Multiple Choice Questions
1. You are taking a multiple-choice test that awards you one point for a correct answer and penalizes you 0.25 points for an incorrect answer. If you have to make a random guess and there are five possible answers, what is the expected value of guessing?
a. 0.5 points
b. 0.25 points
c. -0.25 points
d. 0 points

2. Your firm is considering a potential investment project, and your finance group has prepared the following estimates: an NPV of $10 million if the economy is strong (30% probability), an NPV of $4 million if the economy is normal (50% probability), and an NPV of -$2 million if the economy is poor (20% probability). What is the expected value of NPV (to the nearest dollar) for the following situation?
a. $3.4 million
b. $4.0 million
c. $4.6 million
d. $5.2 million

3. You've just decided to add a new line to your manufacturing plant. Compute the expected loss/profit from the line addition if you estimate the following:
● There's a 70% chance that profit will increase by $100,000.
● There's a 20% chance that profit will remain the same.
● There's a 10% chance that profit will decrease by $15,000.
a. Gain of $100,000
b. Gain of $71,500
c. Loss of $15,000
d. Gain of $68,500

4. Your software development company is considering investing in a new product. If it is very well received by users (30% probability), you expect an NPV of $500,000; if users are mildly happy with the product (50% probability), you expect an NPV of
$400,000; and if users are not that excited by the product (20% probability), you expect an NPV of $300,000. What is the expected NPV of the product?
a. $390,000
b. $400,000
c. $410,000
d. None of the above

5. Suppose an investment project has an NPV of $150 million if it becomes successful and an NPV of -$50 million if it is a failure. What is the minimum probability of success above which you should make the investment?
a. 0.5
b. 1/3
c. 0.25
d. 0.1

6. You want to price posters at the Poster Showcase profitably and run an experiment to estimate the demand elasticity. You raise the price of kitten posters by 10% but keep your dog poster prices unchanged. After a month, kitten poster unit sales fall by 12% but dog posters rise by 8%. What is the difference-in-difference estimate of the demand elasticity?
a. -1.2
b. -2.0
c. -0.8
d. -0.4

7. Your company has a customer list that includes 200 people. Of those 200, your market research indicates that 140 of them hate receiving coupon offers whereas the remainder really likes them. If you send a coupon mailer to one customer at random, what's the probability that he or she will value receiving the coupon?
a. 0.3
b. 0.6
c. 0.70
d. 1.4

8. Your production line has recently been producing a serious defect. One of two possible processes, A and B, could be the culprit.
From past experience you know that the probability that A is causing the problem is 0.8 but investigating A costs $100,000 while investigating B costs only $20,000. What are the expected error costs of shutting down process B first?
a. $80,000
b. $20,000
c. $16,000
d. $4,000

9. You have two types of buyers for your product. The first type values your product at
$10; the second values it at $6. Forty percent of buyers are of the first type ($10 value);
60% are of the second type ($6 value). What price maximizes your expected profit?
a. $10
b. $6
c. $7.60
d. $8

10. You are considering entry into a market in which there is currently only one producer (incumbent). If you enter, the incumbent can take one of two strategies, price low or price high. If they price high, then you expect a $60k profit per year. If they price low, then you expect a $20k loss per year. You should enter if:
a. You believe demand is inelastic.
b. You believe the probability that the incumbent will price low is greater than 0.75.
c. You believe the probability that the incumbent will price low is less than 0.75.
d. You believe the market-size is growing.