Decision on how many homes to build in new residential area

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Consider that you own a construction company and you need to make a decision on how many homes to build in a new residential area. It is estimates that 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 = 105,000 - 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) = 80,000 + 1.8Q + 0.5Q² (MC = 1.8 + Q). If you are risk neutral, how many homes will you start?

Reference no: EM131174680

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