Answers to Back-of-the-Chapter Problems
1. As tough as it may be to do, you should ignore your friend’s story. His
experience represents a single data point. You already have gathered the
2. a. The assessment is subjective in the sense that different “experts” or
“odds makers” would come to different judgments about the team’s
b. Since there are 30 teams in the Major Leagues, a “naive” assessment
would assign each team an equal, one-in-30 chance of winning the
3. a. The chance of a student responding is Pr(R|S) = .08/.24 = 1/3. The
b. The table identifies the market segments being reached by the
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4. a. No. The reason this age group accounts for the greatest proportion of
b. The accident rate for Age 17-30 is:
c. The comparison is misleading because the older group drives many
5. a. The following decision trees show the consortium’s expected profits
from having perfect information in each instance.
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Failure
.4
90
Redesign
Not 75
$125
.5
.5
75$50
Not 75
$25
.5
Restrictons
.5
92.5
Redesign
No
60
$100
$0
.6
.4
60
$25
No$125
6. The chance is 1/3 that the grand prize is behind your chosen curtain.
The fact that you are shown an empty curtain does not change this
7. a. Opening directly on Broadway implies an expected profit of: (.3)(30)
b. The gross profit on average employing out-of-town tryouts is: (.35)
(24) + (.45)(12) + (.2)(0) = $13.8 million. Accounting for the cost of
8. a. Based on the loan officer’s assessments reported in the problem, we
can construct the following joint probability table:
Category
Performing
Loan Defaulted
Loan
Total
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Therefore:
b. The loan officers’ assessments of default risk range between 8% and
18%. The scoring system’s assessments range between 5% and 25%
9. a. The firm should not pursue the R&D program (expected profit = -$4
million).
b. The firm should undertake R&D if it learns it has exclusive rights
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$5
Failure
.5
.4
-$40
$0
-4
0
d. If the prototype chip runs cool, the expected profit from pursuing
the R&D investment is (.625)(32) + (.375)(-40) = $5 million, so it is
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$0
.5 -$40
.4 Do Not
0