Test bank for managerial economics and business strategy chapter 12 PDF

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Chapter 12The Economics of InformationMultiple Choice Questions Suppose a risk-neutral competitive firm must set output before it knows for sure the market price. Suppose the market price is given by p = p* + e, where p* is the mean price and e is a random term with an expected value of zero. Then i...

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Chapter 12 - The Economics of Information

Chapter 12 The Economics of Information Multiple Choice Questions 1. Suppose a risk-neutral competitive firm must set output before it knows for sure the market price. Suppose the market price is given by p = p* + e, where p* is the mean price and e is a random term with an expected value of zero. Then in order to maximize expected profits, the firm should produce where: A. p = MC. B. p* = MC. C. p* + e = MC. D. p > MC. Answer: B Learning Objective: 12-02 Topic: Uncertainty and the Firm Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

2. Suppose a risk-neutral competitive firm must produce output before the market price is known. If the uncertain price is given by p = p* + e, where e is a random term with an expected value of zero, a competitive firm should shut down in the short run if: A. p* < AVC. B. p* + e < AFC. C. p* < AFC. D. p* < MC. Answer: A Learning Objective: 12-02 Topic: Uncertainty and the Firm Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

3. In the presence of ______, the market mechanism can break down. A. extensive form games B. normal form games C. common knowledge D. asymmetric information Answer: D Learning Objective: 12-03 Topic: Uncertainty and the Market Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy 12-1 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

4. _______ occurs when people smoke more after buying life insurance. A. Adverse selection B. Moral hazard C. Asymmetric information D. Cournot and Bertrand competition Answer: B Learning Objective: 12-04 Topic: Uncertainty and the Market Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

5. To maximize profit in the face of uncertainty, firms should produce the output where: A. expected price equals expected marginal cost. B. expected marginal revenue equals marginal cost. C. expected marginal revenue equals expected marginal cost. D. expected price equals marginal cost. Answer: B Learning Objective: 12-02 Topic: Uncertainty and the Firm Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

6. Joe's search costs are $5 per search. He wants to buy a video player for his wife for Christmas, and the lowest price he's found so far is $300. Joe thinks 80 percent of the stores charge $300 for video players and 20 percent charge $200. Joe's optimal decision is to: A. continue to search for a lower price since the expected benefit of an additional search is $20, which exceeds his per-unit search costs. B. stop searching and purchase a video player for $200. C. continue to search for a lower price since the expected benefit of an additional search is $80, which exceeds his per-unit search costs. D. None of the preceding statements is correct. Answer: A Learning Objective: 12-01 Topic: Uncertainty and Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

12-2 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

7. Joe's search costs are $5 per search. He wants to buy a video player for his wife for Christmas, and the lowest price he's found so far is $200. Joe thinks 50 percent of the stores charge $200 for video players and 50 percent charge $190. Based on this information: A. Joe should search again. B. Joe should stop searching and purchase the video player at $200. C. Joe is indifferent between searching again and stopping. D. There is insufficient information to make a determination. Answer: C

Learning Objective: 12-01 Topic: Uncertainty and Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

8. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

Which project has the greatest expected value? A. A B. B C. C D. D Answer: D Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

12-3 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

9. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

Which project has the lowest expected value? A. A B. B C. C D. D Answer: C Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

10. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

Which project has the greatest variance? A. A B. B C. C D. D Answer: C 12-4 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

11. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

Which project has the lowest variance? A. A B. B C. C D. D Answer: D Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

12. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30 12-5

© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

D

$50

$50

A risk-neutral manager will prefer project: A. A. B. B. C. C. D. D. Answer: D Learning Objective: 12-02 Topic: Uncertainty and Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

13. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

A risk-averse manager will prefer project: A. A. B. B. C. C. D. D. Answer: D Learning Objective: 12-02 Topic: Uncertainty and Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

14. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table.

12-6 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

A risk-loving manager will prefer project: A. A. B. B. C. C. D. D. Answer: D Learning Objective: 12-02 Topic: Uncertainty and Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

15. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

Which project yields the greatest return, regardless of whether a boom or a recession occurs? A. A B. B C. C D. D 12-7 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information Answer: D Learning Objective: 12-02 Topic: Uncertainty and Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

16. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

The expected value of project A is: A. $5. B. $10. C. $20. D. None of the preceding statements is correct. Answer: A Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

17. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50 12-8

© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

The expected value of project B is: A. $5. B. $10. C. $20. D. None of the answers are correct. Answer: A Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

18. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

The expected value of project C is: A. $5. B. $10. C. $20. D. None of the answers are correct. Answer: D Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

12-9 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

19. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

The expected value of project D is: A. $5. B. $10. C. $20. D. None of the answers are correct. Answer: D Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

20. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

12-10 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

The variance in the returns of project A is: A. 900. B. 225. C. 0. D. 1,600. Answer: B Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

21. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

The variance in the returns of project B is: A. 900. B. 225. C. 0. D. 1,600. Answer: B Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

12-11 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

22. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

The variance in the returns of project C is: A. 900. B. 225. C. 0. D. 1,600. Answer: A Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

23. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

12-12 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12 - The Economics of Information

The variance in the returns of project D is: A. 900. B. 225. C. 0. D. 1,600. Answer: C Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

24. You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project

Boom (50%)

Recession (50%)

A

$20

−$10

B

−$10

$20

C

$30

−$30

D

$50

$50

If a manager adopted both project A and B simultaneously, the expected value of this joint project would be: A. 10. B. 20. C. 30. D. 40. Answer: A Learning Objective: 12-02 Topic: The Mean and the Variance Blooms: Apply AACSB: Analytical T...