Initiative 2

The development cost depends on the state of its development team. With probability 0.80, the assigned development team is strong and thus the cost is normally distributed with a mean $1 million and a standard deviation $100,000. With probability 0.20, the assigned development team is weak and thus the cost is normally distributed with a mean of $2 million and a standard deviation of $500,000.

The firm has much more discretion on pricing. There are 220 potential clients for the product, and each one will purchase it with probability (p) which depends on the price p. This probability function is given by (p) = 1 p $100,000. Here the highest price that can be charged is $100,000, and it will lead to no customers purchasing it.

1.) For Initiative 2, what price maximizes expected profits?

2.) For Initiative 2, what are the expected profits associated with the optimal price found in Q1?

3.) For Initiative 2, what is the likelihood that profits will exceed $5 million under the optimal price found in Q1?