John Smith is the production manager of Elmos 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 $1,050,000 for the company and an 85% chance of generating $210,000 in profit.

A reformulated household glue that has a 100% chance of making a profit of $315,000.

John gets a bonus of 25% 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 Elmos 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

a. A space-age bonding formula

b. A reformulated household glue

2-b. Is that the product Elmos would prefer? multiple choice

a. Yes

b. No