File: Ch13; Chapter 13:
The Value of Information
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
The Value of Information
2
Revising Probabilities
3
Other Applications
4
Optimal Search
5
The Value of Additional Alternatives
MULTIPLE CHOICE
1.
The expected value of test information is
a)
Zero if the new information does not change the firm’s decisions.
b)
The difference between the actual outcome with test information and without it.
c)
The difference between the expected value with the information and without it.
d)
The expected value of the decision using the test.
e)
Answers a and c are both correct.
ANSWER: e
SECTION: 1
2.
A decisionmaker should acquire new information
a)
Only if its cost is low.
b)
Only if its expected value is greater than its cost.
c)
Whenever the information will have an impact on the manager’s decision.
d)
Only when the information is highly reliable.
e)
None of the answers above is correct.
ANSWER: b
SECTION: 1
3.
A “prior” probability refers to
a)
A probability before new information is obtained.
b)
A conditional probability.
c)
The past accuracy of a given information source.
d)
An assessment that combines both current and new information.
e)
Historical frequencies.
ANSWER: a
SECTION: 1
4.
A firm's expected profit without information is $50,000, while its expected value with test information is
$75,000. If the cost of the test is $40,000, then
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View Full DocumentThe Value of Information
a)
The firm should undertake the test.
b)
The EVI is $35,000.
c)
The EVI is $25,000.
d)
The EVI is $10,000.
e)
Additional information is needed to determine the firm's best decision.
ANSWER: c
SECTION: 1
5.
A price cut would increase the firm's profits by $2 million if demand is weak but would decrease profit
by $3 million if demand proves to be strong. The firm’s best assessment is a .3 probability of strong
demand.
The expected value of perfect information about demand is:
a)
$0.
b)
$.5 million.
c)
$.9 million.
d)
$1.4 million.
e)
None of the answers above is correct.
ANSWER: c
SECTION: 1
6.
You are offered a favorable bet on a coin toss, heads or tails. If you correctly call the result, you gain
$20. If your call is incorrect, you lose $10. What is the EVI if you were clairvoyant and could perfectly
predict the coin toss?
a)
$5.
b)
$10.
c)
$15.
d)
$20.
e)
None of the answers above is correct.
ANSWER: c
SECTION: 1
7. Revised probabilities depend on
a)
Purely subjective assessments.
b)
Prior probabilities.
c)
The accuracy of new information.
d)
Averaging the judgments of experts.
e)
Answers b and c are both correct.
ANSWER: e
SECTION: 2
8.
Joint probability refers to
a)
The decision maker’s prior probability.
b)
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 Fall '08
 BARKLEY
 Bayes Theorem, Stake Gold

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