Question

OJ's Orange Juice produces orange juice to sell in a perfectly competitive market. Given uncertainty in weather patterns, OJ has to determine how much juice to produce prior to knowing the competitive price. It is estimated that the competitive price will be $5 with 20 percent chance and an 80 percent chance the price will be $2. If the marginal cost of producing orange juice is MC = 2Q, then to maximize expected profits, OJ should produce A. 0.25 units. B. 0.90 units. C. 1.15 units. D. 1.30 units

Answer 1

Answer:

so firm will maximize profit produce is 1.30 units

so correct option is D. 1.30 units

Explanation:

given data

competitive price = $5

chance = 20%

chance the price = $2

marginal cost MC = 2Q

to find out

maximize expected profits, OJ should produce

solution

we get here maximum profit as that

E(P) = MC = 2Q    ..............1

as we know competitive firm maximum profit as P = MC

and profit = 0 in long run

so put here value in equation 1

E(P) = 0.2 × 5 + 0.8 × 2

2Q = 2.6

Q = 1.3

so firm will maximize profit produce is 1.30 units

so correct option is D. 1.30 units