Question

1. Suppose the monthly demand for oranges (a perishable good) in a small town is random. With equal probability, demand is 100, 200, or 300 oranges. You are the only producer of oranges in this town. Oranges sell for a fixed price of $1, cost $0.50 to produce, and can only

be sold in the local market. If you produce 200 oranges, your expected profit is:

1. a) $33.33

2. b) $50

3. c) $66.67

4. d) $100

5. e) none of the above

Answer 1

for 200 oranges:

expected profit =expected sales price -total cost of 200 oranges

=((1/3)*100+(2/3)*200)*1-200*0.5 =$ 66.67

option C is correct