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 $8,the expected profit is:
A)$3
B)$4
C)$5
D)$6

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 $8,the expected profit is:
A)​$3
B)$4
C)$5
D)​$6

Quizplus · Accepted Answer

If the price is set at $8, half of the customers would buy the product and the other half wouldn't. So, the expected revenue would be:

Expected revenue = ($8 x 0.5) + ($10 x 0.5) = $9

However, the marginal cost of the product is $4. Therefore, the expected profit would be:

Expected profit = expected revenue - marginal cost
Expected profit = $9 - $4
Expected profit = $5

If the price is set at $10, all customers would buy the product. So, the expected revenue would be:

Expected revenue = $10 x 1 = $10

However, the marginal cost of the product is still $4. Therefore, the expected profit would be:

Expected profit = expected revenue - marginal cost
Expected profit = $10 - $4
Expected profit = $6

Thus, setting the price at $10 would yield a higher profit. However, since half the customers are only willing to pay $8, the demand for the product may reduce if the price is set at $10. Therefore, setting the price at $8 would be a safer option, even though it would yield a lower profit.

​Half of All Your Potential Customers Would Pay $10 for Your

Half of All Your Potential Customers Would Pay $10 for Your