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Expected Market Price & Profits

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You are the manager of a firm that sells a commodity in a market that resembles perfect competition, and your cost function is C(Q)=Q+2Q^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. 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?

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a. Calculate the expected market price.

Expected Market price = sum of [price x probability]

E(p) = sum of [$100 x 60% + $200 x 40%]

= $60 + $80

= $140 ...

Solution Summary

The solution gives fully-displayed calculations for finding the expected market price and profits as well as determining the output necessary to maximize those profits.

See Also This Related BrainMass Solution

Use simulations to analyze sales reports, income statements; describe a strategy


The SLP for this course involves participating in a simulation exercise. Unlike cases, which are static, simulations are interactive and you can see the results of your decisions. What's more, you can repeat the simulation to improve the quality of your decisions.While many simulations focus on just one general area of management (e.g. supply chain management or leadership), I have selected one that integrates several areas. In particular, you will be looking at income statements and sales reports. You will be making decisions about production, pricing, and investment.

Your first step is to come up with a strategy for how you will make these decisions.

1. Access the simulation site http://www.forio.com/pdasim.htm) We will be using the PDA Sim
2. Read the introduction, and study the Financials and the Market Information. Review the Decisions you will be asked to make, BUT DO NOT ENTER ANY DECISIONS! (If you have difficulty with impulse control, try one of the other simulations!)
3. Describe the strategy that you will use over the four years of the simulation, and defend why you think that strategy will work. In doing this you will want to consider what ratios will give you the information you need to make the best decisions. There are numerous ratios you can calculate with the data you have. First, you need to determine what types of ratios are going to be relevant to you. Obviously debt or liquidity ratios are not gong to be germane to this simulation. You are going to want to look at ratios that measure manufacturing efficiency and profitability. Some you will want to use to compare the entire firm's performance over time, others can best be used when applied to comparing the three products' performance or profitability. Begin by looking at

 unit price
 unit cost
 average revenue per unit
 break even

Explain what these ratios tell you and how you can use them to plan and evaluate the effectiveness of your strategy. You will definately need to use additional ratios that will give you more or better information - but at a minimum, you must address these in your paper.

You may append supporting materials, such as data tables and references. Be sure to EXPLICITLY draw on concepts and theories from the courses you have taken throughout the MBA program.

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