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A firm is making production plans for next quarter, but the manager does not know what the price of the product will be next month. She believes there is a 30 percent chance price will be $500 and a 70 percent chance price will be $750. The four possible profit outcomes are:

Profit (loss) when price is:

$500 $750

Option A: produce 1,000 units -$12,000 $80,000

Option B: produce 2,000 units -$20,000 $150,000

a. Which option has the higher expected profit?

b. Which option has the highest (absolute) risk?

c. Which option is chosen using the coefficient of variation rule?

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Help is given with profit outcome.

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a. Which option has the higher expected profit?

Option A: E(profit) = 30% * (-12000) + 70% * 80000 = 52,400
Option B: E(profit) = 30% * (-20000) + 70% * 150000 = 99,000
Thus, Option B has the higher expected profit.

b. ...

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