37) Freddie's company has mostly fixed costs and Valerie's company has mostly variable costs. Which company has the greatest risk of a net loss? Explain why.

3.5 Analyze the implications of uncertainty on decision models.

1) A probability distribution describes the likelihood of each of the mutually exclusive and collectively exhaustive set of events.

2) An expected value is the weighted-average of the outcomes based on the percentage combinations of the incomes.

3) Risk neutral means the decision maker will feel as much pain at losing a dollar as joy at gaining a dollar.

4) "Uncertainty" may be defined as

A) the possibility that an actual amount will be the same as an expected amount.

B) the possibility that an actual amount will be either higher or lower than the expected amount.

C) the possibility that a budgeted amount will be the same as an estimated amount.

D) the possibility that the budgeted amount will be lower than the estimated amount.

E) the possibility that the budgeted amount will be either higher or lower than the expected amount.

5) An expected value decision model is used for

A) determining if a budgeted amount will deviate from an actual amount.

B) determining if a budgeted amount will be the same as an actual amount.

C) enabling managers to deal with events using a qualitative analysis method.

D) enabling managers to deal with uncertainty using quantitative analyses.

E) identifying factors that distinguish an action from an event.

6) Expected monetary value may be defined as

A) the weighted average of all possible outcomes.

B) the probability that each outcome will not occur.

C) the weighted average of the financial outcomes with the probability of each outcome serving as the weight.

D) the average of all possible outcomes.

E) the weighted average of all mutually exclusive outcomes.

7) What would be the expected monetary value for the following data using the probability method?

Probability	Cash Inflows
0.15	$200,000
0.25	$175,000
0.30	$160,000
0.40	$0

A) $535,000

B) $250,000

C) $121,750

D) $200,000

E) $30,000

8) Joan Perry has three booth rental options at the bridal fair where she plans to sell her new product. The booth rental options are:

Option 1: $4,000 fixed fee

Option 2: $3,000 fixed fee + 5% of all revenues generated at the fair

Option 3: 20% of all revenues generated at the fair.

The product sells for $150 per unit. She is able to purchase the units for $50.00 each.

Which option should Joan choose in order to maximize income assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold?

A) Option 1 with expected operating income of $1,200

B) Option 2 with expected operating income of $1,810

C) Option 3 with expected operating income of $3,640

D) Option 3 with expected operating income of $4,160

E) Option 2 with expected operating income of $4,060

9) Lobster Liquidators will make $500,000 if the fishing season weather is good, $200,000 if the weather is fair, and would actually lose $50,000 if the weather is poor during the season. If the weather service gives a 40% probability of good weather, a 25% probability of fair weather, and a 35% probability of poor weather, what is the expected monetary value for Lobster Liquidators?

A) $500,000

B) $750,000

C) $267,500

D) $200,000

E) $232,500