Question

As the manager of We Do It Right Construction, you need to make a decision on how many homes to build in a new residential area. There is a 20 percent chance of a recession, a 60 percent chance the economy will remain as it is, and a 20 percent chance there will be an economic upturn. If a recession hits, your inverse demand curve for new homes will be P = 100,000 – 4Q. If things remain as they are, your inverse demand curve will be P = 115,000 – 3Q. If economic growth occurs, your inverse demand curve will be P = 130,000 – 2Q. Your cost function in all three scenarios is C(Q) = 70,000 + 2Q + 0.5Q2. If you are risk neutral, how many homes will you start?

Answer 1