1) A convenient way to represent decisions, chance events, and possible outcomes in choices under risk and uncertainty is known as a:
A: Probability distribution
B: Decision table
C: decision tree
D: expected outcome tree
E: Risk table
2) An individual is said to risk averse if his/her certainty equivalent for a risky prospect is:
A: always negative
B: equal to its expected value
C: equal to the average probability of the outcomes
D: always zero
E: less than its expected value
A manager who chooses among options by applying the expected value criterion is:
A: risk neutral
B: risk averse
C: risk loving
D: willing to insure or hedge his bets
E: a risk minimizer
3) 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 sum of the expected value with the information and without it
D: the expected value of the decision taken using the test
E: the same as the expected value of the decision taken without the test
4) A firm supplies aircraft engines to the government and to private firms. It must decide between two mutually exclusive contracts. If it contracts with a private firm, its profit will be $2 million, $1 million, or -$1 million with probabilities .25, .4, and .35, respectively. If it contracts with the government, its profit will be $4 million or -$2.5 million with respective probabilities .4 and .6. Which contract offers the greater expected profit or loss?
A: The private contract offers the greater expected profit.
B: The government contract offers the greater expected profit
C: Both contracts offer the same expected profit
D: The private contract results in a greater expected loss
E: The government contract results in a greater expected loss.