2. A firm is making its production plans for next quarter, but the manager of the firm does not know what the price of the product will be next month. He believes that there is a 40 percent probability the price will be $15 and a 60 percent probability the price will be $20. The manager must decide whether to produce 7,000 units or 8,000 units of output.

The following table shows the four possible profit outcomes, depending on which output management chooses and which price actually occurs:

Profit (loss) when price is $15 $20 Option A: produce 7,100 $3,750 $31,770 Option B: produce 8,000 8,000 34,000

a. If the manager chooses the option with the higher expected profits, which output is chosen?

b. Which option is more risky?

c. What is the decision if the manager uses the mean–variance rules to decide between the two options?

d. What is the decision using the coefficient of variation rule?