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Calculating Expected Price and Profits

You are a manager of a firm that sells a "commodity" in market that resembles perfect competition, and your cost function is C(Q) = Q + 1Q^2. 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 60 percent chance the market price will be $100.00 and a 40 percent chance it will be $200.

a.Calculate the expected market price.
b.What output should you produce in order to maximize expected profits?
c.What are your expected profits?

Solution Preview

Solution :

a. Calculate the expected market price.
Expected Price = 100*0.6+200*0.4=$140

b. What ...

Solution Summary

Solution describes the steps in calculating expected profit, profit maximising output and expected profits.

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