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 60 percent chance of low demand and a 40 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P= 500,000 -250Q and P= 700,000 -200Q, respectively. Your cost function is C(Q) = 125,000 + 350,000 Q. How many new homes should you build, and what profits can you expect? Number of homes you should build: Profits you can expect: $ homes

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 60 percent chance of low demand and a 40 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P= 500,000 -250Q and P= 700,000 -200Q, respectively. Your cost function is C(Q) = 125,000 + 350,000 Q. How many new homes should you build, and what profits can you expect? Number of homes you should build: Profits you can expect: $ homes

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.3P

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