A firm is considering two projects,A and B,with the following probability distributions for profit. $$\begin{array} { c c c }
\begin{array} { c }
\text { Prafit } \
\text { (\$1,000s) }
\end{array} & \begin{array} { c }
\text { Praject } A \
\text { Prabability } ( \% )
\end{array} & \begin{array} { c }
\text { Project } B \
\text { Prabability } ( \% )
\end{array} \
\hline \$ 20 & 10 & 10 \
40 & 15 & 15 \
60 & 50 & 25 \
80 & 15 & 40 \
100 & 10 & 10
\end{array}$$ Given the above,a decision maker who is risk neutral would
A)choose project A.
B)choose project B.
C)not be able to make a decision.
D)change probabilities because no decision maker is ever risk neutral.

Question

A firm is considering two projects,A and B,with the following probability distributions for profit. $$\begin{array} { c c c } 
\begin{array} { c } 
\text { Prafit } \
\text { (\$1,000s) }
\end{array} & \begin{array} { c } 
\text { Praject } A \
\text { Prabability } ( \% )
\end{array} & \begin{array} { c } 
\text { Project } B \
\text { Prabability } ( \% )
\end{array} \
\hline \$ 20 & 10 & 10 \
40 & 15 & 15 \
60 & 50 & 25 \
80 & 15 & 40 \
100 & 10 & 10
\end{array}$$ Given the above,a decision maker who is risk neutral would
A)choose project A.
B)choose project B.
C)not be able to make a decision.
D)change probabilities because no decision maker is ever risk neutral.

Quizplus · Accepted Answer

Project B has a higher expected profit of $61,000 (compared to $52,000 for Project A), so a risk neutral decision maker would choose Project B. The fact that Project B has a wider range of profits (with a higher standard deviation) does not matter for a risk neutral decision maker.

A Firm Is Considering Two Projects,A and B,with the Following