QUESTION 5

The Alfredo Fragrance Company produces only one product, a perfume called Hint of
Elegance. Hint of Elegance consists of two secret ingredients blended into an exclusive
fragrance, which is marketed in Zurich. An economic expression referred to as the Cobb-
Douglas function describes the production of Hint of Elegance as follows:

Where X is the amount of perfume produced.

The company operates at a level where ingredient 1 is set daily at 25 units and ingredient 2 at
36 units. Although the price Alfredo pays for ingredient 1 is fixed at $50 per unit, the cost of
ingredient 2 and the selling price for the final perfume are both probabilistic. The sales price
for Hint of Elegance follows this distribution:

SALES PRICE ($) PROBABILITY

300 0.2
350 0.5
400 0.3

The cost for ingredient 2 is

Ingredient 2 Cost ($) Probability

35 0.1
40 0.6
45 0.3

(a) What is the profit equation for Alfredo Fragrance Company?

(b) What is the expected profit to the firm?
(c) Simulate the firm's profit for a period of nine days, using these random numbers from
Table 14.5:
      52, 06, 50, 88, 88, 53, 30, 10, 47, 99, 37, 66, 91, 35, 32, 00, 84, 57, 07.
(d) What is the expected daily profit as simulated in part (c)? [25 Marks ]