Cal and Becky have known each other since high school. Two years ago, they entered the same university, and today they are taking undergraduate courses in the business school. Both hope to graduate with degrees in finance.
In an attempt to make extra money and to use some of the knowledge gained from their business courses, Cal and Becky have decided to look into the possibility of starting a small company that would provide word processing services to students who need term papers or other reports prepared in a professional manner. Using a systems approach, Cal and Becky have identified three strategies:
#1 - To invest in a fairly expensive microcomputer system with a high-quality laser printers. In a favorable market, they should be able to obtain a net profit of $10,000 over the next two years. If the market is unfavorable, they can lose $8,000.
#2 - To purchase a less expensive system. With a favorable market, they could get a return during the next two years of $8,000. With an unfavorable market, they would incur a loss of $4,000.
#3 - To do nothing.
Cal is basically a risk taker, whereas Becky tries to avoid risk.
a1. What type of decision procedure should Cal use?
a2. What would Cal's decision be?
b1. What type of decision maker is Becky?
b2. What would Becky's decision be?
c1. If Cal and Becky were indifferent to risk, what type of decision approach should they use?
c2. What would you recommend if this were the case?
The solution answers the question below.