high costs. However, it's also important to have information on days when both sales and costs are high, as this can give insight into the store's overall profitability and potential for growth. So, all of the above choices are important for making an informed decision about purchasing the store.

Question 16

​Use the following information for question
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

Accepted Answer

With the original information, the expected value (EV) of the complicated technology was: 
0.3 * $50mil - $10mil = $5mil 
And the EV for the simple technology was: 
0.8 * $10mil - $2mil = $6mil 
Therefore, the simple technology was the better choice. 
However, with the new information, the EV for the complicated technology changes to: 
0.5 * $50mil - $15.5mil = $9.5mil 
Which is now higher than the EV for the simple technology. Therefore, the firm would rather invest in the complicated thought-activated software with the revised probabilities and cost.

Question 17

​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

Accepted Answer

A weighted average of all scenarios would provide a more realistic and accurate expectation of the return on investment. It takes into account both favorable and unfavorable days, and calculates the average return based on the frequency and magnitude of each scenario. This approach provides a more comprehensive understanding of the potential return on investment and helps in making informed decisions.

Question 18

​Use the following information for question
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

Accepted Answer

The expected return for the voice-activated software is now 65% * $10 million - $2 million = $4.5 million, which is lower than the expected return for the thought-activated software, which is 30% * $50 million - $10 million = $5 million.

Question 19

​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

Accepted Answer

The store owner is likely to present the best case scenario to make the store appear as profitable as possible to a potential buyer.

Question 20

​Use the following information for question
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

Accepted Answer

To calculate the expected profit for each option,
Expected profit of complicated technology = (0.3 * $50million) - $10million = $5million
Expected profit of simple technology = (0.8 * $10million) - $2million = $6million
Therefore, the simple voice-activated software is more profitable to develop.

Quiz 15: Making Decisions With Uncertainty

​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?

​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:

​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:

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

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:

​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:

​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

​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

​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:

​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

​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

​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

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?

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:

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:

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

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:

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

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

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:

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

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

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