Exercises $18-25($Static$)$ Risk Aversion and Decision Making; Strategy $[$LO $18-1]$

John Smith is the production manager of Elmo$$s Glue Company. Because of limited capacity, the company can produce only one of two possible products. The two products are:

A space$-$age bonding formula that has a $15\%$ probability of making a profit of $$1,000,000$ for the company and an $85\%$ chance of generating $$200,000$ in profit.

A reformulated household glue that has a $100\%$ chance of making a profit of $$310,000.$

John gets a bonus of $20\%$ of the profit from his department. John has the responsibility to choose between the two products. Assume John is more risk$-$averse than the top management of Elmo$$s Glue Company.

Required:

$1.$ Compute the expected profit of the space$-$age bonding formula.

$2-$a$.$ Which product is John most likely to choose?

multiple choice $1$

A space$-$age bonding formula

A reformulated household glue

$2-$b$.$ Is that the product Elmo$$s would prefer?.

multiple choice $2$

Yes

No