As the manager of Smith Construction, you need to make a decision on the number of homes to build in a new residential area where you are the only builder. Unfortunately, you must build the homes before you learn how strong demand is for homes in this large neighborhood. There is a 40 percent chance of low demand and a 60 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P = 400,000 −450Q and P = 600,000 −250Q, respectively. Your cost function is C(Q) = 170,000 + 256,000Q. How many new homes should you build, and what profits can you expect? a. Number of homes you should build: _____ homes b. Profits you can expect: $
As the manager of Smith Construction, you need to make a decision on the number of homes to build in a new residential area where you are the only builder. Unfortunately, you must build the homes before you learn how strong demand is for homes in this large neighborhood. There is a 40 percent chance of low demand and a 60 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P = 400,000 −450Q and P = 600,000 −250Q, respectively. Your cost function is C(Q) = 170,000 + 256,000Q.
How many new homes should you build, and what profits can you expect?
a. Number of homes you should build: _____ homes
b. Profits you can expect: $
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