Test Bank For Quantitative Methods for Business 12th Edition

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Test Bank For Quantitative Methods for Business 12th Edition

Chapter 5—Utility and Game Theory

MULTIPLE CHOICE

1. When consequences are measured on a scale that reflects a decision-maker’s attitude toward profit, loss, and risk, payoffs are replaced by

a.	utility values.
b.	multicriteria measures.
c.	sample information.
d.	opportunity loss.

ANS:APTS:1TOP:Meaning of utility

2.The purchase of insurance and lottery tickets shows that people make decisions based on

a.	expected value.
b.	sample information.
c.	utility.
d.	maximum likelihood.

ANS: C PTS: 1 TOP: Introduction

3.The expected utility approach

a.	does not require probabilities.
b.	leads to the same decision as the expected value approach.
c.	is most useful when excessively large or small payoffs are possible.
d.	requires a decision tree.

ANS: C PTS: 1 TOP: Expected utility approach

4.Utility reflects the decision maker’s attitude toward

a.	probability and profit
b.	profit, loss, and risk
c.	risk and regret
d.	probability and regret

ANS:BPTS:1TOP:Meaning of utility

5.Values of utility

a.	must be between 0 and 1.
b.	must be between 0 and 10.
c.	must be nonnegative.
d.	must increase as the payoff improves.

ANS: D PTS: 1 TOP: Developing utilities for monetary payoffs

6.If the payoff from outcome A is twice the payoff from outcome B, then the ratio of these utilities will be

a.	2 to 1.
b.	less than 2 to 1.
c.	more than 2 to 1.
d.	unknown without further information.

ANS:DPTS:1TOP:Meaning of utility

7.The probability for which a decision maker cannot choose between a certain amount and a lottery based on that probability is

a.	the indifference probability.
b.	the lottery probability.
c.	the uncertain probability.
d.	the utility probability.

ANS: A PTS: 1 TOP: Developing utilities for monetary payoffs

8.A decision maker has chosen .4 as the probability for which he cannot choose between a certain loss of 10,000 and the lottery p(−25000) + (1 − p)(5000). If the utility of −25,000 is 0 and of 5000 is 1, then the utility of −10,000 is

a.	.5
b.	.6
c.	.4
d.	4

ANS: B PTS: 1 TOP: Developing utilities for monetary payoffs

9.When the decision maker prefers a guaranteed payoff value that is smaller than the expected value of the lottery, the decision maker is

a.	a risk avoider.
b.	a risk taker.
c.	an optimist.
d.	an optimizer.

ANS: A PTS: 1 TOP: Risk avoiders versus risk takers

10.A decision maker whose utility function graphs as a straight line is

a.	conservative.
b.	risk neutral.
c.	a risk taker.
d.	a risk avoider.

ANS: B PTS: 1 TOP: Risk avoiders versus risk takers