Question

3. You are the manager of one of the major automobile manufacturing

companies in the country. Your company has developed a new brand of
electric vehicle which you expect will be competitive in the EV market.
However, before bringing your new product to the market, you decided to
conduct a fresh economic analysis on the profitability of your new
automobile. Economists in the company provided you with the following data
and estimation relevant for the kind of economic study you wanted to
undertake. You are told that there is a 20 percent chance of a recession, a
60 percent chance the economy will remain as it is, and a 20 percent chance
there will be an economic upturn. If a recession hits, your inverse demand
curve for new car will be P = 100,000-4Q. If things remain as they are,
your inverse demand curve will be P=115,000-3Q. If economic growth
occurs, your inverse demand curve will be P=130,000-2Q. Your cost
function in all three scenarios is C(Q) = 70,000 + 2Q + 0.5Q².
=
=
Assuming that you are risk neutral:
A. How many cars do you expect to produce and sell?
b. What will be your expected profit maximizing price?
c. What will be your expected total profit?
(6 pts)

Answer 1

The expected profit is 111319998.5, the expected quantity is 499500.0 and the expected price is 113501500.0.

Here is the detail:

Stage Probability Quantity Price Revenue Cost Profit

Recession 0.2 210714.2857142857 118857.14285714285 25074285.714285714 14999999.942857143 10074285.771428571

Normal 0.6 299700.0 113496.42857142857 34048928.57142857 20948928.571428571 13099999.999999999

Upturn 0.2 189085.7142857143 118857.14285714285 22499999.999999999 13349999.942857143 9149999.999999999

Expected - 499500.0 113501.50000000000 59123214.285714286 38398828.487142857