You are the manager of a firm that sells a “commodity” in a market that resembles perfect competition, and your analytics team estimates that your cost function is C(Q) = 2Q + 3Q2. Unfortunately, due to production lags, you must make your output decision prior to knowing for certain the price that will prevail in the market. You believe that there is a 70 percent chance the market price will be $200 and a 30 percent chance it will be $600. a.Calculate the expected market price. b.What ouptut should you produce in order to maximize expected profits? c.What are your expected profits?

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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You are the manager of a firm that sells a “commodity” in a market that resembles perfect competition, and your analytics team estimates that your cost function is C(Q) = 2Q + 3Q2. Unfortunately, due to production lags, you must make your output decision prior to knowing for certain the price that will prevail in the market. You believe that there is a 70 percent chance the market price will be $200 and a 30 percent chance it will be $600.

a.Calculate the expected market price.

b.What ouptut should you produce in order to maximize expected profits?

c.What are your expected profits?

      

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