Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 24

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 ) =2 Q +3 Q 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 70 percent chance the market price will be $200 and a 30 percent chance it will be $600.
a. Calculate the expected market price.
b. What output should you produce in order to maximize expected profits?
c. What are your expected profits?