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 + 2Q2. 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 65 percent chance the market price will be $200 and a 35 percent chance it will be $400. Calculate the expected market price. $ What output should you produce in order to maximize expected profits?
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 + 2Q2. 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 65 percent chance the market price will be $200 and a 35 percent chance it will be $400. Calculate the expected market price. $ What output should you produce in order to maximize expected profits?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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You are the manager of a firm that sells a “commodity” in a market that resembles
- Calculate the expected market price.
$
- What output should you produce in order to maximize expected profits?
units
- What are your expected profits?
$
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