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QUESTION

You manage a construction company and need to decide how many houses to build in a new residential area where your firm is the only builder.

You manage a construction company and need to decide how many houses to build in a new residential area where your firm is the only builder. You have to make this decision in a time of uncertainty, where there is a 60% probability of low demand and a 40% probability of high demand. The corresponding inverse demand functions for these two scenarios are P = 300,000 - 400Q and P = 500,000 - 275Q, respectively. Your cost function is TC = 140,000 + 240,000Q.

a. How many houses should you build?

b. What price should you charge?

c. What profits can you expect?

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