Question

​Half of all your potential customers would pay $10 for your product but the other half would only pay $8. You cannot tell them apart. Your marginal costs are $4. If you set the price at $10, the expected profit is:

Answer 1

Expected Profit is $4

Step-by-step explanation:

Price = $8

Marginal Cost = $4

The formula to derive the expected profit is Expected Profit = Price - Marginal Cost------equ(1)

Using equation (1) and given information, expected profit is calculated as

Expected Profit = Price - Marginal Cost

Expected Profit = 8 - 4

Expected Profit = $4

Thus, the Expected Profit is $4

Answer 2

The expected profit is:

$5.

Step-by-step explanation:

a) Calculations:

Profit from customers paying $10 = $6 ($10 - $4)

Profit from customers paying $8 = $4 ($8 - $4)

Expected profit from customers paying $10, = $6 x 0.5 = $3

Expected profit from customers paying $8, = $4 x 0.5 = $2

Total expected profit = $5.

The expected profit is the profit from customers paying $10 weighted with probability plus the weighted profit from customers paying $8. Adding the expected profit from each class of customers gives the overall expected profit combined.