A Risk-Neutral,price-Taking Firm Must Set Output Before It Knows the Market

question 111

Essay

A risk-neutral,price-taking firm must set output before it knows the market price.There is a 50 percent chance the market demand curve will be Q^d = 10 - 2P and a 50 percent chance it will be Q^d = 20 - 2P.The market supply curve is estimated to be Q^S = 2 + P.
a.Calculate the expected (mean)market price.
b.Calculate the variance of the market price.
c.If the firm's marginal cost is given by MC = 0.01 + 5Q,what level of output maximizes expected profits?

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Definitions:

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