Your company has a customer who is shutting down a production line, and it is yo
ID: 1163339 • Letter: Y
Question
Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for possible future product and estimates that the reservation value is $200,000. Your dealings on the secondhand market lead you to believe that there is a 0.4 chance a random buyer will pay $250,000, a 0.25 chance the buyer will pay $330,000, a 0.1 chance the buyer will pay 390,000, and a 0.25 chance it will not sell.
If you must commit to a posted price, what price maximizes profits? Explain and show calculations.
Explanation / Answer
ANSWER:
The price that needs to be committed must be expected price as that will maximize the profits for me.
the expected price is the probability and payoff of all the choices of the buyers.
Expected price = 0.4 * 250,000 + 0.25 * 330,000 + 0.1 * 390,000 = 100,000 + 82,500 + 39,000 = $221,500
Therefore $221,500 must be committed to maximize the profits.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.