RMI2302 Test 1 Review What effect do political incentives have on the discount rate used to make governmental decisions Increase the discount rate True or False Normative Questions ask what should be True Callie is a supervisor at a firm and wants to spend 1 2 million on a new building The owners are furious they don t believe they need a new building Which term best describes the situation Principal Agent problem Which of the following is the best measure of risk Standard Deviation The possibility of an organization being sued because of a product injuring a customer is an example of which of the following sources of risk Liability The likelihood of an earthquake is an example of which category of risk static True or False A regret table represents the amount of profit earned by adopting the optimal course of action False Which is an advantage of a corporation Ability to issue stock When measuring risk impact is synonymous with severity The immediate cause of a loss is Peril Which of the following categories of risk represent the risks that are NOT inherent in an organization s operations secondary Possible illness and premature death are examples of which of the following sources of risk Personal Cole fails to be careful with his cell phone because he purchased the insurance coverage on it Cole s behavior is an example of Moral hazard Changes to the law such as the legalization of drinking and driving are examples of Societal hazard Which of the following is NOT a step in the risk management process All of the above are steps in the risk management process Common pitfalls in decision making include Ignoring Implicit Costs Failing to Ignore Sunk Costs I II III Miscalculating the reservation price I and II only John Stuart Mill was a child prodigy and prot g of James Mill or Bentham both acceptable answers Which of the following is a rule of risk management Don t risk more than you can afford to lose Which of the following represents the worst case scenario Maximum possible loss Investments in Information is a method of Internal risk reduction In layman s terms what does it mean when we say the utility is increasing at a decreasing rate When I have more wealth each additional dollar means less to me True or False According to the reading Innovation Risk How to Make Smarter Decisions innovation changes the trade off between risk and reward True According to Balancing Liberty and the Pursuit of Well Being which of the following are true statements I II The free market fails to protect consumer interests The government could focus more on externalities than consumers if everyone exhibited rational behavior I and II What is the definition of risk Uncertainty regarding loss Anti lock brakes are an example of Risk loss control Risk loss Reduction is aimed at severity Reducing the level of risky activity is a method of Risk loss control Insurance is an example of Transfer The reading A Scientific View of Risk added what component to the definition of risk A time element One of the core themes of the reading A Scientific View of Risk is that risk reduction has the following costs I Monetary II III Non monetary Societal utility I and II A vehicle is an example of which of the following Durable good True or False According to the reading Innovation Risk How to Make Smarter Decisions the only proper thing to do with an incomplete model is to stop using it False The preferred approach to risk identification is Combination approach True or False According to the reading Innovation Risk How to Make Smarter Decisions a major source of risk is the imbalance that can occur between innovations in products and services and the slower changes to infrastructure True Which of the following is a burden of risk on society Need for larger emergency funds Which of the following are steps of the decision making process Identify all possible outcomes Identify all courses of action Determine the payoff function I II III I II III Which decision rule appeals to the most pessimistic decision makers Maximin principle Who hint in the 19th century urged politicians to design policies that maximized people s happiness increasing their pleasures and reducing their pain Jeremy Bentham Which decision rule assumes all of the outcomes are equally likely A Maximin principle B Maximax principle C Maximum likelihood principle D Expectation principle E None of the above ANSWER A Workings of model lack consistency B Applications are inconsistent C Results are not reproduceable D All of the above E None of the above ANSWER According to the reading Innovation Risk How to Make Smarter Decisions important characteristics of models include According to the reading Innovation Risk How to Make Smarter Decisions the five rules of thumb to minimize risk do NOT include Ensure that your model is complete Who developed the following alternate criterion for decision making Decisions are made so as to maximize expected utility rather than expected monetary value Von Neumann and Morgenstern Which decision rule works best with multistage decisions The rollback technique Casey is faced with the following decision She can either win 25 for certain probability 1 or she can participate in a bet where the expected outcome is 50 with a probability of 0 5 or 10 with a probability of 0 5 Casey decides that she s indifferent between the two options What category of risk aversion best describes Casey Risk averse Utility functions are usually a function of Wealth What word best describes the amount of payoff someone would have to receive to be indifferent between that certain payoff and a given gamble Certainty equivalent Which decision rule uses the most information available Expectation principle True or False Negative externalities occur when important costs of benefits accrue to people other than the decision maker True Who looked at the happy slave problem and noted that poverty does not seem to make people as miserable as it should Amartya Sen Which of the following is NOT one of the ways households dispose of their income Personal Taxes Personal Savings Personal Consumption Expenditures All of the above are ways households dispose of their income ANSWER The marginal cost of adding a new server to A Nyce Place to Work is 3 000 The marginal benefit of the first server is 4 000 but that number drops 500 for each additional server How many servers should A Nyce Place to Work buy 3 What s the typical amount of income saved by U S households 3
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