Risk in Business and Society- Exam 1

s the manager of High Speed Records, you have signed a new artist to the label. There are three different outcomes for investing in the artist. What is the expected return on investment using the information below? Outcome Probability Return 1. .35 .20 2. .25 .36 3. .40 .10 *Make sure your answer is in a decimal format (.25, .90, etc.) and not a percentage (25%). Round to the nearest hundredth. (0.089 -> 0.09)

0.2

Nyce Vineyards is evaluating the impact of climate change on its several types of grapes grown. There are several alternatives for planting multiple varietals that will ultimately determine their success. In order to select between the alternatives to find the optimal choice, Nyce Vineyards should use:

Decision Theory

What is the difference between a decision node/decision fork and the chance node/chance fork in the decision tree?

Decision nodes are at locations where a decision needs to be made, and chance nodes are at locations which happen as a result of the decision.

Which of the following determines optimal strategies when a decision maker is faced with several different alternatives and a risky pattern of future events?

Decision theory

According to "Innovation Risk: How to Make Smarter Decisions", which of the following is NOT one of the five rules of thumb to minimizing risk?

Determine which risks are being faced

An incurred cost that cannot be recovered, which is irrelevant for all decisions about the future, is included in the projected cost of a project. According to "Thinking Like an Economist," this an example of:

Failing to ignore sunk costs

According to "Innovation Risk: How to Make Smarter Decisions", the infrastructure should be changed based on every new innovation.

False

The Florida Lottery has done extensive research on the individuals who purchase their products. They have determined that their customers have a square root utility function and an initial wealth of $100. It costs $19 to purchase a lottery ticket and each ticket has a 50/50 chance of being worth $39. True or False, customers will purchase these lottery tickets.

False

A matrix of conditional values associated with all possible combinations a series of events is a:

Pay-off Table

According to "The US Economy: Private and Public Sectors", which of the following are taxes based on wages and salaries?

Payroll taxes

Expected Utility is calculated by:

Probability of the outcome multiplied by the utility of the resulting wealth

The Smithsonian Institute is in possession of the Hope Diamond and would like to find a new security system to protect this diamond from theft. There are three products under consideration, each with a cost of $3 million to implement. Which product should be purchased? Product A: Probability / Outcome .20 / 33% .15 / 15% .10 / -10% Product B: Probability / Outcome .40 / 17% .22 / 7.5% .10 / -1% Product C: Probability / Outcome .33 / 20% .25 / 17% .15 / -20%

Product B

According to "The US Economy: Private and Public Sectors", goods provided by government that fit the definition of a public good, but can be delivered in such a way that exclusion is possible are called which of the following?

Quasi-public goods

Which of the following is the last step in the risk management process (but often done first)?

Review and Evaluate

The owner of a private language school has a profit of $50,000 for the year. She has the option of saving the $50,000 for future opportunities or investing in a new classroom facility. The investment has a 50% probability of making $20,000 and a 50% probability of losing 35,000. If she has a square root utility function, what should the school do?

Save for future opportunities.

A girl is given $15 by her parents. She has two options of how to spend the money. She can either save the money for future purchases or she can start a lemonade stand on her driveway. If she spends her $15 on the lemonade stand, there is a 50% probability she will lose $10 and a 50% probability she will make $12. Assuming the girl has a square root utility function, what should the girl do with the money?

Save her money.

According to "The US Economy: Private and Public Sectors", which of the following are the two reasons describing why people save?

Security and speculation

How can positive externalities be corrected?

all of the above (subsidizing consumers, subsidizing suppliers, allowing the government to provide goods)

Tom is a college student at FSU. He has the option to buy a parking pass at the beginning of the year for $250. If Tom doesn't buy the pass, he has to park on the street or pay the valet parking service $5 per day. If Tom does not buy the parking pass, he expects to have to use the valet parking services 40 times. However, he may end up using the valet service up to 80 times. Tom decides that he would rather pay the $250 than risk not being able to find a spot on the street. Tom could be described as which of the following:

risk averse

Carly is involved in a three-car automobile accident. Which type of risk is this an example of?

particular risk

Which of the following terms describes the immediate cause of loss?

peril

The portion of household income that is NOT paid in taxes or used to purchase goods is:

personal savings

Gary works in a factory where the workers are known to leave oily rags all over the place. Which of the following best describes the oily rags?

physical hazard

Which of the following is not a category of risk retention?

primary versus secondary

One of the public policy concerns associated with risk reduction in the reading "A Scientific View of Risk" is estimating the cost and benefits of risk reduction. For many risks, such as highway safety estimating the cost and benefits of risk reduction include:

putting a value on human life

In "Thinking Like an Economist," the section "The Role of Economic Theory" states that many economists believe that useful insights into our behavior can be gained by assuming that we act as if governed by the rules of___________ decision making.

rational

Risk prevention and risk reduction are both included under which of the following?

risk (loss) control

One of the core concepts of the reading "A Scientific View of Risk" is:

risk reduction has both monetary and non-monetary costs

Which of the following describes the decision-maker classifications for individuals under utility theory?

risk-averse, risk-seeking and risk-neutral

What is the name for a solution that is obtained by working backwards, from right to left, through a decision tree?

rollback technique

According to "Innovation Risk: How to Make Smarter Decisions", which of the following is NOT an observable external factor measured by the Black-Scholes formula?

the Dow Jones Industrial Average

According to "Thinking Like An Economist", opportunity cost is best defined as

the value of all that must be sacrificed in order to benefit

A pay-off is a(n) __________ value in the sense that associated with each course of action is a certain profit/loss.

conditional

As the operations manager for American Airlines you have decided to invest in 10 new jets for the company's fleet. There are three outcomes for this investment. What is the expected return on investment using the information below? Outcome Probability Return 1. .50 .15 2. .30 .25 3. .20 .10 Make sure your answer is in decimal format (.30, .40, etc.) and not a percentage. Round to the nearest hundredth place (i.e. .264 -> .26) if necessary.

0.17

In 1941 households paid approximately 3% of their income in taxes. In the 2000's, this percentage has grown to:

12%

According to "The US Economy: Private and Public Sectors", what is the typical amount of income saved by U.S. households?

3%

As an application of the "number of days" lost measure of risk discussed in "Scientific View of Risk" consider the following 2015 statistic. Today's life expectancy is well into the 80s. What percentage of life-long smokers die before the age of 70?

50%

Which of the following statements regarding the element of time in measuring risk is/are correct? A. An individual's risk varies with habits B. Time element measurement ignores some information C. Time element measures a specific moment in time.

A and B

Why should we measure loss severity?

Both A and B A) risk classification B) determination of transfer (insurance) amount

What is the author's main theme in "Balancing Liberty and the Pursuit of Well-Being"?

Both freedom and happiness are good, but an imbalance can lead to poor personal decisions.

According to "Thinking Like an Economist", which of the following is NOT a common pitfall of decision-making?

All of the above are common pitfalls in decision making.

Which of the following is NOT a type of funded retention?

All of the above are examples of funded retention. (reserves, self insurance, captives)

According to "The US Economy: Private and Public Sectors", which of the following does NOT describe a method of income disposal?

All of the above describe methods of income disposal. (personal savings, personal taxes, personal consumption expenditures)

Which of the following is extremely useful for the utilization of the rollback technique?

Constructing a decision tree

The free market fails to protect ______ interests.

Consumer

________________ represents the largest spending of Local revenues.

Education

Think about the following statement. "Innovations to make us feel safer often lead to us changing our habits because we feel safer, thereby increasing risk." Which of the following is an example of the statement?

Erin just paid ADT to install an alarm system in her house. Now, she can finally stop worrying about locking her doors at night.

What is the optimal choice with the strategy that has the highest expected pay-off?

Expectation Theory

Redistributing Income, providing a structure and promoting stability are

Government roles

According to Mill, the goal of moral and political action should be to maximize people's:

Happiness

According to "Innovation Risk: How to Make Smarter Decisions", which one of the following was NOT one of the simultaneous factors of the recent financial crisis?

High interest rates

Risk reduction methods are best applied to?

High severity losses.

According to "Innovation Risk: How to Make Smarter Decisions", mathematical modeling is more precise than which of the following?

Human cognition

Factors to consider when selecting criteria for decision rules include I. The decision maker's attitude II. The nature of the situation

I and II

Marginal Cost and Benefit calculations: I. Measure activity incrementally II. Are useful in determining the level at which activity stops III. Are sometimes referred to as average cost and benefits

I and II

State Governments most commonly generate revenue through: I. State Income Taxes II. Sales Taxes III. Property Taxes

I and II

According to Von Neumann and Morgenstern's Utility index, decisions are made to maximize... I. Expected utility II. Expected monetary value III. Expected marginal loss

I only

The Utility Index proposed by Von Neumann and Morgenstern: I. is designed for predictive purposes II. enables decision making based on preferences III. measures utility in situations where risk exists

I, II, and III

The following statement(s) regarding Utility Functions is/are true: I. Utility Functions are usually a function of wages. II. Utility increases at a decreasing rate. III. The Utility Function chosen does not matter. They will all yield the same result.

II

Decision Theory: I. provides the framework for decision-making when conditions are certain. II. determines optimal strategies when faced with several alternatives and a risky pattern of future events.

II Only

Tom is faced with a situation in which he must make a decision. Which of the following best describes the ORDER of the steps of the decision making process Tom should use to come to a decision?

Identify the outcomes, identify the courses of action, determine the pay-off function and then choose from the alternatives.

Which of the following correctly identifies the cost-benefit approach to decision-making?

If the benefit of undertaking an activity exceeds its cost, undertake that activity

Greg and Emily were tasked with developing a model of how an individual may purchase lottery tickets. Greg's model for determining ticket purchases incorrectly assumes all people are equally likely to play the lottery. Emily's model correctly assumed that lottery ticket purchases vary with income and education levels and found very different results than Greg's model. Which of the following describes Greg's model?

Incorrect

Which of the following is NOT a federal agency created to help us manage and reduce risk?

Internal Revenue Service

An investor owns a hostel business and has $10,000 left over after the year (initial wealth = 10,000). He has the choice of not investing the money or purchasing additional property for his hostel. There is a 50% probability he will make $5,000 and a 50% probability he will lose $3,000 if he chooses to invest in the new property. Assuming he has a square root utility function, what should he do?

Invest the money.

The World Phone, Inc. currently has $100,000 to invest in new technology for the firm. There are three possible technologies the firm can invest in. Which of the following should The World Phone pursue? Investment A Probability / Outcome .40 / 15% .35 / 10% .25 / -7.5% Investment B Probability / Outcome .60 / 10% .30 / 20% .10 / -5% Investment C Probability / Outcome .50 / 15% .20 / 10% .30 / -5%

Investment B

Google, Inc. has three potential investment opportunities following the release of their driverless car prototype. Which of the following should they pursue? Investment A Probability / Outcome .55 / 20% .20 / 10% .25 / -5% Investment B Probability / Outcome .60 / 15% .30 / 12% .10 / -10% Investment C Probability / Outcome .50 / 20% .28 / 12% .22 / -3%

Investment C

According to "Balancing Liberty and the Pursuit of Well-Being", the author critiques which political ideology multiple times?

Libertarianism

A resort hotel has $20,000,000 to invest it its next location. There are three potential sites for the expansion. The cost to build the facility in any of the locations is $20,000,000. Which location should be selected? Location A: Probability / Outcome .50 / 20% .30 / 9% .20 / -10% Location B: Probability / Outcome .40/ 19% .32 / 7.5% .28 / -11% Location C: Probability / Outcome .45 / 22% .50 / 6% .05 / -15%

Location C

This principle is adopted by pessimistic decision-makers who are most conservative in their approach.

Maximin or Minimax Principle

According to "Thinking Like an Economist," this economist supported to concept that assuming rules of rational decision making always apply can give insight into human behavior.

Milton Friedman

According to "Innovation Risk: How to Make Smarter Decisions", you use models every day. Why is it that you don't recognize that you're using a model?

Models that apply to real-life situations are often applied semiconsciously.

Molly goes to the grocery store and spends $75 on food. According to "The US Economy: Private and Public Sectors", which of the following describes her purchase?

Non-durable good

Which of the following is the most popular ownership structure within the U.S.?

Sole proprietorship

Which of the following describes how a monopoly controls an industry?

Supply

Having more information is a key tenet of:

The Expectation Principle

According to "Innovation Risk: How to Make Smarter Decisions", what is one of the major factors in determining the risks and benefits of innovation?

The infrastructure in which the innovation is introduced.

In the decision-making process, opportunity loss, or regret, occurs when:

The optimal course of action is not adopted

Bentham's policies were rejected because

They were not easily quantified

The claim that decisions are made to maximize expected utility rather than expected monetary value is the major component of which of the following?

Utility theory

According to "Thinking Like an Economist", when does the invisible hand mechanism break down?

When costs of benefits accrue to people other than the decision-maker

According to "Innovation Risk: How to Make Smarter Decisions", the utility of a model depends on the model itself, why it's being used and which of the following?

Who is using the model

Which of the following method(s) best identifies all the risks faced by an organization?

combination of all of the above (questionaires, checklists, procedure guides)

According to the reading "A Scientific View of Risk", innumeracy is:

a lack of intuitive understanding of numbers

The President of the United states is considering an executive order banning all coal mining in West Virginia. He asked his economic adviser the following question: "Should we fund a retraining program for coal company employees impacted by this decision?" This is:

a normative question

The reading "A Scientific View of Risk" has a different definition of risk than we have used in class. The definition used in this reading added what component to the definition?

a time element (given period of time)

From the reading "Innovation Risk", mathematical modeling:

can be set by humans to execute upon specific guidelines

Which of the following is NOT a method of categorizing risk?

certain versus uncertain

According to the text, which of the following is a recommended method of evaluating the best course of action in a multi-stage decision-making problem?

creating a decision tree

Which of the following is a common pre-loss objective?

economy

From the reading "Innovation Risk", the characteristics of a sound mathematical model include all of the following EXCEPT:

fewer than three variables

Loss severity describes which of the following?

financial impact of losses

Which of the following is not a step in decision theory?

forming an economic framework analysis

From the excerpt of "The Wealth of Nations" (in Thinking Like an Economist), how is the invisible hand developed?

from producers regard of their own self-interest

Risks affecting a large portion of the population at a given time are which of the following?

fundamental risks

In the lecture, we applied some of the concepts of the article "Innovation Risk" to self-drive cars. Which of the following was NOT one of the rewards discussed with self-drive cars?

increased driver error

Karen won't allow any of the neighborhood children into her yard because she has a large swimming pool and doesn't want anyone to fall in, resulting in her being responsible for the harm of a child. What type of risk is Karen trying to avoid?

liability

According to the reading "The US Economy:.." which of the following is NOT a role of the government:

minimizing competition

Imagine a world where health insurance doesn't exist. On the upside, you don't have to pay any health insurance premiums! On the downside, if you become sick you're responsible for the full amount of your healthcare. What if you had children? The risk of unknown payments for healthcare would require all of us to save a much larger amount of money to set aside just in case we needed it. This burden would be in which of the following categories?

need for larger emergency funds

Loss frequency describes which of the following?

number of losses