Jane makes production plans for next month but she does not know what the output’s price will be next month. She believes there is a 50% chance price will be $500 and another 50% chance price will be $750. the four possible profit outcomes are:
Profit When Price Is:
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$500
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$750
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Option A: produce 1,000 units
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$10
|
$80
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Option B: produce 2,000 units
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$20
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$100
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a. If Jane maximizes her expected profit, which option should she choose?
b. Which option is more risky than the other?
c. Can Jane apply mean-variance rule to make her decision? If so, which one?
d. Use the coefficient of variation, which option would Jane choose?
