Question

1) You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. Project Boom (50%) Recession (50%) A $20 -$10 B -$10 $20 C $30 -$30 D $50 $50 The expected value of project C is: Select one: a. $5. b. $20. c. $10. d. None of the answers are correct.

2) You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q2. The profit-maximizing output for your firm is: Select one: a. 45. b. 4/5. c. 10. d. 5.

Answer 1

(1) Project C potential Payoff is $30 when economy is booming

Project C potential Payoff is -$30 when economy is in recession.

Probability of boom = 50% = 0.5

Probability of recession = 50% = 0.5

Expected value of project C = (Payoff in boom) * (Probability of boom) + (Payoff in recession) * (Probability of recession)

=> Expected value of project C = ($30) *(0.5) + (-$30) * (0.5)

=> Expected value of project C = $15 + (-$15)

=> Expected value of project C = $15 - $15

=> Expected value of project C = 0

Answer: Option (D) i.e., None of the answers are correct

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(2) C = 40 + 5Q²

=> MC = ΔC / ΔQ

=> MC = 10Q

Market price (P) = $50.

A perfectly competitive firm produces at P = MC

=> 50 = 10Q

=> Q = (50 /10)

=> Q = 5

Thus, the profit maximizing level of output is 5 units

Answer: Option (D)