Describe risk in business

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Microeconomics, 8e (Pindyck/Rubinfeld)

Chapter 5   Uncertainty and Consumer Behavior

5.1   Describing Risk

Scenario 5.1:

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.

1) Refer to Scenario 5.1. The expected value of the undertaking,

1. A) according to Sarah, is $75,000.
2. B) according to Sarah, is $100,000.
3. C) according to Sarah, is $110,000.
4. D) according to Aline, is $200,000.
5. E) according to Aline, is $100,000.

Answer: E

Diff: 1

Section: 5.1

2) Refer to Scenario 5.1. The probabilities discussed in the information above are

1. A) objective because they are single numbers rather than ranges.
2. B) objective because they have been explicitly articulated by the individuals involved.
3. C) objective because the event hasn’t happened yet.
4. D) subjective because the event hasn’t happened yet.
5. E) subjective because they are estimates made by individuals based upon personal judgment or experience.

Answer: E

Diff: 1

Section: 5.1

Scenario 5.2:

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.

3) Refer to Scenario 5.2. Which of the following is true?

1. A) Randy has a higher expected expense than Samantha for the car.
2. B) Randy has a lower expected expense than Samantha for the car.
3. C) Randy and Samantha have the same expected expense for the car, and it is somewhat less than $20,000.
4. D) Randy and Samantha have the same expected expense for the car: $20,000.
5. E) It is not possible to calculate the expected expense for the car until the true probabilities are known.

Answer: A

Diff: 1

Section: 5.1

4) Refer to Scenario 5.2. Randy’s expected expense for his car is

1. A) $20,000.
2. B) $19,000.
3. C) $18,000.
4. D) $17,500.
5. E) $15,000.

Answer: B

Diff: 1

Section: 5.1

5) Refer to Scenario 5.2. Samantha’s expected expense for her car is

1. A) $20,000.
2. B) $19,000.
3. C) $18,000.
4. D) $17,500.
5. E) $15,000.

Answer: C

Diff: 1

Section: 5.1

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 OfferAccounting.95$25,000Economics.90$30,000English.70$24,000Poli Sci.60$18,000Mathematics1.00$21,000

6) Refer to Table 5.1. Expected income for the first year is

1. A) highest in accounting.
2. B) highest in mathematics.
3. C) higher in English than in mathematics.
4. D) higher in political science than in economics.
5. E) highest in economics.

Answer: E

Diff: 1

Section: 5.1

7) Refer to Table 5.1. Ranked highest to lowest in expected income, the majors are

1. A) economics, accounting, English, mathematics, political science.
2. B) mathematics, English, political science, accounting, economics.
3. C) economics, accounting, mathematics, English, political science.
4. D) English, economics, mathematics, accounting, political science.
5. E) accounting, English, mathematics, political science, economics.

Answer: C

Diff: 1

Section: 5.1

Scenario 5.3:

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:

CompanyGood Year RevenueBad Year RevenueNumber of Good YearsWhizbo$8 million$6 million8Yowzo$10 million$4 million4Zowiebo$30 million$1 million1

8) Refer to Scenario 5.3. Where is the highest expected revenue, based on the 10 years’ past performance?

1. A) Whizbo
2. B) Yowzo
3. C) Zowiebo
4. D) Whizbo and Yowzo
5. E) Yowzo and Zowiebo

Answer: A

Diff: 1

Section: 5.1

9) Refer to Scenario 5.3. Based on the 10 years’ past performance, what is the probability of a good year for Zowiebo?

1. A) 30/31
2. B) 1/31
3. C) 0.9
4. D) 0.1

Answer: D