Happy Cows is a perfectly competitive dairy farm that has consistently faced a 50 percent chance of a high demand of $5 and a 50 percent chance of a low demand of $4. The managers of Happy Cows learn that there is now a 50 percent chance of a high demand of $8 and a 50 percent chance of a low demand of $2. All else equal, the change in the high and low demand values makes an accurate forecast _______valuable to Happy Cows as the firm stands to gain_______ profit from an accurate forecast.

Question

Quizplus · Accepted Answer

When the demand was uncertain, Happy Cows could expect to earn an average of $4.50 per unit of milk sold. Now that the demand is given as $2 or $8 with equal probability, the expected value of a unit of milk is $5. This increase in value means that an accurate forecast is more valuable than before. Additionally, with a higher potential profit of $8 per unit of milk, there is more to be gained from an accurate forecast. Therefore, the best answer is D, more profitable.

Happy Cows Is a Perfectly Competitive Dairy Farm That Has