1.)

The owner of a radio station in a rapidly growing community in central Texas is about to begin operations and must decide what type of program format to offer. She is considering three formats; rock, country, and rap. The number of listeners for a particular format will depend on the type of potential audience that is available. Income from advertising depends on the number of listeners the station has. Three broad categories of audience type can be described as A1, A2, and A3. The rock music format draws mainly for the A1 listener, the country music format draws mainly from the A2 listener and the rap music format draws mainly from the A3 listener. The station owner does not know which type of audience will dominate the community once its growth has stabilized. Probabilities have been assigned to the potential dominant audience, based on the community growth that has already occurred in this area. Since she wants to begin building an image now, the decision as to which format to adopt must be made in an environment of uncertainty. The station owner has been able to construct the following payoff table, in which the entries are average monthly revenue in thousands of dollars.

Audience

Format	A1	A2	A3
Rock	$ 100	$ 80	$ 70
Country	$ 90	$ 100	$ 50
Rap	$ 70	$ 80	$ 100
Probability	0.2	0.5	0.3

What format is optimal?

	A.) Rock
	B.)Country
	C.) Rap
	D.) Both B and C.

2.)

A construction company has obtained a contract for a highway project and will need to lease an additional road grader for a month to fill out its equipment fleet. The company is trying to decide between two different lease options for the grader: 1) lease an older grader for $8,500, or 2) lease a newer grader for $10,000. The company would be responsible for any repair expenses if it leases either grader. The construction companys maintenance foreman believes there is a 30% chance that there will be no need for repairs with the older grader, but also thinks there is a 45% chance that some repairs ($2,000) could be needed, and a 25% chance that significant repairs ($5,000) might be required. The foreman also believes there is a 50% chance that there will be no need for repairs with the newer grader, but also thinks there is a 45% chance that some repairs ($2,000) could be needed, and a 5% chance that significant repairs ($5,000) might be required. Which grader is the best option, and what is the associated expected cost?

	Older, $11,150
	Newer, $11,150
	Older, $10,650
	Newer, $11,150

3.)

For a risk averse decision maker, the certainty equivalent is larger than the expected monetary value (EMV).

True or False

4.)

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 70%.

What should the landowner do?

	a.	She should sell the exploration rights as the EMV of selling is 1.93 million, which is higher than the EMV of developing herself.
	b.	She should develop herself as the EMV of developing is 4.5 million, which is higher than the EMV of selling.
	c.	She should develop herself as the EMV of developing is 3.75 million, which is higher than the EMV of selling.
	d.	There is not enough information to answer this question.

5.)

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. Southports 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. Southports 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.

	High Grade metallurgy (.7)	Low Grade metallurgy (.3)
Prices	Probability	Outcome	Probability	Outcome
High	0.8	20	0.6	$10
Low	0.2	-$10	0.4	-$20

Should Southport invest in the mine or not? What is their expected profit?

	a.	Southport should invest, the expected profit is 18.4.
	b.	Southport should not invest, the expected profit is -10.
	c.	Southport should invest if the price is high, the expected profit is 14.
	d.	Southport should invest, the expected profit is 9.2.

6.)

Suppose that a decision makers risk attitude toward monetary gains or losses x given by the utility function U(x) =

If there is a 1% chance that one of the decision makers family heirlooms, valued at $5,500, 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?

	327.28
	65.89
	0
	55

7.)

Suppose that a decision makers 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 $1,000 for certain. For decision 2, she loses $0 with probability 0.75 and loses $4,000 with probability 0.25. Which decision maximizes the expected utility of her net wealth?

	a.	She should choose option 2. Her expected utility is 9.58.
	b.	She should choose option 2. Her expected utility is 9.54.
	c.	She should choose option 1. Her expected utility is 9.55.
	d.	She is indifferent between the two choices.

8.)

Which of the following is true with regard to a good decision?

	a.	It ensures that good outcomes will be obtained
	b.	It accounts for unlucky outcomes
	c.	It should be independent of the sequencing of uncertainties and decisions
	d.	It should incorporate all information about uncertainties and alternatives
	e.	All of these options