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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
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. 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. b. 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? A space-age bonding formula A reformulated household glue 2-b. Is that the product Elmo's would prefer?. Yes No
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