Refer to the Following Situation:
a Firm Is Making Production

question 5

Multiple Choice

Refer to the following situation:
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:
$$\begin{array} { l c c } & \text { Prod (toss) when pice is: } \\\hline & \$ 500 & \$ 750 \\\hline\text { Option } A \text { produce } 1,000 \text { unids } & - \$ 12,000 & \$ 80,000 \\\text { Oplion } B \text { produce } 2,000 \text { unids } & \$ 20,000 & \$ 150,000\end{array}$$
-Which option has the highest (absolute) risk?

• A) Option A is riskier than Option B.
• B) Option B is riskier than Option A.
• C) Both options have the level of risk if the manager is risk averse.
• D) cannot calculate risk with the given information

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