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 70 percent chance of low demand and a 30 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P = 300,000 -450Q and P = 700,000 -325Q, respectively. Your cost function is C(Q) = 135,000 + 172,500Q. How many new homes should you build, and what profits can you 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 70 percent chance of low demand and a 30 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P = 300,000 -450Q and P = 700,000 -325Q, respectively. Your cost function is C(Q) = 135,000 + 172,500Q. How many new homes should you build, and what profits can you expect?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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 70
percent chance of low demand and a
30 percent chance of high demand.
The corresponding (inverse) demand
functions for these two scenarios are P
= 300,000 -450Q and P = 700,000
-325Q, respectively. Your cost function
is C(Q) = 135,000 + 172,500Q.
How many new homes should you
build, and what profits can you expect?

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