Maximizing Expected 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 squared. 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% chance the market price will be $100 and a 40% 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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Solution Summary
This solution describes the steps to calculate expected profit in the given case.
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A. Calculate the expected market price.
C(Q)=Q+2Q^2
Marginal Cost=dC(Q)/dQ=1+4Q
Expected price=100*60%+200*40%=$140
B. what output should you ...
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- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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