A firm wants to maximize its expected profit. The firm must choose the production quantity q. The production cost is C=2q2 . However, the firm is uncertainty about the price consumers will be willing to pay for the product. With probability 75% the consumers will be willing to pay $24 per unit of output q. With probability 25% consumers will only be willing to pay $8. The firm must choose q before it learns if the price will be high or low. a) Compute the quantity q that maximizes the firm’s expected profit. Find the expected profit given this optimal quantity. b) Suppose that a consulting company knows exactly how much consumers are willing to pay. How much would the firm be willing to pay for this information?
A firm wants to maximize its expected profit. The firm must choose the production quantity q. The production cost is C=2q2 . However, the firm is uncertainty about the
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