Happy Cows and Free Cows are two separate perfectly competitive dairy farms. The table above shows the respective firms' marginal cost at various production levels.
-Refer to the table above. Suppose the perfectly competitive market for dairy products had a 40 percent chance of a high price of $3.00 and a 60 percent chance of a low price of $2.00. However, both Happy Cows and Free Cows have revised their probabilities and now believe that the probability of a high price of $3.00 is 80 percent and the probability of a low price of $2.00 is 20 percent. If the managers of Happy Cows want to maximize expected profit based on the new probabilities by how much will they change the quantity produced?

Question

Quizplus · Accepted Answer

Happy Cows will increase their production by 40 units because the higher probability of a high price ($3.00) increases the expected profit from producing more units.

Happy Cows and Free Cows Are Two Separate Perfectly Competitive