Explore BrainMass
Share

# Expected Market Price & Profits

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

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?

https://brainmass.com/economics/perfect-competition/expected-market-price-profits-217842

#### Solution Preview

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.

\$2.19