A Risk-Averse Manager Is Considering Two Projects

question 103

Essay

A risk-averse manager is considering two projects.The first is to introduce a new product; the second is to revamp the production facilities at the existing plant.There is a 20 percent chance a rival will enter the market and an 80 percent chance it will not.If the rival enters,the firm will lose $20,000 if it introduces the new product,whereas revamping the production facilities will earn it $50,000 in profits.If the rival does not enter,the firm will earn $15,000 if it introduces the new product,and revamping the production facilities will earn net profits of $60,000.What should the manager do?
Why?

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Definitions:

Foot-In-The-Door Technique

A persuasion strategy where a small request is made first in order to increase the likelihood of compliance with a larger request later.

Balance Theory

A theory in social psychology suggesting that individuals strive for consistency in their beliefs, attitudes, and sentiments in relation to one another.

Assimilate

To absorb and integrate new information, cultures, or ideas into one's existing knowledge base or cultural identity.

Attitude Commitment

The degree to which an individual is psychologically attached to their attitudes or beliefs.