Chapter 12, Problem 2PB

Oleg Markov is the production manager of NASA Solvents. Due to limited capacity, the company can only produce one of two possible products:

• an industrial concentrated solvent with a 15% probability of making a profit of $1 million and an 85% probability of making a profit of $200,000

• a household diluted solvent with a 100% chance of making a profit of $310,000 Oleg will get a 20% bonus from his department. Oleg has the responsibility to choose between the two products and is more risk averse than most of the top management at NASA Solvents.

A. Which option is Oleg more likely to choose and why?

B. Which option would the company be more likely to choose and why?

C. What changes should the company make to Oleg’s compensation to encourage managers to take appropriate risks