OJ's Orange Juice produces orange juice to sell in a competitive market.Given uncertainty in weather patterns,OJ has to determine how much juice to produce before knowing the competitive price.It is estimated that there is a 10 percent chance the competitive price will be $5 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 at which the expected marginal revenue (EMR) equals the marginal cost (MC).

EMR is the expected revenue per unit of output, which in this case is equal to the expected competitive price.

The expected competitive price is:

($5 x 0.1) + ($2 x 0.9) = $2.30

So, EMR = $2.30

Setting EMR equal to MC:

EMR = MC

$2.30 = 2Q

Q = 1.15 units

Therefore, OJ should produce 1.15 units to maximize expected profits.

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