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: $$\begin{array} { l c c }
& \text { Profit (loss) when price is: } \
& \$ 500 & \$ 750 \
\hline \text { Oplian A produce } 1,000 \text { unids } & -\$ 12,000 & \$ 80,000 \
\text { Option } 8 \text { produce } 2,000 \text { unids }& -\$ 20,000 & \$ 150,000
\end{array}$$ Which option has the higher expected profit?
A)Option A
B)Option B
C)Both Options have the same expected profit
D)cannot calculate expected profit 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: $$\begin{array} { l c c } 
& \text { Profit (loss) when price is: } \
& \$ 500 & \$ 750 \
\hline  \text { Oplian A produce } 1,000 \text { unids }  & -\$ 12,000 & \$ 80,000 \
\text { Option } 8 \text { produce } 2,000 \text { unids }& -\$ 20,000 & \$ 150,000
\end{array}$$ Which option has the higher expected profit?
A)Option A
B)Option B
C)Both Options have the same expected profit
D)cannot calculate expected profit with the given information

Quizplus · Accepted Answer

To calculate the expected profit of each option, we need to find the weighted average of the profits at each price level, using the probabilities of each price level occurring.

For Option A:

Expected profit = (0.3 x (-$12,000)) + (0.7 x $80,000) 
Expected profit = -$3,600 + $56,000 
Expected profit = $52,400

For Option B:

Expected profit = (0.3 x (-$20,000)) + (0.7 x $150,000) 
Expected profit = -$6,000 + $105,000 
Expected profit = $99,000

Therefore, Option B has the higher expected profit.

As for the best choice, it depends on the risk tolerance of the manager. Option B has a higher expected profit, but it also requires producing more units, which may be a riskier move. Option A has a lower expected profit, but it also has a lower level of risk. The manager should consider both the expected profit and the level of risk involved in each option before making a decision.

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