1
AGEC 325 Final Exam Questions with Answers (100%
Correct Answers)
Ability to Bear Risk— Answer: -Financial reserves play a big part in
determining an operation's risk bearing ability
-farms with a large amount of capital can withstand larger losses
before becoming insolvent
-cash flow commitments also affect the ability to repay loans
Willingness to Bear Risk— Answer: - some producers avoid risks even
though they have no debt and a strong cash flow
- factors affecting willingness include; Age, equity, financial
commitment, past financial experiences, the size of potential gains or
losses
Decision makers tend to prefer ______ variability to ______
variability— Answer: Low; High
Probabilities:— Answer: - help us form expectation
- the true probabilities are seldom known
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-subjective probabilities formed by available information, managers
experience, and personal judgement
Decision making under risk— Answer: 1. Identify possible sources of
risk (weather)
2. Identify possible outcomes that can occur
3. List the strategies available (how many steers?)
4. Quantify the consequences or results of each possible outcome
5. Estimate the risk and expected returns for each strategy
Decision tree— Answer: Diagram that traces several possible
management strategies, the potential outcomes from an event and their
results
Payoff matrix— Answer: Contains the same information as a decision
tree but organized in the form of a table
What are the four decision rules— Answer: 1. Maximum expected
value
2. Risk and Returns Comparison
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3. Most likely outcome
4. Safety First
Maximum expected value— Answer: choose the strategy with the
highest expected return
Risk & Returns comparison— Answer: eliminate options with both a
lower expected return and higher risk
Most likely outcome— Answer: Choose the strategy with the highest
expected return in the most likely scenario "average"
What are the 5 general sources of risk?— Answer: 1. Production Risk
2. Price and Market Risk
3. Financial Risk
4. Legal Risk
5. Personal Risk
Production Risk and how to manage it— Answer: Production Risk is
the biological processes that could be affect by
- weather
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, 4
- diseases
- insects
- weeds
- metabolism
- genetics
You can manage this by...
- choosing enterprises with stable incomes
- enterprise diversification
insurance
- extra production capacity for years when weather impacts timeline of
planting or harvesting
- custom farming; provide specific operations for a farmer at a fixed
rate
© 2025 All rights reserved
AGEC 325 Final Exam Questions with Answers (100%
Correct Answers)
Ability to Bear Risk— Answer: -Financial reserves play a big part in
determining an operation's risk bearing ability
-farms with a large amount of capital can withstand larger losses
before becoming insolvent
-cash flow commitments also affect the ability to repay loans
Willingness to Bear Risk— Answer: - some producers avoid risks even
though they have no debt and a strong cash flow
- factors affecting willingness include; Age, equity, financial
commitment, past financial experiences, the size of potential gains or
losses
Decision makers tend to prefer ______ variability to ______
variability— Answer: Low; High
Probabilities:— Answer: - help us form expectation
- the true probabilities are seldom known
© 2025 All rights reserved
,2
-subjective probabilities formed by available information, managers
experience, and personal judgement
Decision making under risk— Answer: 1. Identify possible sources of
risk (weather)
2. Identify possible outcomes that can occur
3. List the strategies available (how many steers?)
4. Quantify the consequences or results of each possible outcome
5. Estimate the risk and expected returns for each strategy
Decision tree— Answer: Diagram that traces several possible
management strategies, the potential outcomes from an event and their
results
Payoff matrix— Answer: Contains the same information as a decision
tree but organized in the form of a table
What are the four decision rules— Answer: 1. Maximum expected
value
2. Risk and Returns Comparison
© 2025 All rights reserved
,3
3. Most likely outcome
4. Safety First
Maximum expected value— Answer: choose the strategy with the
highest expected return
Risk & Returns comparison— Answer: eliminate options with both a
lower expected return and higher risk
Most likely outcome— Answer: Choose the strategy with the highest
expected return in the most likely scenario "average"
What are the 5 general sources of risk?— Answer: 1. Production Risk
2. Price and Market Risk
3. Financial Risk
4. Legal Risk
5. Personal Risk
Production Risk and how to manage it— Answer: Production Risk is
the biological processes that could be affect by
- weather
© 2025 All rights reserved
, 4
- diseases
- insects
- weeds
- metabolism
- genetics
You can manage this by...
- choosing enterprises with stable incomes
- enterprise diversification
insurance
- extra production capacity for years when weather impacts timeline of
planting or harvesting
- custom farming; provide specific operations for a farmer at a fixed
rate
© 2025 All rights reserved
