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You manage a construction company and need to decide how many houses to build in a new residential area where your firm is the only builder. You have to make this decision in a time of uncertainty, where there is a 60% probability of low demand and a 40% probability of high demand. The corresponding inverse demand functions for these two scenarios are P = 300,000 – 400Q and P = 500,000 – 275Q, respectively. Your cost function is TC = 140,000 + 240,000Q.
a. How many houses should you build?
b. What price should you charge?
c. What profits can you expect?