A manager must determine which of two products to market. From market studies, the manager constructed the following payoff matrix of the present value of all future net profits under all the different possible states of the economy:State of the economyProduct 1Product 2ProbabilityProfit ($)ProbabilityProfit ($)Boom0.2500.230Normal0.5200.420Recession0.300.410 The manager’s utility function for money is U = 100M – M2where U is the total utility of money (in utils) and M refers to the dollars of profit. Determine if this manager a risk seeker, risk neutral, or a risk averter. Explain your answer. If the manager’s objective was profit maximization regardless of risk (أي دون أخذ المخاطرة بعين الاعتبار), which product should the manager introduces? Explain your answer. Evaluate the risk associated per dollar of profit with each product, i.e. find the coefficient of variation for each project. If the manager’s objectives were utility maximization, which product should the manager introduce? (Hint: in this section, you can assume the same probability distribution indicated in the table above.)

Ans.a) The manager is a risk averter since the utility function is concave down. Indeed, U'= 100-2M…

Answered: Determine if this manager a risk…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A manager must determine which of two products to market. From market studies, the manager constructed the following payoff matrix of the present value of all future net profits under all the different possible states of the economy:

State of the economy	Product 1	Product 2
Probability	Profit ($)	Probability	Profit ($)
Boom	0.2	50	0.2	30
Normal	0.5	20	0.4	20
Recession	0.3	0	0.4	10

The manager’s utility function for money is

U = 100M – M2

where U is the total utility of money (in utils) and M refers to the dollars of profit.

Determine if this manager a risk seeker, risk neutral, or a risk averter. Explain your answer.

If the manager’s objective was profit maximization regardless of risk (أي دون أخذ المخاطرة بعين الاعتبار), which product should the manager introduces? Explain your answer.

Evaluate the risk associated per dollar of profit with each product, i.e. find the coefficient of variation for each project.

If the manager’s objectives were utility maximization, which product should the manager introduce? (Hint: in this section, you can assume the same probability distribution indicated in the table above.)

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