A car manufacturer can launch either a new luxury sedan (L) or a new high-performance sports car (S).

• The car company expects that there is a p=0.7 chance that the luxury sedan will be a hit, and a (1-p)=0.3 chance that it will be a flop.
• The car company expects that there is a q=0.6 chance that the high-performance sports car will be a hit, and a (1-q) = 0.4 chance that it will be a flop.
• If the luxury sedan will be a hit, the company earns $3 Million; if it is a flop, it still earns $2 Million.
• If the high-performance sports car will be a hit, the company earns $6 Million; if it is a flop, it loses $2 Million.

Q1. Measured by the expected payoffs and holding constant q, for what range of p is launching the luxury sedan always the best choice?

1.P>0.6

2.P>0.7

3.P>0.8

4.P>0.9

Q2. Measured by the expected payoffs and holding constant p, for what range of q is launching the high-performance sports car always the best choice?

1.Q>0.5875

2.Q.>0.6125

3.Q>0.625

4.Q>0.65

Assume next that a risk averse manager needs to make the decision to launch either the luxury sedan or the high-performance sports car. The manager has a base salary of $100,000 plus an incentive package. The incentive package either increases or decreases the base salary, depending on the success of the new car. For every extra dollar earned with the new car, the manager's base salary increases by one cent. Likewise, for every dollar lost with the new car, the manager's base salary decreases by 1 cent. The manager's income utility function is U(Income)=sqrt(Income).

Q3. If the manager decides to launch the luxury sedan and it is a hit, what will be the manager's total income?

1.80,000

2.120,000

3.130,000

4.160,000

Q 4. If the manager decides to launch the luxury sedan and it is a flop, what will be the manager's total income?

1.80,000

2.120,000

3.130,000

4.160,000

Q5. If the manager decides to launch the high-performance sports car and it is a hit, what will be the manager's total income?

1.80,000

2.120,000

3.130,000

4.160,000

Q6. If the manager decides to launch the high-performance sports care and it is a flop, what will be the manager's total income?

1.80,000

2.120,000

3.130,000

4.160,000

Q7. What is the manager's expected utility from launching the luxury sedan?

1.351.89

2.353.14

3.356.31

4.358.25

Q8. What is the manager's expected utility from launching the high-performance sports car?

1.351.89

2.353.14

3.356.31

4.358.25

Q9.Measured by the expected utility, which statement is true? The manager

1.will launch the luxury sedan

2.will launch the high-performance sports car

3.is indifferent between launching the luxury sedan and the high-performance sports car.

4.should launch a high-performance luxury sedan without any market study

Q10. Holding constant p an q, the payoffs for the luxury sedan under each scenario, and the payoff for the high-performance sports car under the flop scenario, how big would the payoff for the high performance sports under the hit scenario have to be for the manager to choose the high-performance sports car? (Round to full numbers - zero decimals).

1.2,425,856

2.4,253,333

3.5,425,852

4.6,425,852

Q. 11 Which statement is true?

1. It is reasonable to assume that large companies are risk neutral and individuals risk averse.

2. It is reasonable to assume that individuals are risk neutral and large companies risk averse.

3. It is reasonable to assume that both individuals and large companies are risk neutral.

Q 12. Which statement describes a good decision-making process best?

1. Think backwards, reason backwards

2. Think forwards, reason forwards

3. Think backwards, reason forwards

4. Think forwards, reason backwards