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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 mid-point of the extreme (high and low) possible values. c) The benchmark scenario or most-likely scenario. d) The sum of the products of the probabilities of all outcomes and their values. e) The equally-weighted 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 12-1 Decision Making Under Uncertainty a) A long-run 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, he’ll 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 clear-cut 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