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**I need help with my homework. Multiple choice questions and two problem set. **

**Book : Managerial Economic: A Problem-Solving Approach (3rd Edition) Chapter 17**

Class: Economic and decision making

Class: Economic and decision making

Book Managerial Economic: A Problem-Solving Approach (3rd Edition)n

Chapter 17

Multiple choice questions

1. You are taking a multiple-choice test that awards you one point for a correct answer and

penalizes you 0.25 points for an incorrect answer. If you have to make a random guess and there

are five possible answers, what is the expected value of guessing?

a. 0.5 points

b. 0.25 points

c. ?0.25 points

d. 0 points

2. Your firm is considering a potential investment project, and your finance group has prepared

the following estimates: an NPV of $10 million if the economy is strong (30% probability), an

NPV of $4 million if the economy is normal (50% probability), and an NPV of ?$2 million if the

economy is poor (20% probability). What is the expected value of NPV (to the nearest dollar) for

the following situation?

a. $3.4 million

b. $4.0 million

c. $4.6 million

d. $5.2 million

3. You?ve just decided to add a new line to your manufacturing plant. Compute the expected

loss/profit from the line addition if you estimate the following:

? There?s a 70% chance that profit will increase by $100,000.

? There?s a 20% chance that profit will remain the same.

? There?s a 10% chance that profit will decrease by $15,000.

a. Gain of $100,000

b. Gain of $71,500

c. Loss of $15,000

d. Gain of $68,500

4. Your software development company is considering investing in a new product. If it is very

well received by users (30% probability), you expect an NPV of $500,000; if users are mildly

happy with the product (50%

probability), you expect an NPV of $400,000; and if users are not that excited by the product

(20% probability), you expect an NPV of $300,000. What is the expected NPV of the product?

a. $390,000

b. $400,000

c. $410,000

d. None of the above 5. Suppose an investment project has an NPV of $150 million if it becomes successful and an

NPV of ?$50 million if it is a failure. What is the minimum probability of success above which

you should make the investment?

a. 0.5

b. 1/3

c. 0.25

d. 0.1 6. You want to price posters at the Poster Showcase profitably and run an experiment to estimate

the demand elasticity. You raise the price of kitten posters by 10% but keep your dog poster

prices unchanged. After a month, kitten poster unit sales fall by 12% but dog posters rise by 8%.

What is the difference-in-difference estimate of the demand elasticity?

a. ?1.2

b. ?2.0

c. ?0.8

d. ?0.4

7. Your company has a customer list that includes 200 people. Of those 200, your market

research indicates that 140 of them hate receiving coupon offers whereas the remainder really

likes them. If you send a coupon mailer to one

customer at random, what?s the probability that he or she will value receiving the coupon?

a. 0.3

b. 0.6

c. 0.70

d. 1.4

8. Your production line has recently been producing a serious defect. One of two possible

processes, A and B, could be the culprit. From past experience you know that the probability that

A is causing the problem is 0.8 but investigating A costs $100,000 while investigating B costs

only $20,000. What are the expected error costs of shutting down process B first?

a. $80,000

b. $20,000

c. $16,000

d. $4,000

9. You have two types of buyers for your product. The first type values your product at $10; the

second values it at $6. Forty percent of buyers are of the first type ($10 value); 60% are of the

second type ($6 value). What price maximizes your expected profit?

a. $10

b. $6

c. $7.60

d. $8 10. You are considering entry into a market in which there is currently only one producer

(incumbent). If you enter, the incumbent can take one of two strategies, price low or price high.

If they price high, then you expect a $60k profit per year. If they price low, then you expect a

$20k loss per year. You should enter if:

a. You believe demand is inelastic.

b. You believe the probability that the incumbent will price low is greater than 0.75.

c. You believe the probability that the incumbent will price low is less than 0.75.

d. You believe the market-size is growing.

17-2 Game Show Uncertainty

In the final round of a TV game show, contestants have a chance to increase their current

winnings of 1 million dollars to 10 million dollars. If they are wrong, their prize is decreased to

$100,000. To win, they have to guess the exact percentage that answered a question a certain

way, and the range has already been narrowed to an 11-point range. So, for example, the

contestant knows that the correct answer is between 20% and 30% and he or she must guess the

correct percentage in that range. So, let?s say you have no idea what the right answer is and have

to make a random guess. Should you play?

17-6 Hiring

The HR department is trying to fill a vacant position for a job with a small talent pool. Valid

applications arrive every week or so, and the applicants all seem to bring different levels of

expertise. For each applicant, the HR manager gathers information by trying to verify various

claims on resumes, but some doubt about fit always lingers when a decision to hire or not is to be

made. What are the type I and II decision error costs? Which decision error is more likely to be

discovered by the CEO? How does this affect the HR manager?s hiring decisions?

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