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: 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

Question

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:  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

Quizplus · Accepted Answer

Option B has the highest absolute risk as it has the lowest profit outcome in the case of the lowest price ($500) which has a 30% chance of occurring. This means there is a higher chance of the firm experiencing lower profits compared to Option A.

A Firm Is Making Production Plans for Next Quarter,but the Manager