| Question |
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 50 percent chance of low demand and a 50 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P = 200,000 – 250Q and P = 400,000 – 250Q, respectively. Your cost function is C(Q) = 110,000 + 200,000Q. How many new homes should you build, and what profits can you expect? |
