1			The variance of a probability distribution is used to measure risk because a higher variance is associated with…
			A)	a more compact distribution.
			B)	a wider spread of values around the mean.
			C)	a lower expected value.
			D)	both a and c
			E)	both b and c
2			When a manager can list all outcomes and assign probabilities to each,
			A)	the manager should use the maximin rule for decision making.
			B)	both risk and uncertainty exist.
			C)	risk exists.
			D)	uncertainty exists.
			E)	both a and d
3			Choosing the decision with the maximum possible payoff…
			A)	is the maximax rule.
			B)	ignores possible bad outcomes.
			C)	is a guide for decision making under uncertainty.
			D)	both a and c
			E)	all of the above
4			The maximin rule…
			A)	ignores bad outcomes.
			B)	is used by optimistic managers.
			C)	minimizes the potential regret.
			D)	chooses the maximum worst payoff.
			E)	none of the above
5			Using the minimax regret rule the manager makes the decision…
			A)	that has the highest expected value relative to the other decisions.
			B)	knowing he or she will not regret it.
			C)	with the largest worst-potential regret.
			D)	with the smallest worst-potential regret.
6			In making decisions under risk,
			A)	maximizing expected value is best for making repeated decisions with identical probabilities.
			B)	maximizing expected value is always the best rule.
			C)	the coefficient of variation rule is always best.
			D)	mean variance analysis is always the best rule.
			E)	none of the above

The next 5 questions refer to the following:

The following payoff matrix shows the various profit outcomes for 3 projects, A, B, and C, under 2 possible states of nature: the product price is $15 or the product price is $25.

	Profit
Project	P = $15	P = $25
A	60	80
B	-28	160
C	40	100

7			Using the maximax rule, the decision maker would choose…
			A)	A.
			B)	B.
			C)	C.
			D)	impossible to say from the information given
8			Using the maximin rule, the decision maker would choose…
			A)	A.
			B)	B.
			C)	C.
			D)	impossible to tell from the information given
9			Using the expected value rule, the decision maker would choose…
			A)	A.
			B)	B.
			C)	C.
			D)	impossible to tell from the information given
10			Using the equal probability rule the decision maker would choose…
			A)	A.
			B)	B.
			C)	C.
			D)	either A or C.
11			Using the minimax regret rule the decision maker would choose…
			A)	A.
			B)	B.
			C)	C.
			D)	impossible to tell from the information

The next 3 questions refer to the following table showing the probability distribution of payoffs from an activity.

Units	Payoff	Probability
1 2 3 4 5	$20 40 60 50 30	5% 25% 35% 20% 15%

12			What is the expected value?
			A)	21
			B)	36.5
			C)	40
			D)	42.5
			E)	46.5
13			What is the variance of the distribution?
			A)	20
			B)	152.8
			C)	195
			D)	273.5
			E)	469
14			What is the coefficient of variation for this distribution?
			A)	0.26
			B)	3.76
			C)	12.4
			D)	13.9
			E)	21.7
15			If marginal benefits and marginal costs of an activity are risky and have a constant variance, expected net benefits are maximized when level of the activity is chosen so that…
			A)	expected marginal benefit equal expected marginal cost and the decision maker must be risk-averse.
			B)	expected marginal benefit exceeds expected marginal cost by the largest amount.
			C)	expected marginal cost equals expected marginal benefit.
			D)	expected marginal benefit equal expected marginal cost and the decision maker must be risk loving.

Answer the next five questions using the following information:

The manager of a perfectly competitive firm must choose the profit-maximizing level of production without knowing with certainty the price of the product or the costs of production. The manager wishes to maximize expected profit given the following subjective probabilities for price:

Price	Probability
$10	0.15
$11	0.35
$12	0.35
$13	0.15

The manager has estimated average variable cost using regression analysis, which assumes the variance of costs is constant at all levels of production. The estimated equation for average variable cost is:

AVC = 18 - 0.03Q + 0.00003Q²

The manager is certain that total fixed costs are $500.

16			What is the equation for expected marginal cost?
			A)	E(MC) = 18 - 0.03Q + 0.00002Q2
			B)	E(MC) = 18Q - 0.06Q2 + 0.00009Q3
			C)	E(MC) = 18 - 0.06Q + 0.00009Q2
			D)	E(MC) = 18 - 0.02Q + 0.00002Q2
17			What is the expected price?
			A)	$10.75
			B)	$11.50
			C)	$15
			D)	$20
			E)	$22.60
18			What is the expected minimum average variable cost? Should the manager shut down?
			A)	$5.00; the manager should shut down because $5.00 is less than the expected price.
			B)	$7.80; the manager should not shut down since expected price is greater than $8.80.
			C)	$10.50; the manager should shut down because $10.50 is less than the expected price.
			D)	$10.50; the manager should not shut down since expected price is greater than $10.50.
19			What level of production maximizes expected profit?
			A)	412 units
			B)	531 units
			C)	1,115 units
			D)	1,281 units
			E)	1,304 units
20			What is the expected profit?
			A)	$416
			B)	$593
			C)	$672
			D)	$1,045
			E)	$2,387