Uncertainty and Consumer Behavior.doc

CHAPTER 5 Uncertainty and Consumer Behavior 149 MULTIPLE CHOICE SECTION 5 1 Scenario 1 Aline and Sarah decide to go into business together as economic consultants Aline believes they have a 50 50 chance of earning 200 000 a year and that if they don t they ll earn 0 Sarah believes they have a 75 chance of earning 100 000 and a 25 chance of earning 10 000 easy1 Refer to Scenario 1 The expected value of the undertaking a according to Sarah is 75 000 b according to Sarah is 100 000 c according to Sarah is 110 000 d according to Aline is 200 000 e according to Aline is 100 000 easy2 Refer to Scenario 1 The probabilities discussed in the information above are a objective because they are single numbers rather than ranges b objective because they have been explicitly articulated by the individuals involved c objective because the event hasn t happened yet d subjective because the event hasn t happened yet e subjective because they are estimates made by individuals based upon personal judgment or experience Scenario 2 Randy and Samantha are shopping for new cars one each Randy expects to pay 15 000 with 1 5 probability and 20 000 with 4 5 probability Samantha expects to pay 12 000 with 1 4 probability and 20 000 with 3 4 probability easy3 Refer to Scenario 2 Which of the following is true a Randy has a higher expected expense than Samantha for the car b Randy has a lower expected expense than Samantha for the car c Randy and Samantha have the same expected expense for the car and it is somewhat less than 20 000 d Randy and Samantha have the same expected expense for the car 20 000 e It is not possible to calculate the expected expense for the car until the true probabilities are known easy4 Refer to Scenario 2 Randy s expected expense for his car is a 20 000 b 19 000 c 18 000 d 17 500 e 15 000 CHAPTER 5TEST BANK UNCERTAINTY AND CONSUMER BEHAVIORSIXTH EDITION 150 easy5 Refer to Scenario 2 Samantha s expected expense for her car is a 20 000 b 19 000 c 18 000 d 17 500 e 15 000 Consider the following information about job opportunities for new college graduates in Megalopolis Table 5 1 MajorProbability of Receiving an Offer In One Year Average Salary Offer Accounting95 25 000 Economics 90 30 000 English 70 24 000 Poli Sci 60 18 000 Mathematics1 00 21 000 easy6 Refer to Table 5 1 Expected income for the first year is a highest in accounting b highest in mathematics c higher in English than in mathematics d higher in political science than in economics e highest in economics easy7 Refer to Table 5 1 Ranked highest to lowest in expected income the majors are a economics accounting English mathematics political science b mathematics English political science accounting economics c economics accounting mathematics English political science d English economics mathematics accounting political science e accounting English mathematics political science economics Scenario 3 Wanting to invest in the computer games industry you select Whizbo Yowzo and Zowiebo as the three best firms Over the past 10 years the three firms have had good years and bad years The following table shows their performance Company Good Year Revenue Bad Year Revenue Number of Good Years Whizbo 8 million 6 million8 Yowzo 10 million 4 million4 Zowiebo 30 million 1 million1 easy8 Refer to Scenario 3 Where is the highest expected revenue based on the 10 years past performance a Whizbo b Yowzo c Zowiebo d Whizbo and Yowzo e Yowzo and Zowiebo TEST BANKCHAPTER 5 SIXTH EDITIONUNCERTAINTY AND CONSUMER BEHAVIOR 151 easy9 Refer to Scenario 3 Based on the 10 years past performance what is the probability of a good year for Zowiebo 27 million a 3 million b 1 million c 0 9 d 0 1 easy10 Refer to Scenario 3 Based on the 10 years past performance rank the companies expected revenue highest to lowest a Whizbo Yowzo Zowiebo b Whizbo Zowiebo Yowzo c Zowiebo Yowzo Whizbo d Zowiebo Whizbo Yowzo e Zowiebo with Whizbo and Yowzo tied for second easy11 Refer to Scenario 3 The expected revenue from all three companies combined is a 11 million b 17 9 million c 25 5 million d 29 5 million e 48 million The information in the table below describes choices for a new doctor The outcomes represent different macroeconomic environments which the individual cannot predict Table 5 3 Outcome 1Outcome 2 Job ChoiceProb IncomeProb Income Work for HMO 0 95 100 0000 05 60 000 Own practice0 2 250 0000 8 30 000 Research0 1 500 0000 9 50 000 easy12 Refer to Table 5 3 The expected returns are highest for the physician who a works for an HMO b opens her own practice c does research d either opens her own practice or does research e either works for an HMO or does research easy13 Refer to Table 5 3 Rank the doctor s job options in expected income order highest first a Work for HMO open own practice do research b Work for HMO do research open own practice c Do research open own practice work for HMO d Do research work for HMO open own practice e Open own practice work for HMO do research CHAPTER 5TEST BANK UNCERTAINTY AND CONSUMER BEHAVIORSIXTH EDITION 152 moderate14 In Table 5 3 the standard deviation is a highest for the HMO choice and it is 76 000 b lowest for the HMO choice c higher for owning one s own practice than for going into research d higher for the HMO choice than for going into research moderate15 Refer to Table 5 3 In order to weigh which of the job choices is riskiest an individual should look at a the deviation which is the difference between the probabilities of the two outcomes b the deviation which is the difference between the dollar amounts of the two outcomes c the average deviation which is found by averaging the dollar amounts of the two outcomes d the standard deviation which is the square root of the average squared deviation e the standard deviation which is the squared average square root of the deviation moderate 16 Refer to Table 5 3 Rank the doctor s job choices in order least risky first a Work for HMO open own practice do research b Work for HMO do research open own practice c Do research open own practice work for HMO d Do research work for HMO open own practice e Open own practice work for HMO do research easy17 Upon graduation you are offered three jobs CompanySalaryBonusProbability of Receiving Bonus Samsa Exterminators100 00020 000 90 Gradgrind Tech100 00030 000 70 Goblin Fruits115 000 Rank the three job offers in terms of expected income from the highest to the lowest a Samsa Exterminators Gradgrind Tech Goblin Fruits b Samsa Exterminators Goblin Fruits Gradgrind Tech c Gradgrind Tech Samsa Exterminators Goblin Fruits d Gradgrind Tech Goblin Fruits Samsa Exterminators e Goblin Fruits Samsa Exterminators Gradgrind Tech TEST BANKCHAPTER 5 SIXTH EDITIONUNCERTAINTY AND CONSUMER BEHAVIOR 153 easy18 As president and CEO of MegaWorld industries you must decide on some very risky alternative investments ProjectProfit if SuccessfulProbability of Success Loss if Failure Probability of Failure A 10 million 5 6 million 5 B 50 million 2 4 million 8 C 90 million 1 10 million 9 D 20 million 8 50 million 2 E 15 million 4 0 6 The highest expected return belongs to investment a A b B c C d D moderate19 What is the advantage of the standard deviation over the average deviation a Because the standard deviation requires squaring of deviations before further computation positive and negative deviations do not cancel out b Because the standard deviation does not require squaring of deviations it is easy to tell whether deviations are positive or negative c The standard deviation removes the units from the calculation and delivers a pure number d The standard deviation expresses the average deviation in percentage terms so that different choices can be more easily compared e The standard deviation transforms subjective probabilities into objective ones so that calculations can be performed Table 5 4 JobOutcome 1 Deviation Outcome 2 Deviation A 40W 60X B 20Y 50Z easy20 Refer to Table 5 4 If outcomes 1 and 2 are equally likely at Job A then in absolute value a W X 10 b W X 20 c W Y 100 d W Y 200 e W Y 300 easy21 Refer to Table 5 4 If outcomes 1 and 2 are equally likely at Job A then the standard deviation of payoffs at Job A is a 1 b 10 c 40 d 50 e 60 CHAPTER 5TEST BANK UNCERTAINTY AND CONSUMER BEHAVIORSIXTH EDITION 154 easy22 Refer to Table 5 4 If at Job B the 20 outcome occurs with probability 2 and the 50 outcome occurs with probability 8 then in absolute value a Y Z 6 b Y Z 24 c Y Z 35 d Y 24 Z 6 e Y 6 Z 24 moderate23 Refer to Table 5 4 If at Job B the 20 outcome occurs with probability 2 and the 50 outcome occurs with probability 8 then the standard deviation of payoffs at Job B is nearest which value a 10 b 12 c 20 d 35 e 44 moderate24 Refer to Table 5 4 If outcomes 1 and 2 are equally likely at Job A and if at Job B the 20 outcome occurs with probability 1 and the 50 outcome occurs with probability 9 then a Job A is safer because the difference in the probabilities is lower b Job A is riskier only because the expected value is lower c Job A is riskier because the standard deviation is higher d Job B is riskier because the difference in the probabilities is higher e There is no definite way given this information to tell how risky the two jobs are easy25 The expected value is a measure of a risk b variability c uncertainty d central tendency easy26 Assume that one of two possible outcomes will follow a decision One outcome yields a 75 payoff and has a probability of 0 3 the other outcome has a 125 payoff and has a probability of 0 7 In this case the expected value is a 85 b 60 c 110 d 35 easy27 The weighted average of all possible outcomes of a project with the probabilities of the outcomes used as weights is known as the a variance b standard deviation c expected value d coefficient of variation easy28 Which of the following is NOT a generally accepted measure of the riskiness of an investment a standard deviation b expected value c variance d none of these TEST BANKCHAPTER 5 SIXTH EDITIONUNCERTAINTY AND CONSUMER BEHAVIOR 155 easy29 The expected value of a project is always the a median value of the project b modal value of the project c standard deviation of the project d weighted average of the outcomes with probabilities of the outcomes used as weights easy30 An investment opportunity has two possible outcomes and the value of the investment opportunity is 250 One outcome yields a 100 payoff and has a probability of 0 25 What is the probability of the other outcome a 0 b 0 25 c 0 5 d 0 75 e 1 0 moderate31 The variance of an investment opportunity a cannot be negative b has the same unit of measure as the variable from which it is derived c is a measure of central tendency d is unrelated to the standard deviation moderate32 An investment opportunity is a sure thing it will pay off 100 regardless of which of the three possible outcomes comes to pass The variance of this investment opportunity a is 0 b is 1 c is 2 d is 1 e cannot be determined without knowing the probabilities of each of the outcomes moderate33 An investment opportunity has two possible outcomes The expected value of the investment opportunity is 250 One outcome yields a 100 payoff and has a probability of 0 25 What is the payoff of the other outcome a 400 b 0 c 150 d 300 e none of the above CHAPTER 5TEST BANK UNCERTAINTY AND CONSUMER BEHAVIORSIXTH EDITION 156 Scenario 4 Suppose an individual is considering an investment in which there are exactly three possible outcomes whose probabilities and pay offs are given below OutcomeProbabilityPay offs A 3 100 B 50 C 2 The expected value of the investment is 25 Although all the information is correct information is missing moderate34 Refer to Scenario 4 What is the probability of outcome B a 0 b 0 5 c 0 5 d 0 4 e 0 2 moderate35 Refer to Scenario 4 What is the pay off of outcome C a 150 b 0 c 25 d 100 e 150 moderate36 Refer to Scenario 4 What is the deviation of outcome A a 30 b 50 c 75 d 100 moderate37 Refer to Scenario 4 What is the variance of the investment a 75 b 275 c 3 150 d 4 637 50 e 8 125 moderate38 Refer to Scenario 4 What is the standard deviation of the investment a 0 b 16 58 c 56 12 d 90 14 e none of the above TEST BANKCHAPTER 5 SIXTH EDITIONUNCERTAINTY AND CONSUMER BEHAVIOR 157 easy39 Blanca has her choice of either a certain income of 20 000 or a gamble with a 0 5 probability of 10 000 and a 0 5 probability of 30 000 The expected value of the gamble a is less than 20 000 b is 20 000 c is greater than 20 000 d cannot be determined with the information provided SECTION 5 2 easy40 Assume that two investment opportunities have identical expected values of 100 000 Investment A has a variance of 25 000 while investment B s variance is 10 000 We would expect most investors who dislike risk to prefer investment opportunity a A because it has less risk b A because it provides higher potential earnings c B because it has less risk d B because of its higher potential earnings Scenario 5 Engineers at Jalopy Automotive have discovered a safety flaw in their new model car It would cost 500 per car to fix the flaw and 10 000 cars have been sold The company works out the following possible scenarios for what might happen if the car is not fixed and assigns probabilities to those events ScenarioProbabilityCost A No one discovers flaw 15 0 B Government fines firm 40 10 million no lawsuits C Resulting lawsuits are lost 30 12 million no government fine D Resulting lawsuits are won 15 2 million no government fine easy41 Refer to Scenario 5 The expected cost to the firm if it does not fix the car is a 0 b 24 million c 7 9 million d 2 million e 3 6 million moderate42 Refer to Scenario 5 Which of the following statements is true a The expected cost of not fixing the car is less than the cost of fixing it b The expected cost of not fixing the car is greater than the cost of fixing it c It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it because the probabilities are subjective d It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it because the probabilities are not equal CHAPTER 5TEST BANK UNCERTAINTY AND CONSUMER BEHAVIORSIXTH EDITION 158 moderate43 Refer to Scenario 5 Jalopy Automotive s executives a if risk neutral would fix the flaw because it enables them to have a sure outcome b if risk neutral would fix the flaw because the cost of fixing the flaw is less than the expected cost of not fixing it c if risk loving would fix the flaw because it enables them to have a sure outcome d if risk averse would not fix the flaw because the cost of fixing the flaw is more than the expected cost of not fixing it e would fix the flaw regardless of their risk preference because of the large probability of high cost outcomes easy44 Other things equal expected income can be used as a direct measure of well being a always b no matter what a person s preference to risk c if and only if individuals are not risk loving d if and only if individuals are risk averse e if and only if individuals are risk neutral easy45 A person with a diminishing marginal utility of income a will be risk averse b will be risk neutral c will be risk loving d cannot decide without more information easy46 An individual with a constant marginal utility of income will be a risk averse b risk neutral c risk loving d insufficient information for a decision TEST BANKCHAPTER 5 SIXTH EDITIONUNCERTAINTY AND CONSUMER BEHAVIOR 159 Figure 5 1 easy47 In Figure 5 1 the marginal utility of income is a increasing as income increases b constant for all levels of income c diminishes as income increases d none of the above is necessarily correct easy48 An individual whose attitude toward risk is illustrated in Figure 5 1 is a risk averse b risk loving c risk neutral d none of the above is necessarily correct easy49 The concept of a risk premium applies to a person that is a risk averse b risk neutral c risk loving d all of these difficult50 John Brown s utility of income function is U log I 1 where I represents income From this information you can say that a John Brown is risk neutral b John Brown is risk loving c John Brown is risk averse d we need more information before we can determine John Brown s preference for risk CHAPTER 5TEST BANK UNCERTAINTY AND CONSUMER BEHAVIORSIXTH EDITION 160 difficult51 Amos Long s marginal utility of income function is given as MU I I1 5 where I represents income From this you would say that he is a risk averse b risk loving c risk neutral d none of these easy52 Blanca would prefer a certain income of 20 000 to a gamble with a 0 5 probability of 10 000 and a 0 5 probability of 30 000 Based on this information a we can infer that Blanca neutral b we can infer that Blanca is risk averse c we can infer that Blanca is risk loving d we cannot infer Blanca s risk preferences difficult53 The difference between the utility of expected income and expected utility from income is a zero because income generates utility b positive because if utility from income is uncertain it is worth less c negative because if income is uncertain it is worth less d that expected utility from income is calculated by summing the utilities of possible incomes weighted by their probability of occurring and the utility of expected income is calculated by summing the possible incomes weighted by their probability of occurring and finding the utility of that figure e that the utility of expected income is calculated by summing the utilities of possible incomes weighted by their probability of occurring and the expected utility of income is calculated by summing the possible incomes weighted by their probability of occurring and finding the utility of that figure Scenario 6 Consider the information in the table below describing choices for a new doctor The outcomes represent different macroeconomic environments which the individual cannot predict Outcome 1Outcome 2 Job ChoiceProb Inc