OJ's Orange Juice produces orange juice to sell in 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 10 percent chance and a 90 percent chance the price will be $2.If the marginal cost of producing orange juice is MC(Q) = 2Q, then to maximize expected profits, OJ should produce

Question

Quizplus · Accepted Answer

To maximize expected profits, OJ should produce the quantity where marginal cost equals the expected marginal revenue. 
Expected marginal revenue (EMR) can be calculated using the probabilities and prices given: 
EMR = (0.1 x $5) + (0.9 x $2) = $2.30 
Setting MC(Q) equal to EMR: 
2Q = $2.30 
Q = 1.15 
Therefore, OJ should produce 1.15 units to maximize expected profits.

OJ's Orange Juice Produces Orange Juice to Sell in Competitive