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Unformatted text preview: File: Ch12; CHAPTER 12: Decision Making under Uncertainty Each question contains a code showing the section of the chapter text from which it was taken. The codes for this chapter are: Code Section 1 Uncertainty, Probability, and Expected Value 2 Decision Trees 3 Sequential Decisions 4 Risk Aversion MULTIPLE CHOICE 1. The degree of uncertainty depends on a) The expected value of an unknown event. b) The chance that a particular outcome occurs. c) The number of possible outcomes. d) The unpredictable nature of life. e) The future trend of an economic variable. ANSWER: c SECTION: 1 2. Expected value is defined as a) The value of the outcome with the highest probability. b) The midpoint of the extreme (high and low) possible values. c) The benchmark scenario or mostlikely scenario. d) The sum of the products of the probabilities of all outcomes and their values. e) The equallyweighted average of all outcomes. ANSWER: d SECTION: 1 3. An investment has the possibility of earning $10,000, $8,000 or $2,000 depending on the state of the economy. The probabilities of prosperity, moderate growth, or recession are .4, .3, and .3 respectively. The expected value of the investment is a) $10,000. b) $21,000. c) $7,000. d) $3,000. e) $8,000. ANSWER: c SECTION: 1 4. Probability may sometimes be estimated as 121 Decision Making Under Uncertainty a) A longrun frequency. b) An educated guess. c) The degree of uncertainty. d) The expected value. e) The degree of variation around the mean. ANSWER: a SECTION: 1 5. A subjective probability represents a) A measure of the historical frequency of an uncertain event. b) A measure of the frequency of a certain event. c) The degree of belief that an outcome will occur. d) an arbitrary or ad hoc assessment. e) The degree of variation around the mean. ANSWER: c SECTION: 1 6. An individual is uncertain whether to bet on a football game. He believes that the probability of his team winning is 40%. If his team wins, he will receive $180. If his team loses, hell pay $130. If the decision is made based exclusively on the expected value criterion then this person should a) Take the bet. b) Not take the bet. c) No clearcut decision can be made. d) The expected value criterion cannot be applied in this situation. e) Be exactly indifferent to the bet. ANSWER: b SECTION: 1 7. A decision leading to a bad outcome or a loss a) Is always a bad decision. b) Is a bad decision if its underlying basis was purely subjective. c) Is a good decision plagued by bad luck. d) Is a good decision if the option chosen had the highest expected value. e) Should have never been taken. ANSWER: d SECTION: 2 8. When there are multiple risks, evaluating a decision tree involves a) First evaluating the most future risk....
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 Fall '08
 BARKLEY

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