ECP Chapter 12 – Complete Study Notes, Key Concepts, and Practice Questions
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(1/6)12+(1/6)10...=7 - correct answer ✔✔Suppose that a fair die is rolled and, based on the
result, you receive the following payout: Rolling a six pays $12, a five pays $10, a four pays $8, a
three pays $6, a two pays $4, and a one pays $2.The expected value of the game equals $
variance - correct answer ✔✔"The sum of the probabilities that different outcomes will occur
multiplied by the squared deviations from the mean of the random variable" describes which of
the following?
option 2 - correct answer ✔✔Suppose option 1 is the realization of a random variable with an
expected value equal to zero and variance equal to 100, and option 2 is the realization of a
random variable with an expected value equal to zero and variance equal to 10,000. Which of
the two options is riskier?
risk averse - correct answer ✔✔Suppose an individual prefers $12 with certainty over a risky
prospect with the possibility to win $18, but an expected value of $12. What type of individual
is this?
averse - correct answer ✔✔Comparison advertising is a technique used to induce risk _____
individuals to try new products.
E[x] = 0.5($10) + 0.5($20) = $15 - correct answer ✔✔Suppose that a fair coin is tossed and if a
head appears you receive $10 and if a tail appears you receive $20. The expected value of this
game is:
the square root of the variance. - correct answer ✔✔The standard deviation equals
, -Consumers opt for familiar products, even if the expected quality is lower.
-They have less information about local products. - correct answer ✔✔Why do out-of-town
consumers tend to make purchases in chain stores?
Reason:
Scenario 2 has a greater variance than scenario 1, which makes scenario 2 riskier. - correct
answer ✔✔Consider the following two scenarios:1). Roll a fair die. If it comes up 1, 2, or 3, you
receive $5. If it comes up 4, 5, or 6, you pay $5.
2). Roll a fair die. If it comes up 1, 2, or 3, you receive $50. If it comes up 4, 5, or 6, you pay $50.
Which scenario is riskier?
loving, averse - correct answer ✔✔For small gambles, people are generally risk _____. .For
larger gambles, people are generally risk
insurance aimed at risk averse consumers. - correct answer ✔✔Extended warranties and
money-back guarantees are examples of
the individual will not likely switch from the existing product to the new product - correct
answer ✔✔Comparison advertising is used to induce a risk averse individual to purchase a new
product because if the consumer expects homogeneity between the old and the new product,
it isn't worthwhile to continue searching for a lower price.
Reason:
The expected benefit of the search is:
EB = (1/3)($800 - $500) + (2/3) x (0) = $100
The expected benefit is less than the cost of an additional search. - correct answer ✔✔Suppose
that two-thirds of the stores in a market charge $800 for a certain brand of mountain bike while
one-third of the stores charge $500. If a customer is at a store charging $800 and the cost of an
additional search equals $125, then
7
(1/6)12+(1/6)10...=7 - correct answer ✔✔Suppose that a fair die is rolled and, based on the
result, you receive the following payout: Rolling a six pays $12, a five pays $10, a four pays $8, a
three pays $6, a two pays $4, and a one pays $2.The expected value of the game equals $
variance - correct answer ✔✔"The sum of the probabilities that different outcomes will occur
multiplied by the squared deviations from the mean of the random variable" describes which of
the following?
option 2 - correct answer ✔✔Suppose option 1 is the realization of a random variable with an
expected value equal to zero and variance equal to 100, and option 2 is the realization of a
random variable with an expected value equal to zero and variance equal to 10,000. Which of
the two options is riskier?
risk averse - correct answer ✔✔Suppose an individual prefers $12 with certainty over a risky
prospect with the possibility to win $18, but an expected value of $12. What type of individual
is this?
averse - correct answer ✔✔Comparison advertising is a technique used to induce risk _____
individuals to try new products.
E[x] = 0.5($10) + 0.5($20) = $15 - correct answer ✔✔Suppose that a fair coin is tossed and if a
head appears you receive $10 and if a tail appears you receive $20. The expected value of this
game is:
the square root of the variance. - correct answer ✔✔The standard deviation equals
, -Consumers opt for familiar products, even if the expected quality is lower.
-They have less information about local products. - correct answer ✔✔Why do out-of-town
consumers tend to make purchases in chain stores?
Reason:
Scenario 2 has a greater variance than scenario 1, which makes scenario 2 riskier. - correct
answer ✔✔Consider the following two scenarios:1). Roll a fair die. If it comes up 1, 2, or 3, you
receive $5. If it comes up 4, 5, or 6, you pay $5.
2). Roll a fair die. If it comes up 1, 2, or 3, you receive $50. If it comes up 4, 5, or 6, you pay $50.
Which scenario is riskier?
loving, averse - correct answer ✔✔For small gambles, people are generally risk _____. .For
larger gambles, people are generally risk
insurance aimed at risk averse consumers. - correct answer ✔✔Extended warranties and
money-back guarantees are examples of
the individual will not likely switch from the existing product to the new product - correct
answer ✔✔Comparison advertising is used to induce a risk averse individual to purchase a new
product because if the consumer expects homogeneity between the old and the new product,
it isn't worthwhile to continue searching for a lower price.
Reason:
The expected benefit of the search is:
EB = (1/3)($800 - $500) + (2/3) x (0) = $100
The expected benefit is less than the cost of an additional search. - correct answer ✔✔Suppose
that two-thirds of the stores in a market charge $800 for a certain brand of mountain bike while
one-third of the stores charge $500. If a customer is at a store charging $800 and the cost of an
additional search equals $125, then
