1. Suppose an investment project has an NPV of $150 million if it becomes succes
ID: 1180766 • Letter: 1
Question
1. Suppose an investment project has an NPV of $150 million if it becomes successful and an NPV of ?$50 million if it is a failure. What is the minimum probability of success above which you should make the investment?
a. 0.5
b. 1/3
c. 0.25
d. 0.1
2. Your production line has recently been producing a serious defect. One of two possible processes, A and B, could be the culprit. From past experience you know that the probability that A is causing the problem is 0.8 but investigating A costs $100,000 while investigating B costs only $20,000. What are the expected error costs of shutting down process B first?
a. $80,000
b. $20,000
c. $16,000
d. $4,000
3. You want to price posters at the Poster Showcase profitably and run an experiment to estimate the demand elasticity. You raise the price of kitten posters 10% but keep your dog poster prices unchanged. After a month, kitten poster unit sales fall by 12%, but dog posters rise by 8%. Why might the elasticity estimate from this experiment be biased?
4. Tennessee just instituted a state lottery. The initial jackpot is $100,000. If the first week yields no winners, the next week's jackpot goes up, depending on the number of previous players who placed the $1 lottery bets. The probability of winning is one in a million (1.0
Explanation / Answer
1. .25
150*x-50y=0, x+y=1, solve to get x=.25
2. 16000
.8*20000
3. The sample could be problematic. Is this month during the showcase? Like only one of the two situations seems to be during the showcase.
4. 2.5 million
x*.4=1000000
5. This seems to be the lemon problem, but 7500
5000*.9+30000*.1
6. -6000
.7*100+.3*120=106,000. Only regular workers will accept that.
7a. Because people only kept the car if it was profitable.
b. Take away the choice.
7. They don't know it will work, you don't know how much the actual savings are and this says you are confident it works (you get nothing if it fails).
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