As the manager of Smith Construction, you need to make a decision on the number of homes to build in a new residential area where you are the only builder. Unfortunately, you must build the homes before you learn how strong demand is for homes in this large neighborhood. There is a 70 percent chance of low demand and a 30 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P = 300,000 -450Q and P = 700,000 -325Q, respectively. Your cost function is C(Q) = 135,000 + 172,500Q. How many new homes should you build, and what profits can you expect?

As the manager of Smith Construction, you need to make a decision on the number of homes to build in a new residential area where you are the only builder. Unfortunately, you must build the homes before you learn how strong demand is for homes in this large neighborhood. There is a 70 percent chance of low demand and a 30 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P = 300,000 -450Q and P = 700,000 -325Q, respectively. Your cost function is C(Q) = 135,000 + 172,500Q. How many new homes should you build, and what profits can you expect?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.10P

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