What output should you produce in order to maximize expected profits?

a. Explain the difference between a regular credit default swap and a binary credit default swap.
January 4, 2018
Production theory and cost function
January 4, 2018

What output should you produce in order to maximize expected profits?

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) = 2Q + 3Q2. 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?

 

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