Which of the following is true with regard to a good decision? It guarantees tha
ID: 2922049 • Letter: W
Question
Which of the following is true with regard to a good decision?
It guarantees that good outcomes will be obtained.
It should incorporate all information about uncertainties and alternatives.
It should be independent of the sequencing of uncertainties and decisions.
It avoids unlucky outcomes.
All of these options
Utility functions are mathematical functions that transform monetary values – payoffs and costs – into ________________.
expected values
utility values
EMV values
anchor values
None of the above
Expected monetary value (EMV) is:
the amount that you would lose by not picking the best alternative
the average or expected value of the information if it was completely accurate
the average or expected value of the decision if you knew what would happen ahead of time
the weighted average of possible monetary values, weighted by their probabilities
a decision criterion that places an equal amount on all states of nature
For a risk averse decision maker, the certainty equivalent is less than the expected monetary value (EMV).
True
False
With regard to decision making, most individuals are __________________.
risk averse
risk seekers
risk maximizers
EMV maximizers
None of these options
A landowner in Texas is offered $200,000 for the exploration rights to oil on her land, along with a 25% royalty on the future profits if oil is discovered. The landowner is also tempted to develop the field herself, believing that the interest in her land is a good indication that oil is present. In that case, she will have to contract a local drilling company to drill an exploratory well on her own. The cost for such a well is $750,000, which is lost forever if no oil is found. If oil is discovered, however, the landowner expects to earn future profits of $7,500,000. Finally, the landowner estimates (with the help of her geologist friend) the probability of finding oil on this site to be 75%.
What should the landowner do?
She should sell the exploration rights as the EMV of selling is 1.43 million, which is higher than the EMV of developing herself.
She should develop herself as the EMV of developing is 4.5 million, which is higher than the EMV of selling.
She should develop herself as the EMV of developing is 4.9 million, which is higher than the EMV of selling.
There is not enough information to answer this question.
Southport Mining Corporation is considering a new mining venture in Indonesia. There are two uncertainties associated with this prospect; the metallurgical properties of the ore and the net price (market price minus mining and transportation costs) of the ore in the future.
The metallurgical properties of the ore would be classified as either “high grade” or “low grade”. Southport’s geologists have estimated that there is a 70% chance that the ore will be “high grade”, and otherwise, it will be “low grade”. Depending on the net price, both ore classifications could be commercially successful.
The anticipated net prices depended on market conditions, and also on the metallurgical properties of the ore. Southport’s economists have simplified the continuous distribution of possible prices into a two-outcome discrete distribution (“high” or “low” net price) for the investment analysis. The probabilities of these net prices, and the associated outcomes (in millions of dollars), are summarized below.
Should Southport invest in the mine or not? What is their expected profit?
Southport should invest, the expected profit is 4.6.
Southport should not invest, the expected profit is -10.
Southport should invest if the price is high, the expected profit is 11.
Southport should invest, the expected profit is 9.2.
Suppose that a decision maker’s utility as a function of her wealth, x, is given by U(x) = ln x (the natural logarithm of x).
The decision maker now has $15,000 and two possible decisions. For decision 1, she loses $2,000 for certain. For decision 2, she loses $5,000 with probability 0.75, but gains $10,000 with probability 0.25. Which decision maximizes the expected utility of her net wealth?
She should choose option 2. Her expected utility is 9.43.
She should choose option 1. Her expected utility is 9.47.
She should choose option 1. Her expected utility is 9.55.
She is indifferent between the two choices.
One class of “ready-made” utility functions is called exponential utility. Exponential utility has an adjustable parameter called risk tolerance. The risk tolerance parameter measures:
how much money the decision maker has to spend
the decision maker’s attitude toward risk
how much risk there is in a given decision
the probability of an unfavorable outcome
None of these options
Her initial level of wealth is $15,000. If there is a 10% chance that one of the decision maker’s family heirlooms, valued at $5,000, will be stolen during the next year, what is the most that she would be willing to pay each year for an insurance policy that completely covers the potential loss of her cherished items?
Round all answers (also intermediate answers to 2 decimals).
544.75
65.89
0
55
a.It guarantees that good outcomes will be obtained.
b.It should incorporate all information about uncertainties and alternatives.
c.It should be independent of the sequencing of uncertainties and decisions.
d.It avoids unlucky outcomes.
e.All of these options
Explanation / Answer
Dear student, as per chegg guidelines please post one question in one thread. you may post rest of the questions in a seperate threads. Thankls.
Solution :
(1) Option (b) is correct.
A good decision should incorporate all information about uncertainties and alternatives.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.