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    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 Preview

    A. Calculate the expected market price.

    Marginal Cost=dC(Q)/dQ=1+4Q
    Expected price=100*60%+200*40%=$140

    B. what output should you ...

    Solution Summary

    This solution describes the steps to calculate expected profit in the given case.