Question

OJ's Orange Juice produces orange juice to sell in a competitive market.Given uncertainty in weather patterns, OJ has to determine how much juice to produce before knowing the competitive price. It is estimated that there is a 10 percent chance the competitive price will be $5 and a 90 percent chance the price will be $2. If the marginal cost of producing orange juice is MC(Q) = 2Q, then to maximize expected profits, OJ should produce:__________.a- 0.25 units. b- 2.5 units. c- 1.15 units. d- 0.9 units.

Answer 1

c- 1.15 units.

Step-by-step explanation:

This can be calculated as follows:

Expected price at 10 percent = $5 * 10% = $0.5

Expected price at 90 percent = $2 * 90% = $1.80

Total expected price (EP) = $0.5 + $1.80 = $2.3

Since profit is maximized when EP = MC, we have:

2.3 = 2Q

Q = 2.3 / 2 = 1.15

Therefore, OJ should produce 1.15 units to maximize expected profit. The correction is therefore c- 1.15 units.